The New York Times
California’s great experiment with utility deregulation relies on the wisdom of the marketplace to keep things running, but as the threat of utility bankruptcies, sharply rising electric rates and dimmed Christmas lights grip the state, the marketplace has no clear idea of what to do.
Worse yet, it seems to many Californians, neither does anyone else, from political leaders who have every incentive to keep the state’s economy humming to the agencies charged with keeping the lights on.
In fact, things have grown so tense that these people are lashing out at one another, and in some cases are barely on speaking terms.
California’s usually mild-mannered Democratic governor, Gray Davis, has sharply criticized federal regulators for dragging their feet, calling them “armchair Washington bureaucrats.” Calling the deregulation experiment a disaster, Mr. Davis has also complained that those in charge of the state’s power grid are not doing their jobs.
The chief executive of that network, in turn, freely admits that he purposely did not consult with the governor when the system neared a breakdown in mid-December.
The utilities, which were big contributors to the governor’s 1998 campaign, say he has been slow to react to a crisis he was warned about months ago. Consumer advocates are also mad at Mr. Davis for meeting privately with the executives to work out a rate increase. To make matters worse, officials in surrounding states are angry about being pressured to sell their own scarce power to California.
All this would be mildly amusing for spectators if the world’s sixth largest economy and the center of the technology revolution were not at stake. “The interested groups don’t care if they drive this state into recession,” said Joel Kotkin, a senior fellow at the Davenport Institute for Public Policy at Pepperdine University. “Essentially we are going to take an economy the size of the United Kingdom and cut the juice so it doesn’t function.”
Few people predicted the straits that California would be in when it decided in 1996 to deregulate its utility industry. Then, the state had plenty of electricity and most people thought that new competition would lower prices for consumers and businesses alike. But energy companies, worried that the end of regulation would mean the end of guaranteed profits, stopped building power plants in California.
Ground zero for the energy crisis in California is a nondescript office park building in Folsom, a rural town 18 miles northeast of Sacramento.
It is the headquarters of the California Independent System Operator, the nonprofit group that manages 75 percent of the state’s power grid. Two weeks ago Terry Winter, the chief executive of the independent operator, worried that his engineers were consumed with endless haggling for spare megawatts to avoid daily blackouts, went behind Mr. Davis’s back and appealed to federal regulators to lift a price cap on electricity sold in California. That, he hoped, would keep the lights on.
Mr. Winter said that he and Mr. Davis have not talked for weeks — it is only their staffs that speak — despite the fact that wholesale electricity prices have skyrocketed and California’s energy market was turning into “a big Turkish bazaar.” Further, he explained, “If I called the governor, he would have said, ‘Don’t make the call.’ So do I violate his order? I had people on the floor exhausted.”
Mr. Winter might have learned that Governor Davis and his staff had been quietly negotiating with two investment banks to guarantee loans to ensure the state’s utility companies remained solvent, buying more time. Once the banks heard the price cap had been lifted, exposing them to unknowable losses, they balked on the loans, Mr. Davis said.
“If you’ve concluded I’m not a fan of the Independent System Operator, you are right,” the governor said recently. “We’ve been spending too much time doing their job for them.” The political stakes are high for Governor Davis, who is calling for more control. That’s because President-elect George W. Bush is preparing to name a new energy secretary and his free-market outlook collides with that of the governor. Governor Davis, who has already spoken to Mr. Bush about the energy crisis in California, has been seeking the counsel of experts recently and is expected to meet with Federal Reserve Chairman Alan Greenspan next week.
“These guys are all under enormous political pressure,” said former Gov. Pete Wilson, a Republican, whose administration backed the deregulation legislation in 1996. “You can escape blame by assigning it to someone else.”
Meanwhile, the Independent System Operator, born of deregulation in 1998 with the blessing of utility companies, politicians and regulators, lurches from calm to chaos almost hourly.
At about 8 a.m. on Dec. 13, power generators from the Northwest, worried about credit problems at California’s two largest utilities, Southern California Edison and PG&E, balked at sending the state much-needed electricity.
Panic spread through headquarters there as more than three million homes were expected to go dark.
Officials frantically called executives at power generators in the Northwest to “see what we could argue out of them,” said the chief operating officer, Kellan Fluckiger. But as quickly as that crisis subsided, another surfaced. Governor Davis released the power generators’ names, which are supposed to be kept private, angering one executive who threatened to cut off shipments altogether.
“Am I worried about people getting into accidents because they have no traffic lights? Of course,” Mr. Fluckiger said that day, his eyes crimson from lack of sleep. “But I have no sense of what I need to do.”
Just who exactly has the power to address the concerns with the power generators is the cause of much friction. With deregulation, the authority over the power plants was transferred from California officials to the Federal Energy Regulatory Commission, which pursues a free market approach. This is frustrating to Governor Davis, who wants more control over the plants.
Some experts say the solution is not that complex. “I would advise them to take a break, say it isn’t working and start all over,” said Paul Joskow, the director of the Massachusetts Institute of Technology’s Center for Energy and Environmental Policy Research.
But James J. Hoecker, the chairman of the Federal Energy Regulatory Commission, said California needed to get its own house in order. “Our disagreement is over how to solve the problem,” he said, “not what the problem is.”
In fact, a quick resolution may be forced on state officials by Southern California Edison and PG&E, which are threatened by insolvency because skyrocketing wholesale power prices have left them with huge bills they cannot pass on to consumers.
“We need some leadership here,” said John E. Bryson, chairman of Edison International, the parent of Southern California Edison, which today shed 400 contract labor jobs. “This has gone on for too long a time.”
Some utilities, fearing they would not have enough money, have had to consider rationing power.
Whatever steps are taken to solve the financial crisis in the short term, everyone agrees that more power plants and stringent conservation are needed. “We’ve got a ton of power plants in the pipeline and all of them are good,” said Daniel Kirshner, an environmentalist who is on the board of the System Operator. “But we have to get the religion that energy conservation is even better.”
More supply alone, though, is not enough, said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights. He said his group wanted a ballot initiative for 2002 that would seek to impose a windfall profits tax on power generators and suppliers, and create a public power agency with authority to build and operate power plants.
“This was politics that got us into this mess and it will take us politics to get us out,” he said.
That is little comfort to the engineers who are managing the electrical system this winter. On Tuesday, Mr. Fluckiger had a new crisis. A transmission line went out of service, making it difficult to transfer electricity from the deserts in the south to users in the north.
Now blackouts in Northern California are a possibility over the holiday weekend. I guess, Mr. Fluckiger said, “we would really be the Grinch who stole Christmas if we did that.”