GP: California Electric Crises & Alternative Energy Investments

[Craig Hibberd <chibberd@earthlink.net>]

As an investment advisor, I have clients asking about investing in
alternative energy in California.  Until some of the major uncertainties
are removed and better energy policies are in place, I recommend
waiting.  I would appreciate some feedback on the following.  - Craig
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California was one of the first states to attempt partial electricity
deregulation. It was poorly done and has broader implications for
consumers in other Western states and investors in alternative energy.

The California's deregulation has been described as what would happen if
a decision were made to switch to driving on the other side of the
road.  But rather than doing it all at once, it was decided to have
trucks switch sides first, and then, at some future time, everyone else
would be asked to switch to the other side of the road.  Not a pretty
picture.

Today, Pacific Gas and Electric (PG&E) and Southern California Edison
(SCE) are financially up against a wall because of the combination of
extremely expensive wholesale electricity they are forced to buy and the
inability to pass this $8 billion in extra costs on to customers.  SCE
has requested a 30% rate hike.  But only a small rate increase has been
granted.  The stocks of both companies have plunged in value.  Pressure
is coming from other directions as well.  According to the December 13
Wall Street Journal; " . . . a consumer group urged the state to seize
and run the strapped $20 billion electricity system."  This mess is the
result of poor timing and partial deregulation.

Federal Reserve Chairman Greenspan met with California Governor Gray
Davis right before the Fed lowered rates on December 19th.  Energy
Secretary Richardson will convene a meeting on the California energy
problems this week.

These problems are bigger than just one state.  California's energy
problems are being exported. With extremely high prices, electricity
supplies are beginning to be diverted to California.

Compounding the situation are the low water levels causing much less
hydropower electricity generation in the western states.  One company in
the Pacific Northwest decided they can make more money re-selling their
electricity rather than by making aluminum. They are making enough from
selling electricity to make a profit and to pay workers not to work.

Natural gas prices are directly connected to electricity prices because
much of the new electric generation is fueled by natural gas. Some
natural gas suppliers in Colorado are reportedly canceling cheap
contracts in order to sell at higher prices to others.  Adding to the
natural gas demand are the six new California power plants under
construction. One Wyoming mine has seen it's natural gas prices triple
in one month.

The Western Governor's Association is now on the case.  They have
started the Power Watch Clearinghouse - located on the web at
http://www.westgov.org/wieb/power/. Here are some of the options
discussed during their December 20 meeting on the price issues:

- Impose hard caps on the price of wholesale electricity in California.
- Impose price caps for the entire U.S. portion of the Western
Interconnection.
- Appeal for conservation during critical shortage times.
- Allow waivers of environmental requirements during crisis
- Require all utilities to allow their customers to bid to reduce their
load in exchange for money.
- Implement near-term energy efficiency measures.
- Build power plants and transmission.
- Accelerate longer-term energy efficiency measures.
- Develop energy policies that avoid similar crises in the future.

Some of our investment clients are interested in alternative energy
investments.  They are asking, "What about investing in alternative
energy companies, particularly in California where high prices should
make the alternatives very attractive?"

Most of California's and the Western Governor's Association's efforts
are short-term in nature.  "Crises Conservation" and the other quick
fixes will increase investment uncertainty rather than creating a better
investment climate. Keeping the lights on will be the highest priority,
no matter what it does to prices, the environment, or the economics of
alternative energy.  Unless you are comfortable with these
uncertainties, wait for more stable energy policies before investing in
alternative energy in California.

Higher energy prices are similar in affect to a tax increase and have
the potential to further slow the economy. The old rigid,
compartmentalized electric utility system is breaking down and energy is
starting to flow toward the highest price. Western energy prices will be
this year's roller coaster ride.  Hang on!

Craig Hibberd
http://www.neweconomyinvestor.com

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This discussion group is sponsored in part by:
* Center for Renewable Energy and Sustainable Technology, http://www.crest.org
* Global Environmental Options, http://www.geonetwork.org
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