By Anna Pulley
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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.
Against that backdrop, millions of customers outside L.A., Sacramento, and other communities served by municipal power companies -- which generate their own power and are not affected by deregulation -- have been subjected to rolling blackouts this year. And as the critical summer months approach, and people start cranking up their air conditioners, there is widespread concern that the state's anemic power grid may suffer a meltdown. "People are extremely nervous about the summer," says Mark Baldassare, director of the nonpartisan Public Policy Institute of California, based in Berkeley. "Not just in terms of expense and inconvenience, but what the implications may be for the state's economy." Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., echoes a similar view. "Right now there's a window of opportunity through about July to get the [blackout] problem under control," he says. "Otherwise you're going to see businesses and industries already toying with the idea of picking up and leaving the state start to explore their options."
A slew of polls show that residents and business owners angered by the blackouts aren't buying the explanation of a power shortage that the utilities and power generators are pushing. In fact, Peter Navarro, an associate professor of economics and public policy at UC Irvine, suggests that the utilities and the power cartel have purposely turned the lights out to pressure Wilson's successor, Governor Gray Davis, and the Legislature into yet another utility bailout, something the accused parties vehemently deny. "The power generators have bled the utilities dry. Now it looks like they want to do the same to ratepayers," Navarro says.
Davis, who inherited the mess, has won decent marks from the public for his handling of the crisis thus far, but the full implications of his "rescue plan" announced earlier this month have yet to sink in. What seems certain is that millions of the big three utilities' customers will have to pay at least 19 percent more for their electricity starting next year, and perhaps much more. The state has already moved into the power-purchasing business, buying electricity that the cash-starved utilities can no longer afford, in order to keep the lights on, at a cost to taxpayers that has already surpassed $2 billion. And while the total cost of the complicated rescue package can't yet be determined, on the table in Sacramento are rescue-related bonds that could exceed $20 billion -- an unprecedented sum for state government -- to pay for everything from a state takeover of the utilities' power grid to a partial payment of the $13 billion in new debt the utilities have piled up since last summer, when wholesale prices skyrocketed.
A deregulation plan that was supposed to make electricity cheaper has instead shifted billions of dollars from the utilities and their customers into the pockets of the independent energy companies. But to blame the out-of-state cartel, which has become a favorite pastime of politicians -- including Davis -- is like holding vultures accountable for roadkill. "Deregulation was the biggest public giveaway since the railroads," says Harry Snyder, a longtime lobbyist for Consumers Union, based in San Francisco. "Those responsible for it have no one to blame but themselves." Like some others, he faults the hubris of politicians, undue influence by the utilities and their biggest customers, and a news media that failed to grasp deregulation's meaning, becoming captive to the faulty assumptions of regulators and lawmakers. Sherry Bebitch Jeffe, a senior scholar at USC's School of Policy, Planning and Development, sees the fiasco in a different light. "This entire mess is part of the fallout from the imposition of term limits," she says. "There's no institutional memory among lawmakers. There's an approach to policy that says focus on immediate political gain and defer the economic consequences to the next guy who comes into office after you're out of there." The numbers bear her out. Of the 120 lawmakers in the Legislature, only 30 were around in 1996 to vote for deregulation.
The push for deregulation began in the early '90s, but not -- as one might suspect -- at the urging of California's high-tech industry. The Internet's commercial infrastructure, with its reliance on air-conditioned rooms crammed with servers and routers, was not then the energy-guzzling colossus it has since become. Rather, it was big industrial users, such as cement and steel producers, who agitated for the right to buy electricity directly from providers other than the state's utility monopolies -- and for good reason. At the time, electric rates in California, although cheap by today's standards, were among the nation's highest.
As a pro-business Republican with presidential aspirations, Wilson had surrendered his U.S. Senate seat and was elected governor in 1990 just as the state plunged into severe recession. His first three years in office saw some 750,000 jobs disappear, and his public approval ratings dipped to single digits. Yet Wilson was a natural ally of the manufacturers, having come into office with the goal of reducing government's role in all the industries answerable to the Public Utilities Commission. Amid the layoffs and increasing threats by companies to leave the state unless something was done about electricity prices, Wilson took up the deregulation mantra, nudging his PUC appointees into action.