Energy crisis cited as turning point for Davis

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The San Diego Union Tribune

SACRAMENTO — Facing his own blackout in the Oct. 7 recall election, Gov. Gray Davis has told voters at two town hall-style meetings that he regrets not acting quickly on the state’s energy crisis, the turning point that began his plunge in the polls.

At the same time, Davis continues to vigorously defend not taking the action that was urged by utilities as they ran up massive debts under a failed deregulation plan: a steep rate increase for consumers.

Now, more than three years after the crisis began when electricity bills soared in San Diego in May 2000, and more than two years after the crisis eased in June 2001, Davis still is looking for an answer.

Elected in November 1998, Davis entered 2000 with high job approval ratings, which plummeted early the next year. His numbers were driven to historic lows during the subsequent state budget crisis.

That combination of events lit the fuse for the recall effort.

As the electricity crisis began to unfold, Davis made it clear on several occasions that he knew he should take action. But he thought then, as he does now, that a massive rate increase would do more harm than good.

A big rate increase would have punished ratepayers, who did not ask for deregulation, and rewarded generators accused of gouging – not to mention posing possible political peril for Davis’s re-election in 2002.

The deregulation system was put in place in 1996 during the administration of Republican predecessor Pete Wilson, but did not take full effect until things went haywire four years later.

Davis, a Democrat, told voters at a meeting in San Francisco last week that “the only thing people were telling me to do” was raise electricity rates by as much as 400 percent.

“I knew instinctively that was wrong,” Davis said. “But I couldn’t figure out exactly what to do. Without going into a lot of details, I did what I was allowed to do.”

Davis said he spent $1 billion on energy conservation, including a program offering a 20 percent rebate for a 20 percent reduction in consumption.

Davis ordered the “fast tracking” of the approval and construction of new power plants, particularly the small “peakers” that run in periods of high demand during the summer.

“The combination of conservation and new power plants have actually served us pretty darn well,” he said.

Electricity rates, which eventually went up, are higher than he would like them to be, Davis said. However, he pointed out that California has not had blackouts in more than two years, while much of the Northeast endured a massive power failure last month.

“So while we had problems figuring out exactly what to do on energy, at the end of the day we are in better shape energy-wise in California than they are on the East Coast,” he said.

The deregulation plan approved in 1996 without a “no” vote in the Legislature created a crisis when the wholesale prices utilities paid for power soared, but the rates they charged customers remained capped.

The utilities lost billions of dollars as wholesale prices, expected to drop in winter 2000, continued to skyrocket amid charges that generators were manipulating the market by shutting down plants for maintenance.

Davis made an early and accurate diagnosis of the problem, warning in September 2000: “The current path of unconscionable wholesale energy prices will lead to bankrupting California’s utilities.”

Davis spent fall 2000 in a futile attempt to get the Federal Energy Regulatory Commission to control wholesale power prices, a move resisted by regulators known to be strongly committed to deregulation.

By January 2001, the utilities were deep in debt and unable to borrow. The state was forced to step in and begin buying power for the utilities in order to keep the lights on.

In the following months, Davis continued to say that it was his “hope and expectation” that the energy crisis could be solved without a rate increase.

“Believe me, if I wanted to raise rates I could have solved this problem in 20 minutes,” Davis said in February 2001. “But I am not going to ask the ratepayers to accept a disproportionate burden.”

The next month his appointees on the state Public Utilities Commission, despite Davis’s objections, approved a 46 percent rate increase for the customers of Pacific Gas & Electric and Southern California Edison.

Since then, federal regulators have concluded that market manipulation by generators was a factor contributing to the California energy crisis, and an internal Enron memo outlining manipulation schemes has surfaced.

“If I knew then what I know now, I would have acted quicker, and we could have gotten to the bottom of the problem quicker,” Davis said last week of the market manipulation.

But if he did not want to raise rates, what would Davis have done if he had “acted quicker?”

Davis did not say, and there were few alternatives to a rate increase being proposed as solutions at the time.

A consumer group was among those urging Davis to seize some of the power plants that California utilities had sold to out-of-state generating firms as part of the failed deregulation plan.

“He could either capitulate to blackout blackmail and raise rates and cut long-term contracts, or he could have seized power plants,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Given the market manipulation, Rosenfield said, the state could have obtained the plants at little or no cost. He thinks Davis, then regarded as a potential presidential candidate, did not want to seize private property.

In addition to a rate increase, utilities were pushing in 2000 for the ability to move away from the expensive spot market and obtain long-term contracts without fear of penalty if prices fell sharply in the future.

An advocate of an early rate increase, James L. Sweeney of the Hoover Institution, author of “The California Electricity Crisis,” said doubling the rates would have curbed prices by reducing the demand for electricity.

But Sweeney said Davis should not be blamed for failing to push for the expanded ability of utilities to obtain long-term contracts. He said the issue is complicated and the responsibility of the PUC, not the governor.

“I don’t think it’s fair to hang Gov. Davis with those,” Sweeney said. “I’m suggesting that you hang him with a few other things, with a different rope.”

Another author of a study of the crisis, Christopher Weare of the Public Policy Institute of California, thinks the answer was state and federal action to raise consumer rates and lower wholesale prices.

“In retrospect, a well-designed combination of increased prices and short-term price controls on wholesale prices implemented in 2000 could have avoided much of the damage of this crisis,” Weare wrote.

In the end, that is what happened as the state finally raised rates and the federal regulating agency, controlled by new appointees, belatedly capped wholesale power prices in June 2001 as the crisis eased.

When Weare was writing his study, published earlier this year, he estimated that the electricity crisis already had cost California about $40 billion.

Davis is criticized often for not acting as the crisis developed, and then rushing to sign overpriced long-term power contracts in March 2001 at the peak of the market.

It was another case where Davis correctly diagnosed the problem, but didn’t follow his own prognosis.

“As anybody knows, in the power business you don’t try and acquire all your long-term power at once,” Davis said as contract bids were opened in January 2001. “It’s done sequentially over time. That’s the methodology that assures the best price and best quantity of power for the ratepayer.”

But the state signed 56 contracts worth $43 billion at an average price of 6.9 cents per kilowatt-hour. Ongoing renegotiations have trimmed the amount to 46 contracts worth $33 billion averaging 6.6 cents per kilowatt-hour.

A PUC spokeswoman said the average electricity rate in California is now the highest of any state except for Hawaii’s.

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