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Commentary Solving the energy crisis lies in a ‘New Deal’ example

The bankruptcy of Pacific Gas & Electric, the planned purchase of Edison’s power grid by the state, and the rate hike of up to 80 percent all have one thing in common: Each does little to solve the basic problem of encouraging power generators to provide sufficient electric power at attractive rates to support a growing California.

What, then, could motivate the power generators to cooperate? The answer lies in a triumph of the New Deal, the Tennessee Valley Authority.

Much of Tennessee was without power in the 1930s. Power companies wouldn’t build there because banks refused to finance power projects, which in rural areas were considered risky. The Tennessee Valley Authority Act of 1933 guaranteed the government would buy electricity from qualifying power plants. This broke the impasse, and coal companies were able to get financing to build power plants.

California can adopt this TVA strategy to assure a steady supply of privately produced electricity at competitive rates.

Here’s how it would work: Producers would be invited to submit proposals to add power capacity , new plants or expansions of existing plants , that would be financed 100 percent by California.

To qualify, 75 percent of this new capacity would be dedicated to California on a “take or pay” basis. That is, the state would buy the power whether or not it uses it (unneeded power could be resold). The remaining 25 percent of new capacity would be for the power generator to do with as it wishes.

Each contract would call for power at a fixed rate over a five- to 15-year term, with the minimum amount of electricity increasing annually to keep pace with California’s robust growth. An inflation pass-along clause would protect the generator’s expected return on investment.

Generators would be assured of payment because contracts would be backed by the full faith and credit of California. And the state would be assured of performance because each contract would be guaranteed by a fidelity bond.


There are four reasons why this plan will work:

– First, it calls for new capacity instead of merely fighting over existing capacity.

– Second, it utilizes the initiative and experience of the private sector in siting, designing and building this new capacity.

– Third, it promises increasing profits at lower risk to power generators that are good operators because they will get state financing for 100 percent of new capacity but be required to sell at fixed rates only 75 percent of that capacity.

– Fourth, it will attract proposals from smaller producers, which otherwise might not have sufficient borrowing power.

In short, state financing will maximize competition, which was the whole point of deregulation. The formation of a California Power Authority with the ability to finance power plant construction would bring new supplies of energy into the market at a faster rate than demand is growing , about 4 percent annually , which is the only way to achieve lower prices.

Although it’s unlikely that wholesale rates will return to pre-2000 levels, surely California could obtain rates near $50 to $75 per kilowatt hour and growing power availability year-to-year as well.

Strike is a director of the national management consulting firm Ballenger, Strike and Associates, LLC, and is CEO of Modernfold Inc., an Indiana manufacturing company.

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