Dim Bulbs

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.

Deregulation was hardly a novel idea. The federal government had already opened a variety of once-regulated industries -- airlines, telephone companies, and savings and loans -- to greater competition. After Wilson became governor, and with prodding from the feds, the PUC began to look for ways to encourage the development of independent power sources. It ordered the big three utilities to seek bids from companies interested in producing power for them. The response was strong enough -- especially among would-be producers of so-called environmentally friendly electricity -- to convince free-market advocates that there were plenty of companies eager to give the investor-owned utilities a run for their money. However, the utilities, led by Southern California Edison, persuaded federal regulators to cancel the bids, arguing that they were costly and unnecessary.

In 1993, the PUC produced a report that blamed the state's regulatory system for giving the big utilities no incentive to become more efficient. The 200-page document, known as the "yellow book" because of the color of its cover, for the first time suggested deregulation as the solution to the manufacturers' complaints. The next year, with Wilson's encouragement, the PUC went from suggestion to commitment. In a seminal 100-page policy statement that came to be known as the "blue book," it declared its intent to dissolve the old power monopolies and create an open market within two years. It was a giant leap, and as Cal State Fullerton economics professor Robert Michaels recalls, "a bit incredible in that it was all happening beneath the public's radar. For such a momentous step, there was amazingly little press or public focus on what it might mean."

For nearly a century, regulators had set rates and guaranteed an investment return for the utilities' shareholders. The utilities enjoyed a monopoly in exchange for the government's regulating them to make sure their profits weren't exorbitant. After all, it wasn't in the public interest for competing companies to string thousands of miles of duplicate power lines. But the utilities also became bloated under regulation. They had little incentive to trim costs since they could depend on the PUC to let them pass the costs to consumers.

Former Governor Pete Wilson, deregulation's godfather, says he's not to blame.
Gary Leonard
Former Governor Pete Wilson, deregulation's godfather, says he's not to blame.
State Senator Steve Peace disavows his reputation as the "architect of deregulation."
State Senator Steve Peace disavows his reputation as the "architect of deregulation."

Yet as the push to deregulate gained steam with the publication of the "blue book," California's three utilities were reeling from their enormous investments in nuclear and alternative power -- an estimated $28 billion. Frightened by the nation's dependence on Mideast oil, Congress in 1978 forced utilities to buy electricity from companies willing to produce it with solar panels, windmills, farm waste, or factory steam. But in California, regulators miscalculated how high oil and natural gas prices would go, and priced alternative electricity so high that the state became a magnet for the green energy industry. By 1994, California was home to 80 percent of the nation's wind- and solar-energy sources, and utilities were locked into expensive contracts.

If the utilities' green energy predicament could be laid at the feet of federal mandates, the experiment with nuclear power was a different story. The state's two nuclear power plants, which provide about 20 percent of its electricity, suffered massive cost overruns. PG&E's Diablo Canyon plant near San Luis Obispo was estimated in 1965 to cost $400 million, but ended up costing $5.8 billion. The San Onofre plant near San Clemente, jointly owned by Edison and San Diego Gas & Electric, was budgeted at $1.3 billion but cost $4.3 billion.

The utilities feared they would never recover those investments, known as "stranded costs," in a deregulated environment where they would have to lower rates to compete with companies selling energy from newer, more efficient plants. But sensing that deregulation was inevitable, they set out to shape it. By 1995, Edison was openly campaigning for the PUC to enact a British-style system that it viewed as less threatening than other proposals. Although it included an end to the monopolies, the scheme would still channel wholesale energy purchases through a regulated "pool," similar to a commodities exchange, which would bring buyers and sellers together while stabilizing prices. Big energy consumers didn't like the idea, complaining it would give the utilities too much control over the market. Big users pressed state officials to let them negotiate directly with other suppliers as part of any deregulation plan. PG&E, the largest of the utilities, generally sided with the manufacturers, as did Houston-based Enron and a host of out-of-state suppliers who have since made a killing in California.

In the spring of 1995, Edison and the manufacturers were at such loggerheads -- and the pressure each was bringing to bear in Sacramento so intense -- that deregulation almost foundered just as Wilson was getting ready to run for president. To get things back on track, the governor directed two aides, George Dunn, his chief of staff, and Philip Romero, his chief economist, to convene negotiations with the major parties. "It was analogous to the Arab-Israeli peace talks," recalls Romero, now dean of the business school at the University of Oregon. The participants included lobbyists and lawyers for Edison, the California Large Energy Consumers Association, the California Manufacturers Association, and the Independent Energy Producers Association. Consumer groups weren't invited. Over the spring and summer, these big-money interests -- meeting in hotel conference rooms, the governor's office, and the manufacturers association board room in Sacramento -- determined among themselves what deregulation in California should mean.

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