Davis Is Overreaching in His Bid for True Grid

Plan will produce high electricity costs, inept decisions

Negotiations are thick and accusations are flying fast and furious as Gov. Gray Davis pushes ahead with his plans for the state to take over 32,000 miles of electricity transmission lines from the utilities.

Like trying to fix software full of bugs with a Band-Aid that only introduces more bugs, Davis proposes to fix a problem of poor government electricity policy by getting the state government even deeper into the electricity business.

Unfortunately, a state buyout of transmission lines will not add a kilowatt of power to head off inevitable summer blackouts. Worse, if the state buys the electricity grid, California will dig itself even deeper into a longer-term hole of high electricity costs and politicized, inept electricity management decisions.

Either way, cost creep has already set in-a few weeks ago estimates of taxpayer costs to buy the grid hovered around $3 billion, or the amount of nearly one year’s budget surplus. Now an additional $4 billion has been added to the price tag.

The problem is that Davis is not proposing that the state buy the transmission lines because it is good policy–indeed, governments are getting out of the electricity business, with $500 billion in electric power privatizations projected over the next eight years. Rather, Davis wants control, and the utilities’ financial crisis gives him the opening to demand this exchange.

Davis will neither allow the price we pay for electricity to rise nor the utilities to go bankrupt; his only answer to their financial losses is a state bailout. But, in return, he demands title to the power lines. Taxpayers get hit from every direction, bailing out utilities they don’t want to rescue by buying assets they don’t need, and all the while little is being done to address looming summer blackouts.

While Davis claims to be concerned with the utilities finances, his motives are increasingly suspect when you consider the recent offer from the private firm Trans-Elect Inc. to purchase the grid for $5.25 billion. Davis refused, clinging instead to the idea of state ownership. Maybe he is less concerned with helping the utilities turn assets into cash as with getting his hands on those assets himself.

In the long run, Davis’ solution will only make things worse. State-owned transmission would be prone to political decision-making, which would slow down building new lines and drive up costs.

Privately owned transmission lines work; no other deregulated state has considered a state takeover of the grid. Or look at the Britain: It was the first country to enact electricity deregulation, which increased competition, lowered prices and spurred the energy industry to innovation. Britain’s transmission grid is owned and operated by an independent, for-profit company, National Grid (formed in 1990). When the British deregulation legislation set up National Grid, its mission was to deliver power efficiently while facilitating competition in other parts of the electricity industry, particularly generation. It also has built-in incentives from the regulator to manage congestion so that customers do not incur outage costs. National Grid has one of the best power availability records in the world, even in the face of growing demand.

For-profit transmission, not state ownership, will create a stable power environment for customers, returns for shareholders and dynamic incentives to innovate. Most likely, state ownership will mean higher electricity costs in the long run and political jockeying over transmission grid management decisions.

Adrian Moore is Vice President of Reason Foundation.

Lynne Kiesling is director of applied energy research at the International Foundation for Research in Experimental Economics and an adjunct scholar at the Reason Foundation.