The Sacramento Bee

Two years after energy deregulation left Californians with soaring electricity prices, rolling blackouts and a bankrupt utility, Gov.-elect Arnold Schwarzenegger wants to give free markets another try.

Some consumer advocates and Democratic lawmakers say the former actor’s plan could mean a remake of the energy crisis. But Schwarzenegger says the best way to ensure low prices and encourage new power-plant construction is to “make markets work,” according to his energy policy statement.

His statement acknowledges the flaws in California’s first deregulation plan but says the state must reverse the course taken by outgoing Gov. Gray Davis – who put the brakes on deregulation after the energy crisis sent his popularity into a tailspin.

“It’s not about going back, it’s about going forward,” said Schwarzenegger policy adviser Joe Rodota, adding that California could learn plenty from other states where deregulation has succeeded. “I think you should expect aggressive action on this … early on in Arnold’s term.”

But given the pressing importance of resolving the budget mess, Schwarzenegger probably will wait awhile before tackling energy, some analysts say. “It won’t be the primary focus of the new administration – the budget and the economy will be,” said Gary Ackerman of the Western Power Trading Forum, an association of energy producers.

And the Democratic-controlled Legislature would be reluctant to embrace free markets again, said Sen. Joe Dunn, D-Santa Ana, one of the leading lawmakers on energy issues.

Still, many believe California has to chart an energy course quickly. Although things have quieted down – because the recession put a damper on energy consumption and the controversial long-term contracts signed by Davis provided the utilities with a dependable power supply – stability won’t last forever.

California still has a partly deregulated mechanism in which the big investor-owned utilities get most of their electricity from independent generating firms. As some of the state’s major long-term supply contracts begin expiring in the next couple of years, “we are evolving back to a spot market,” Dunn said. It was on the spot market that prices zoomed out of sight, forcing Pacific Gas and Electric Co. (PG&E) into bankruptcy protection.

In addition, California remains saddled with some of the highest energy costs in the nation – a point noted by Schwarzenegger in the campaign. And many forecasters say California could face energy shortages again by 2005, assuming the economy recovers, unless more power plants are built. Schwarzenegger would abolish the California Power Authority, an agency created by the Legislature in 2001 to build new power plants but which so far has done little. Schwarzenegger says the agency needs to go because its presence discourages private plant construction.

Also, generators see California as hostile territory. The issue was underscored Monday when Houston’s Reliant Resources Inc. said it has retired two small generating units near Rancho Cucamonga. Reliant said, “It is not economic to invest in the required environmental upgrades given current market conditions in California and uncertainty regarding future market conditions.”

Rodota, the Schwarzenegger adviser, said the new governor will move quickly to bring private investment back.

Business lobbyists also say Schwarzenegger’s energy plan won’t languish. “He is concerned about job security and the economic climate in California, and energy is a big part of that,” said Allan Zaremberg, president of the California Chamber of Commerce. “He’ll go ahead and say, ‘This is going to solve the budget crisis in the long run if I can keep high-paying jobs here.’ “

Schwarzenegger’s energy plan depends heavily on creating enough excess power generation so there’s no room for “market manipulation,” according to his policy paper. He would require utilities to meet “minimum reserve requirements” by having enough power standing by in case of a shortage. Many experts believe a legitimate electricity shortage – sparked by a surging economy and a decline in the supply of hydroelectric power – set the stage for the rampant market manipulation that followed.

The governor-elect isn’t just proposing a slew of new plants, though. Big customers would be given cheaper rates if they let the state shut off their electricity when supplies are tight. Big customers also would be subject to “real-time pricing,” in which rates shoot up when demand for electricity peaks.

“This is a very progressive vision of how to implement market incentives in a way that could benefit customers,” said Severin Borenstein, director of the University of California Energy Institute.

Schwarzenegger also would restore big customers’ “direct access” – the right to bypass the local utility and shop for electricity. Direct access was suspended in 2001, but business lobbyists and many in the Legislature want it restored in some fashion.

He advocates reducing California’s dependence on natural gas for generating electricity and focusing on alternative energy, including renewable sources. While campaigning, he said he wants California to reduce its energy consumption by 20 percent in five to eight years.

Consumer advocates, however, plan to fight Schwarzenegger’s deregulation proposals. “Californians prefer the stability and affordability of regulated electricity to the pitfalls of deregulation,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights.

Heller also cited a meeting at the height of the energy crisis in 2001, convened by then-Enron Chairman Kenneth Lay with California business and political leaders including Schwarzenegger, to drum up support for deregulation. Schwarzenegger “took a lot more from the secret meeting he had with Ken Lay back in 2001 than he would admit,” Heller said. “He shares Ken Lay’s values about electricity.”

During the recall campaign, Schwarzenegger said he didn’t remember the meeting. Rodota said Schwarzenegger’s energy policies represent “completely an Arnold Schwarzenegger-generated effort.”

Heller, meanwhile, said he believes Schwarzenegger will abandon efforts to collect $9 billion in refunds from energy generators – money the Davis administration says is owed to compensate ratepayers for overcharges.

Rodota, however, said the new governor will pursue refunds, and the generators’ spokesman Ackerman agrees.
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The Bee’s Dale Kasler can be reached at (916) 321-1066 or [email protected]