By Wayne Lusvardi

When did the California Dream begin?

Peter Huck, a refugee journalist from Los Angeles to New Zealand, has an answer. He writes in the July 20 issue of the New Zealand Herald newspaper “Sustainability Reinventing California Dream” that the California Dream began when Los Angeles Department of Water and Power’s William Mulholland said at the 1913 opening of the California Aqueduct: “There it is, take it.”

Huck believes that “sustainability” will lead to an economic recovery in California.

But the California Dream may have ended with California’s Anti-Sprawl Law, Senate Bill 375, which Huck champions in his article as an economic stimulus to get the state out of a managed depression.

More recently, the County of San Bernardino in California has proposed to use eminent domain to condemn mortgages on “over-mortgaged” homes.  The county would do this by spreading about 30,000 over-mortgaged loans to all 699,000-property owners in the county by way of additional property taxes.

If there is a new slogan for California nearly 100 years after Mulholland’s epic statement, it is: “Socialize losses and privatize gains.”  Which is another way of saying: “Everyone wants out of bubble-created debts, but no one wants to pay for them except through more bubbles.”

Yet no one in San Bernardino has apparently realized that reducing the over-mortgaged portion of home loans will just lower assessed property values and drastically reduce property tax revenues.  Mass delusion is starting to spread across desperate California just as the Tulip Bulb Mania, the South Seas Bubble and the Mississippi Bubble followed the debt bubbles of the 1700’s in Europe and early America.

“Sustainable” Transit Will Result in Unsustainable Water

Having handled land use for a regional water agency in California for 20 years, I find that Huck has focused on the ideological level of explanation, rather than the empirical.

Contrary to Huck, steering population and housing into coastal cities in California will result in an unsustainable use of water resources.  Infill housing near urban job centers may result in fewer auto emissions from auto commuting.  But diverting population growth to dense urban cities will also force greater reliance on imported water supplies from the Sacramento Delta and the Colorado River.  California’s cities depend on groundwater for about one third of their water during dry years.

What has historically made water valuable in California has been the relative cheapness of water from urban groundwater basins compared to expensive imported water.

The anti-sprawl law will require that cities adopt sustainable growth plans to shift new development from the urban fringe, where groundwater resources are more abundant, to highly dense urban areas, where local water supplies are patchy and often polluted from war time industrial toxic wastes.  It would take decades, if ever, to clean up polluted urban groundwater basins.

Viewing a map of groundwater basins and a map of housing density for California indicates that water and populations are not geographically proximate. The densest populated areas are mostly along the coast while most groundwater resources are inland.

Moreover, by virtue of shifting to reliance on imported water supplies, California will need to buy more imported electricity to pump that water to urban centers located far from the sources of water.  Will expensive Green Power mostly be used to pump water long distances?  Or will Green Power be dedicated to powering the proposed California High-Speed Rail Authority?

Solar power can only be used in mid-to-late daytime; while wind power mostly peaks at night.  But neither can be relied on for non-peak load power uses — homes, industries, hospitals, and public transit — because they are unreliable and thus unsustainable.

How Cal Energy Crisis Resulted in “Sustained” Drought

In 2001, this writer was a member of an Energy Crisis Task Force for a large regional government water utility.  The original cause of the California Energy Crisis of 2001 was the 1996 Federal Environmental Protection Agency “mandate” to California to clean up urban smog by 2001 or face a cut off of highway and education funds.

The only way to comply with the federal mandate was to shut down old polluting fossil-fuel power plants along the California coast owned by Pacific Gas & Electric, San Diego Gas & Electric, and Southern California Edison companies.  Then these obsolescent power plants had to be divested to private operators and converted to cleaner natural gas fuel power plants.

California was not running out of energy in 2001; it was running out of clear sky.  The real crisis was not energy, but how to pay off the old stranded or “underwater” mortgages — called corporate bonds — on the mothballed power plants. Everybody wanted smog eliminated, but no one wanted to pay for it.  Federal environmental policy became “clean air at any cost.”

The initial energy crisis solution in 2001 was to give a quasi-monopoly to natural gas suppliers, mainly in Texas, to try to pay off the bonds on the old power plants. This policy was erroneously called “deregulation,” which failed. The plug was pulled on deregulation by the Democratic legislature and governor and replaced with a system of energy price caps.

Retail electricity prices were eventually capped; but wholesale energy prices were not resulting in an induced energy pricing fever. This bubble in energy prices was intentionally created to pay off the unpaid mortgages on the mothballed power plants.  But it also failed miserably and even resulted in some fatalities.

Finally, some $42 billion in mortgages were paid off by energy price premiums loaded into long-term energy contracts mainly to run the pumps for the California State Water Project.  Smog reduction was paid for by inflated water rates.

By 2007, a man-made drought resulted from an environmental lawsuit to protect the purportedly endangered Delta Smelt fish in the Sacramento Delta. In 2010, an appeals court ruled that the allegation that the Smelt was endangered was bogus.

By manufacturing a drought, California not only protected a bubble in water rates that securitized the pay off of long-term bonds to reduce smog, but also brought about even higher water rates. These higher local water rates have not been repealed anywhere in California after the court-ordered drought was ended in 2010.

California Politician’s Dream Come True: “Taxation without Representation and Limitation”

Loading the cost to clean up the air into water contracts avoided having to go to the California Public Utilities Commission for an electric rate increase, to the Legislature for a tax increase, or to the voters for the approval of a tax increase, as required under Proposition 13.  To politicians, it was a California Dream come true: ”taxation without representation and limitation.” But it led to economic stagnation.

Long-term water contracts expire in 2013, when AB 32, the California Global Warming Solutions Act of 2006, kicks in.  In other words, in 2013 California will no longer pay premiums loaded into the price of water to pay off the cost to reduce smog.

But a replacement premium will be added to electricity rates to pay for the mandatory shift to expensive Green Power.  Solar and wind power located in remote areas is supposed to reduce urban air pollution but will add transmission costs.

This will prevent the building of new conventional power plants in urban areas where smog is trapped in urban air basins.  It isn’t solely pollutants that cause smog, but the trapping of pollutants in air basins.  The solution to pollution is dilution and dispersion — not anti-sprawl legislation that will concentrate more people in dense urban air basins who will travel to work in bullet trains subsidized by Cap and Trade taxes disguised as a pollution emissions market.

Moreover, back up conventional power plants will have to cycle up and down as the sun shines or clouds cover the sun and the wind gusts. Power-plant “cycling” will cause more air pollution as surely as pushing your gas pedal up and down constantly in your car or frequently moving your home thermostat will do the same.

The California Energy Crisis of 2001 ended up loading the huge cost to reduce smog into premiums in water rates.  That, in turn, resulted in the necessity of an artificial drought.  Instead of building more dams, reservoirs and pipelines, the only way left to manage water supplies was by conservation. California had to protect its water-rate bubble, and thus had to squelch any new water development or water markets for over a decade.  It needed a “sustainability” ideology to legitimate its conservation policy.  “Sustainability” is just public “hucksterism” if you will forgive the pun.

California may finally put an $11 billion water bond on the election ballot in 2014, coincidentally after the bonds on the California Energy Crisis of 2001 are paid off.

The Solution to Bubbles is Not More Bubbles

In Michael Lewis’ pop economics book, “Boomerang: Travels in the New Third World,” he describes the blowback from Greece’s debt-created bubble.  All Greeks wanted the national debt reduced, but nobody wanted to pay for it.

Greece tried to load its unpaid national debt into electric power rates.  This only resulted in ratepayers refusing to pay their electricity bills and falling revenues for the state utility agency.  The result was power blackouts, disinvestment by the bond market and social and political destabilization.  Should we expect anything less from California’s loading of the cost to reduce air pollution in water rates securitized by water conservation and legitimated by a “sustainability” ideology?

Contrary to Peter Huck, a “sustainability” ideology will not result in an economic recovery for California. The future of California’s economy is more likely to be slow growth due to having to pay down the private sector mortgage-debt bubble and the public sector’s pension, redevelopment and air quality-water rate bubbles.

Creating new tax bubbles by condemning “underwater” mortgages, by Cap and Trade “tax farming,” and by inflating Green Power rates, will only assure the older bubbles will be replaced with new ones.  California band musician Lawrence Welk famously invented “the Bubble Machine.” But perhaps comedian Stan Freberg was prophetically right when he recorded his spoof of the Lawrence Welk Show by saying it was time to “turn off the bubble machine?”

By Wayne Lusvardi

A rerun is playing on TV of the inaccurate 2005 “documentary” movie, “Enron: The Smartest Guys in the Room” about Enron manipulating the California Electricity Crisis of 2001. It features Sen. Barbara Boxer, D-Calif., and former Gov. Gray Davis, D-Calif.

Back in the real world: the California electricity grid operator has accused JP Morgan, Barclays, Deutsche Bank AG, and several other banks of more recently manipulating the California electricity market.

Concurrently, as Katy Grimes reported on CalWatcdhDog.com, the California Legislature passed a hidden trailer bill as part of the 2012 state budget package that shrouds public information on its green energy trades under its Cap and Trade Program trading hub in Delaware.

Apparently, if you’re in the private sector, you have to disclose not only your energy bid, you have to disclose its intent. But if you are in the public sector, you can get away with not disclosing green energy bids at all.  Such is the double standard in California, where the private sector is criminalized before its day in court and the public sector can get away with anything it wants without the mainstream media even reporting it.

Media Focus: “Make-Whole” Payments in the Day-Ahead Energy Market

The energy-trading arm of JP Morgan is said to have cost electricity ratepayers $73 million since 2010 in self-serving energy trades.  The Federal Energy Regulatory Commission is investigating the allegations made by the California Independent System Operator that coordinates 80 percent of the electric transmission grid in California.

At issue to Cal-ISO are trades made by JP Morgan Chase, Barclays, Deutsche Bank AG, and other banks in what is called the “day-ahead” wholesale electricity market.  After the 2001 California Energy Crisis, the California electricity market was reformed to require all retail energy providers to schedule their bids one day ahead of time to prevent market manipulation.  Cal-ISO was established to serve as a coordinator of the grid and also to bring transparency to energy trading. Cal-ISO is an impartial, non-governmental grid operator.

In order to encourage competitive bidding for the provision of retail electricity, Cal-ISO reimburses bidders twice the preparation cost of their bids.  This practice is called “full cost recovery” or “bid cost recovery.”  Where bid manipulation enters the rules of the bidding game is where a bidder bids so low that they qualify for the ISO’s roster of potential electricity suppliers. Once on the roster, the bidder qualifies for double reimbursement for preparing a bid.

The same bidder would then price its electricity so high in the real time “spot market” that the ISO wouldn’t buy it.  Thus, the bidder was assured of never having to actually sell power, but would get reimbursed for submitting a bid.  This bid splitting practice is what Cal-ISO has referred to FERC for review.  Cal-ISO alleges that banks using such bidding strategies never had any intent on selling power, just skimming bidding fees.  This may have cost electricity ratepayers hundreds of millions of dollars.

Shrouded Cap and Trades

Meanwhile, the Committee on Budget and Fiscal Review of the California State Senate attached a rider to its 2012-2013 State Budget Package, Senate Bill 1018, to allow the California Air Resources Board to end run around the California Open Meeting Act on its pollution-credit energy trades.

CARB’s private Delaware Corporation, Western Climate Initiative Inc. — set up to manage air pollution emissions trading under its Cap and Trade Program –- doesn’t have to comply with California’s transparency law for its Delaware trading activities.  This action was snuck into Senate Bill 1018 on July 26 and signed into law with the state budget on July 27.  The same rider on SB 1018 also allows Cap and Trade taxes to be siphoned into designated accounts for use by the State Legislature.

On July 27, Gov. Jerry Brown used his veto power to reduce the amount of funding for State Parks and Recreation, but left CARB’s exemption from the state Open Meeting Law unchanged.

The final vote on SB 1018 in the State Senate was 58 percent in favor.  The minority Republican Party was unable to gain any compromise, amendments, or vetoes to the State Budget Package or rider bills. This was because Proposition 25 eliminated the previous two-thirds vote requirement for taxes and the state budget.

Voters originally passed Prop 25. to permit the passage of a state budget on time, to not delay funding for public schools and the needy.  The state budget was barely passed on time on the June 15 deadline by the Legislature.  Prop. 25 is now being abused to approve items having no bearing on taxes or the state budget. This is one of several reforms sought by political reformers in California in the name of greater “democracy.”

Of course, the mainstream newspaper media, such as the Los Angeles Times and San Francisco Chronicle, have focused on reporting the alleged bank abuses of energy bids. But the same newspapers have “blacked out” any coverage of the Legislature’s granting to CARB an exemption from state meeting laws for its out-of-state pollution credit-trading arm.

Why should the public’s attention be focused only on manipulated energy bids and not also on hidden legislation that would shroud green energy trades?

Is this Enron 2?  We Don’t Know Yet

Times columnist Michael Hiltzik writes that what banks have recently been doing is the same as what Enron did:

“What’s worse, it shows that we haven’t learned anything from Enron’s bogus energy trading, the disclosure of which helped destroy that firm in 2001 and land several of its executives in jail. To the extent it was designed to exploit loopholes in energy trading rules, experts say, the scheme allegedly perpetrated by JPMorgan Ventures Energy Corp. is cut from the same cloth as Enron’s infamous ‘fat boy’ swindle, which cost the state’s ratepayers an estimated $1.4 billion in 2000.” 

From what Cara Ellison writes on The Enron Blog, Enron’s “Fat Boy” trading strategy would have been similar to what JP Morgan is presently accused of.  She quotes California Treasurer Bill Lockyer:

“According to Bill Lockyer and other anti-Enron types, Fat Boy was less a trading strategy than just a plain old lie: Enron traders would tell electricity officials that it was going to use more power than it actually intended to use. That way, Enron would reap extra payments by appearing to deliver more power on a high-demand day when, in fact, it was merely using less power than promised.”

However, I believe Ellison accurately states Enron’s Fat Boy trades were numerically “minuscule, rare, and inconsequential” and a case of prosecutors piling on charges. This in no way denies that Enron executives committed accounting fraud and other crimes for which they were prosecuted and convicted.  All it indicates is that Enron did not cause the California Energy Crisis of 2001 and its energy trading practices were overblown mainly for political gain to keep the focus away from government’s complicity in the Crisis.

Katarzyna Klimasinska of the San Francisco Chronicle says price-manipulation charges against JP Morgan are not the same as for Enron, which was accused of driving up prices by shutting down power plants during the California Energy Crisis of 2001:

“The price-manipulation allegations against JPMorgan’s energy-trading unit appear to differ from charges against Enron Corp.’s power traders during the California energy crisis of 2000 and 2001, John Olson, managing partner of Pool Capital Partners LLC in Houston and former energy analyst at Merrill Lynch & Co., said. Enron was accused of driving up prices by persuading operators to shut down, he said.”

As someone who was behind the curtain of government during the 2001 Energy Crisis, I personally investigated the accusation that Enron manipulated power prices by shutting down power plants.  There’s an infamous tape from Jan. 17, 2001 of Enron traders asking an operator to shut down a 52-megawatt power plant in Las Vegas. But that was grid congestion, not lack of power. Relieving grid congestion would have lowered, not raised, electricity prices.

My experience with the California Energy Crisis of 2001 indicated that it was public utilities such as the Los Angeles Department of Water and Power, the city of Pasadena, and the Southern California Power Authority that gamed the energy trading system the most and reaped huge monetary windfalls.  Moreover, it was private power providers such as the Mirant Corporation that kept electric “spinning reserves” available and were the unheralded heroes of the crisis.

Do Regulators Have a Duty to Keep the Regulated Legal? 

What the media typically know little about the electricity and energy markets.  And is not known typically is misreported and ensationalized.  The press usually asks the wrong questions and thus gets the wrong answers.  To pre-indict the banks named in this energy trading case is premature and irresponsible.  Here are some questions that might be more helpful at this stage of the investigation based on my experience on a 2001 Energy Crisis Task Force for a large water utility, my experience as a real estate appraiser and manager and some plain old common sense.

As pointed out by online newspaper commentators, imagine that California decided to sell off surplus equipment for a few dollars and you knew you could re-sell it for $100 on eBay.  Would it be wrong for you to do so?

Or if an elderly person advertised their old, but historical car with low mileage for sale but you knew you could re-sell it for big bucks, would you buy it?

Or if you are a real estate broker and someone keeps submitting tricky high bids full of weird conditions, should you take the high bid or just take the simple lower cash bid?  If a broker recommends to his client taking the tricky high bid and later gets the seller ensnarled in a lawsuit, can the seller sue them? Most brokers I have encountered prefer to just take the most straightforward bid, despite the price.

Is the problem inherent in such situations the abuse of the buyer or the problem of an unknowledgeble seller?  Should you be able to call in the cops, the district attorney or a small claims court judge to recover what you later learned you lost on your old car?

These questions seem to be how the average person in the street or a professional real estate broker would frame such a problem.  But that is not how Cal-ISO and the mainstream newspaper media frame it.  They frame it as likely criminal or pre-concluded unethical activity.

Indeed, taking advantage of energy trading rules may be found to be an abuse.  But if so, who is to blame?  Is Cal-ISO just covering up the public perception of its own ineptness or is it cracking down as it should as a regulator?  Is it the role of regulators to “acquire” violators, just as cops may be said to acquire criminals? Is the proverbial “thin blue line” of social order to be kept first by citizens or solely by the police?  Do regulators have a fiduciary duty to keep those they regulate out of legal trouble?  Or is using the media to bring attention to such trades a way to publicly shame those who straddle the line between what is legal and what is moral?

And in the case of Legislature, now with no limits on what it can get away with, who will help the public focus on abuses of the Open Meeting Law? Certainly not the mainstream media in California.