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Greedy out-of-state profiteers make easy targets, but the real villains of California's energy debacle are the ones under the state capitol dome.

Wednesday, Mar 7 2001
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The setting was a politician's dream. With TV cameras rolling and surrounded by beaming lawmakers and business leaders, then-governor Pete Wilson stood in front of a San Diego high-tech firm in the summer of 1996 to sign a landmark bill that promised to lower electricity rates for all Californians. The state's watershed electricity deregulation law, passed without a single opposition vote in either chamber of the Legislature, seemed to offer something for everyone. Big industrial users of electricity, having long complained about paying too much compared to their brethren in other states, were promised rate relief. Pacific Gas & Electric and the state's two other big investor-owned utility monopolies -- Southern California Edison and San Diego Gas & Electric -- were to be unburdened of billions of dollars in bad investments in nuclear power. Residential customers were promised a 10 percent rate cut for four years or until the utilities could get out from under their debts, whichever came first. And in keeping with the new competition that the law was supposed to engender, residential and small business customers could choose from an array of new power distributors eager to sell them electricity at ever lower prices.

In political parlance, deregulation seemed strictly win-win. California was at the forefront of a national movement, and the theory of breaking up its monopolistic energy-delivery system looked appealing. It was supposed to work like this: The big three utilities, which combined serve 27 million customers (although not those in Los Angeles, Sacramento, and a handful of other cities with publicly owned electric utilities), would sell many of their power plants to independent energy generators. A multiplicity of those leaner, meaner generators would produce power more cheaply and efficiently than the monopoly utilities had. The utilities would then buy power from the independents, from one another's nuclear and hydroelectric plants, and from other out-of-state generators hooked up to a multistate power grid, in a new power marketplace called the California Power Exchange.

But beneath the breathless cheerleading, there were signs that the anticipated benefits were stacked in favor of the utilities and big industrial users, as opposed to ordinary consumers. As they rushed to put their official stamp on the deregulatory scheme, the state's lawmakers, Democrat and Republican alike, were awash in campaign contributions from the utilities and other powerful interests with a stake in the outcome. Having bought into the purported logic of deregulation, the lawmakers could stuff their campaign war chests even while crowing to the folks back home about the wonderful thing they had done.

Foremost among them was Wilson. As the political godfather of deregulation, his starring role in this free-market saga was perfectly suited -- not to mention timed -- to distinguish him on the national stage from a pack of fellow Republicans with designs on the White House. First, he assembled leaders from among the utilities and big manufacturers to hammer out a series of backroom deals in the summer of 1995 that set the terms of deregulation -- terms that his appointees to the state Public Utilities Commission, which regulates utilities, later rubber-stamped. Then, by exerting pressure on key legislators, most notably senators Steve Peace (D-El Cajon) and Jim Brulte (R-Rancho Cucamonga), to ensure that the Legislature codified what the PUC had done without much tinkering, Wilson more than anyone became responsible for fashioning the experiment. "It's like a Batman cartoon. There are so many deregulation villains it's impossible to count them all," says Michael Shames, executive director of the Utility Consumers Action Network, a San Diego-based consumer watchdog group. Still, in the final analysis, he says, "Wilson made it happen."

Rarely have so many elected officials marched in lockstep with such disastrous consequences. Four years after one of the most far-reaching pieces of legislation ever to come out of Sacramento rolled through the Legislature in less than three weeks, a Pandora's box has spilled open, threatening to halt the Golden State's economic boom dead in its tracks. What deregulation's boosters never counted on was that out-of-state energy generators might decide not to play the game that the Legislature and the regulators designed for them. Instead of offering the output of their plants to the Power Exchange at slightly more than the cost of generating it, these suppliers have offered to sell only at sky-high prices, or not at all.

They're able to get away with it because, unlike in other states that embarked on deregulation, California's PUC -- after the 1996 law was passed -- forced the investor-owned utilities to sell off their power plants and prohibited them from entering into long-term contracts for energy supplies. The idea was to prevent the utilities from dominating the new market arrangement, but things didn't work out that way. Reduced to obtaining energy from a spot market that critics say a mostly Texas-based cartel of energy companies has been able to manipulate, two of the utilities -- PG&E and Edison -- have been pushed to the brink of bankruptcy. Under the rate freeze that the utilities were eager to accept as part of the scheme to let them recover a combined $28 billion investment in nuclear and alternative energy, the utilities became victims of their own game. That's because, since the out-of-state manipulators began sending wholesale prices through the roof last summer, the utilities have had to pay far more for a kilowatt-hour of electricity than they're able to charge their customers under the frozen rate structure.

Last year, when the Dow Jones Industrial Average fell nearly 5 percent, out-of-state power companies that piled into California's chaotic market saw their profits spiral heavenward. Dynegy Inc., of Houston, which owns three major California power plants, saw its net income triple to more than $500 million. Even a company such as Enron Corp., also of Houston, which owns very little generating capacity in California but has nonetheless profited from the run-up of wholesale prices, reported record profits of $1.3 billion, up 32 percent from the previous year.

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Ron Russell

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