San Francisco Chronicle - 23 Dec 01

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 29 Apr 09)

The Energy Crunch: A Year Later

Paying the price of power
After the state spends billions, PG&E faces bankruptcy and rates soar, the cost of keeping the lights on hits home

Mark Martin and Lynda Gledhill
Sunday, December 23, 2001

When the energy market's version of the "perfect storm" came ashore last January, it lashed California with full fury.

Power went out. Once-mighty utilities appeared doomed. Heating costs soared.

Elected officials -- some accused of inviting the disaster with a flawed deregulation scheme -- braced for the economic and political fallout.

The summer forecast was grim. A state renowned for Hollywood magic and Silicon Valley innovation faced financial ruin. Thirty days of rolling blackouts were projected. Some warned that the sick and elderly could die when life-support equipment flickered off.

Those dire predictions never came true, but the crisis that consumed the state earlier this year hasn't gone away.

"The days of energy blackouts are over," said Peter Navarro, an associate professor of business at the University of California at Irvine. "Now we're faced with financial blackouts."

California survived by conserving energy, building enough new plants to power 1.5 million homes and buying power from merchant generators. Unusually mild summer weather also helped the cause.

"We tamed the tiger," said S. David Freeman, the governor's outspoken energy czar who now serves as chairman of the newly created California Power Authority. "But it can still bite."

Taxpayers are out billions of dollars, the state's largest utility is in bankruptcy court, and ratepayers have been saddled with the biggest electricity hikes in state history.

In early January, Gov. Gray Davis and the Legislature devised a scheme to begin using tax dollars to buy power on behalf of the utilities, spending billions of tax dollars but stabilizing a market that had crumbled into chaos.

The state spent $6 billion buying electricity, and efforts to issue a revenue bond that would pay taxpayers back have been stymied by a political rift between Davis and the state's Public Utilities Commission. The spending spree ate up a huge budget surplus that could have helped a state now reeling from recession, financial experts say.

The long-term contracts -- worth an estimated $43 billion -- that Davis signed in the spring lock consumers into high energy prices for a decade.

Critics like Navarro say the governor had to sign contracts to get the state out of the spot market, where prices were racing upward. But Davis signed too many deals in a decision Navarro says will go down "as one of the worst public policy moves in state history."

Davis hopes to renegotiate the contracts as the state now finds itself in the embarrassing position of having to sell surplus power.

A Chronicle analysis of planned power purchases shows consumers will lose more than $3.9 billion through 2010 on electricity the state will sell for a loss. The analysis is based on the Department of Water Resources projections of future electricity prices and the projected surpluses created by the long- term contracts.

But state officials say the record rate hikes enacted this year -- residential rates jumped by 62 percent for PG&E customers -- won't go any higher.

"Rates have reached their peak," Freeman said.

Higher rates weren't the biggest concern for some. When blackouts struck Northern California over two days in January and then rolled across the state in March, Shannon Cashman of Walnut Creek was terrified.

Cashman's 5-year-old daughter, Madison, has a rare condition that causes her to stop breathing if she falls asleep and isn't hooked up to a respirator. To keep Madison from taking her usual naps, Cashman played games of Candyland with her during afternoon blackouts.

"It was scary," Cashman recalled.

While individual Californians struggled to save kilowatts, lawmakers scrambled to resolve energy issues many later admitted were too complicated for a quick political fix. An energy market poorly designed by the Legislature in 1996 was thrown into turmoil by a series of events that led to energy shortages.

Soaring natural gas prices, a dearth of hydroelectric power from the Northwest and scores of power plants shuttered for maintenance created the unstable market, said Bill Marcus, an economist who studies California's energy markets. Those problems -- coupled with the state's deregulation laws, which forbade utilities from raising consumer rates -- meant utilities could not recover their costs.

"The market failed in so many ways that no one could have dreamed of," Marcus said.

With the control room of the state's Independent System Operator, which is responsible for running the power grid, beginning to feel like a trading floor on Wall Street, Davis made attacks from his bully pulpit.

The Democratic governor vilified Texas energy companies -- which were seen as gouging California. Davis called on federal regulators to step in and implement price caps on wholesale electricity. They finally did in June.

Davis was criticized for not taking action on the energy issue earlier in 2000, when San Diego residents saw their electric bills skyrocket and experts began to warn that a financial meltdown was coming. San Diego's utility was the first to complete the transition to deregulation.

"Who knows how it would have turned out if anyone had acted earlier, if rates had gone up, or the utilities had contracted for power," said state Sen. Debra Bowen, D-Marina del Rey, chair of the Senate Energy, Utilities and Communications Committee. Davis also inaugurated conservation programs and urged Californians to change their habits. They did.

More than 30 percent of Californians earned a rebate on their power bills by cutting their usage by 20 percent. An energy fair at San Francisco City Hall drew crowds akin to a rock concert; Home Depot reported a 265 percent increase in sales of compact fluorescent light bulbs.

"The headline is that Californians did more than we thought possible," said Scott Matthews, deputy director of energy efficiency for the California Energy Commission.

Summer conservation numbers delighted experts like Matthews. June electricity usage was down 12 percent from the year before. On June 21, Californians used 4,000 megawatts less during peak demand hours than on the same day the year before -- enough to power about 4 million homes.

Conservation has waned this fall, but Matthews said the number of new, efficient appliances inside California homes will help the state save power for years.

This month -- one year after the state's first-ever Stage 3 power alert brought the energy crisis to the forefront -- California's energy market is again at a place few could have predicted.

Some of the ironies:

-- Houston's Enron Corp., which a year ago was a billion-dollar company with presidential access and the inside track to becoming the champion of energy deregulation, has filed for bankruptcy and come under scrutiny by federal regulators. The company has begged California to sell it megawatts to serve its clients.

-- Big power companies like Mirant Inc. and Reliant Energy Inc. -- still under investigation by the California attorney general for possibly withholding power during the crisis to drive up prices -- have told the Federal Energy Regulatory Commission that state power buyers unfairly manipulated the market to bypass them in favor of companies signed to long- term contracts.

-- Some worry that the state is so flush with energy that greater conservation efforts could cost ratepayers money by forcing the state to sell more electricity for a loss.

With nine new power plants on line this year and more than 20 scheduled to fire up next year, the Energy Commission predicts supply won't be a problem as long as Californians continue to conserve and the weather isn't extreme. The state power authority, created by the governor and the Legislature to lend $5 billion to energy projects, has shifted its focus from building plants dependent on natural gas to funding solar power and other renewable generators.

But billion-dollar questions remain.

Whether a bond to pay back the general fund will ever be issued is unclear. The uncertainty already has caused credit-rating services to lower the state's bond ratings, which raises the state's interest costs for future borrowing.

The Public Utilities Commission will decide in the next few months whether many big businesses will be allowed to avoid paying the same high electricity rates as homeowners and small businesses. Large-scale energy users took advantage of a key component of deregulation to sign "direct access" contracts with private energy suppliers this summer. The PUC could nullify those contracts.

And plans by both PG&E and Southern California Edison to get back into fiscal shape have been drubbed by energy experts, who say both companies want to avoid regulation while making their comeback.

How those issues will play out -- and the role they will play in the coming gubernatorial race -- will be the energy story for 2002.

Whatever the solutions, economists and consumer advocates say it will not be the utilities or the energy giants that will foot the bills for the damage left by the post-deregulation energy crisis.

"We have met the shareholders, and the shareholders are us," Marcus said.

State, federal agencies probing crisis

The energy crisis gave rise to several investigations by state and federal agencies:

-- California Senate Committee to Investigate Price Manipulation of the Wholesale Energy Market: Led by state Sen. Joseph Dunn, D-Santa Ana, the committee has examined several aspects of the energy crisis. Committee staffers are examining documents from energy companies accused of withholding energy to drive up prices. The committee also has taken testimony from state power grid officials accused by generators of manipulating the market to their benefit, and Dunn has said he will probe the sale of power plants to out-of- state generators in the 1990s and its relationship to the ensuing crisis.

-- California Attorney General Bill Lockyer: Convened a grand jury in June to investigate whether power companies manipulated the power market during the energy crisis. Lockyer also is looking into complaints that consultants hired by Gov. Gray Davis to negotiate contracts with energy providers had illegal ties to the companies.

-- California Public Utilities Commission: Continuing a broad investigation into the origins of the state's energy problems and whether the market for power was manipulated.

-- U.S. Securities and Exchange Commission: Will not comment on its own investigations, but two energy consultants hired by Davis have acknowledged the SEC has contacted them about allegations of insider trading. The two men allegedly bought and sold energy-related stock while working for the state.

-- California Fair Political Practices Commission: Investigating whether the governor's office erred in not requiring several consultants hired to handle the energy crisis to fill out forms indicating investments and other economic interests.

About the series

-- Today: Whatever happened to the energy crisis?

-- Monday: The march of folly that led to the energy problem.

-- Tuesday: Deregulation is not dead . . . yet.