LONG-TERM SYSTEMIC PROBLEMS SEEN IF STATE STAYS THE CURRENT COURSE

Contra Costa Times

With the lights no longer flickering and power once again cheap and abundant in the West, most California energy users probably woke up today without a hangover — at least of the energy variety.

But the state begins the new year without a clear resolution about how to build a more secure energy future, free from the sharp rate hikes, rolling blackouts and industry bankruptcies that marred 2001.

Some power industry insiders regret that California failed to turn last year’s energy crisis into an opportunity to fix a broken system.

“We survived,” said Michael Florio, senior attorney for the Utility Reform Network in San Francisco. “For that, we all should be grateful. But we didn’t create any coherent way of moving forward.”

And standing pat isn’t a very attractive option, according to the staff of the California Energy Commission.

“The market structure that currently exists is an ad hoc arrangement, created to respond to the immediate needs of the crisis that was averted,” it said in a recent report. “If pending electricity related financial issues are not resolved and positive steps towards fixing the market structure are delayed, California will most likely face long-term system problems.”

Those problems include a boom-bust cycle that could subject the state to more rolling blackouts as soon as 2005, the commission staff warned. Limitations in the statewide electricity grid could cause outages even sooner in some areas, including San Francisco and San Diego.

Analysts, advocates and economists have ideas — lots of them — about how to create a reliable infrastructure that delivers affordable power. But the many, sometimes contradictory, proposals presume the adoption of a broad energy strategy.

“There are many visions for the future, but nothing has really taken hold,” said Severin Borenstein, director of the University of California’s Energy Institute.

The spectrum of California energy consumers ranges from heavy industrial users, whose profits depend on cheap power, to small residential users, who view their monthly power bill as a mild irritant but a dinner-hour blackout as a major crisis.

That spectrum breeds diverse takes on the fundamental power policy choice confronting Californians: whether to continue on the so-far bumpy road toward a market-driven electricity industry or return to a bureaucratic system that, through regulation or direct government investment, promises reliability and stability but sticks ratepayers with the tab if system operators make mistakes.

With the state at a crossroads in energy policy, there is little public discussion about which direction to take. The issue is no longer on the front burner in the Legislature. An initiative on the issue looks unlikely. Even this year’s governor’s race offers a limited choice.

Meanwhile, the best and brightest minds in the energy industry focus on sorting out the residue of last year’s crisis, wrangling over who will get stuck with a statewide annual power tab that nearly quadrupled to $27.4 billion. In bankruptcy court, PG&E wants the judge to trump state law so that the company can generate a windfall and pay off creditors seeking $13 billion.

In other venues, Gov. Gray Davis and the state Public Utilities Commission have faced off over a logjam of issues, including utility rates, repayment of $6 billion borrowed from the state’s general fund, a $3 billion bailout of Southern California Edison and the cost of the state’s $43 billion portfolio of long-term power contracts.

Both tangles could shape the state’s energy industry for coming decades, by hiking utility bills or shifting ownership and oversight of power plants and transmission lines. But neither process is geared to develop a consensus, or even a mandate, about how to structure the energy industry. Instead, expect more crisis-driven tinkering and frequent policy reversals.

California flipped the switch on wholesale competition in 1998. It worked well at first but spun out of control in 2000. Urged on by Davis and others, private investors went on a power plant construction binge. Currently, more than 9,600 megawatts of new generation is under construction inside the state, with even more on the way elsewhere in the West, according to the Energy Commission staff.

But that construction boom has plunged California into an energy bust, with excess supplies and low prices smothering investors’ interest in power plant projects and likely to prompt owners of older power plants to mothball or scrap those facilities.

Additional supplies may seem superfluous now, but could be sorely missed during a hot spell, especially after renewed economic growth boosts energy demand, said Mark Bernstein, an analyst with the Rand Corp. in Santa Monica. “Two summers from now, I see the same mess we had” re-emerging, he said.

While economists and analysts argue that wholesale electricity markets can be structured to avoid the boom-bust cycle, even some market advocates worry that the growth of competition will be stifled by limitations in the grid of transmission lines that connect power supplies and electricity users in different regions. Grid bottlenecks make some Californians — including those in San Francisco and San Diego — vulnerable to energy shortfalls in 2003, according to the Energy Commission staff.

Bottlenecks in California and elsewhere have gotten the attention of the Federal Energy Regulatory Commission, which has asked Congress to give it more power to order grid operators to merge into large regional networks.

But Borenstein warned that efforts to ease grid bottlenecks could get bogged down in controversy between potential winners — power plant owners seeking access to new markets, and electricity users in those markets — and losers — the owners of power plants protected from competition by those same bottlenecks.

Some are suspicious of an increased role by the FERC which, according to recent testimony by Chairman Pat Wood, remains determined to “restructure the electric utility industry to full, effective wholesale competition.”

That, says Doug Heller, spokesman for the Foundation for Taxpayer and Consumer Rights in Santa Monica, sounds like a recipe to “take the California energy crisis and expand it nationally.” The foundation no longer plans a ballot initiative this year on energy, he said.

The nationwide advance of electricity restructuring has been slowed by the California crisis and the December bankruptcy filing by Enron Corp., the Houston energy trader that was the leading advocate for electricity deregulation.

That’s no loss to California, said Carl Wood, a member of the state Public Utilities Commission. “In my opinion, it doesn’t make a lot of sense to have unregulated power generators in California,” he said. “We can have utilities build power plants.”

Wood favors a return to the pre-1998 system of regulation, in which utilities such as PG&E had exclusive territorial franchises to produce, deliver and sell electricity, subject to rates and rules set by state regulators. Increased investment in that system could help rein in the so-called merchant generators.

“There has to be enough utility capacity so that it can discipline that power market,” he said.

Others are skeptical. Matthew White, a Stanford Business School professor, said regulation was a pork barrel system that produced a biennial round of political and financial horse-trading and failed to resolve disputes among participants. He dismissed the system as so awful that “it led virtually every participant (in the California market to support) the move toward deregulation.”

Gary Ackerman, executive director of the Western Power Trading Forum, an organization of power sellers, thinks the state already plays too big a role in the electricity industry. “What we have now (are) four regulatory agencies that altogether don’t add up to a megawatt-hour,” he said.

Others would like to see the state’s role expanded. California should “develop the Public Power Authority that has been created into a fully integrated public power system like the Los Angeles Department of Water and Power or the New York Power Authority,” said Heller of the Foundation for Taxpayer and Consumer Rights.

Such an authority could act as a “government competitor” in the power market, he said. With much of California’s aging fleet of power plants ready to be rebuilt or replaced, the Power Authority could step in to fund development of new capacity, Heller said.

S. David Freeman, chairman of the Power Authority, thinks it should merely function as a watchdog to make sure the state has enough power plant capacity, as well as to encourage conservation and the development of renewable resources. “I hope we never have to build anything,” he said.

Some see California’s future in a hybrid system that allows big users to cut power costs by negotiating separate deals with merchant generators but regulates small customers’ rates. Christopher Weare, a researcher at the Public Policy Institute in San Francisco, says such an approach would revive a “sensible political compromise” embedded in the state’s original restructuring plan.

A hybrid makes sense to Heller. “You could have a system where most people aren’t exposed to the marketplace,” he said. “Let the big dogs fight the big dogs and let the rest — use the retained generation.’

In the end, it likely will all come down to politics. “The main question is who’s in charge,” said Assemblyman Joe Canciamilla, D-Pittsburg. Currently, he said, “no one is running the show and no one is setting the policy.”

The power issue is likely to surface in this fall’s gubernatorial race. Both Davis and the early leader for the Republican nomination, former Los Angeles Mayor Richard Riordan, favor reliance on markets to price and prompt investments in power.

Riordan appears to be the more fervent advocate. “Private industry should build new power plants, not the state,” he said in a recent speech.

He has also called for abolition of the Power Authority, better terms for the long-term contracts and the “phase-out” of the California statewide grid operator in favor of a regional authority being promoted by the FERC.

Davis favors markets for wholesale energy but only with tough safeguards, said Roger Salazar, a spokesman for his campaign. “Deregulation can’t work unless we have (a 15 percent) surplus of supply over demand,” Salazar said.

Freeman, who is also an adviser to the governor, said that means a continuing role for government. “The market is going to have to have some public involvement to be sure that it stays in surplus,” he said.

That involvement could increase if power shortages and sharp rate hikes recur, Freeman said: “We’re going to give the marketplace a last, clear chance to function.”