San Francisco Chronicle - 25 Dec 01

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

The Energy Crunch: A Year Later

Deregulation (sort of) lives on in state

Bernadette Tansey
Tuesday, December 25, 2001

In a spite of a year of retreat from California's electricity deregulation plan, the free market is far from dead in the Golden State.

In the popular mind, California is the state that took a 180-degree turn away from deregulation after an epic price blowup. But California hasn't really turned around -- it's more like a driver who has slammed on the brakes in the middle of the road, wondering where to go next.

Now that the blackouts are over and prices have stabilized, California is left with a hybrid system born from the crisis.

Power plants that are still owned by utilities are back to selling electricity at regulated rates. But more than half the plants once owned by utilities have been sold to private generators, which sell their electricity at whatever price the market will bear. And the free-market sector of California's power supply is growing, because all the new plants are being built by private firms.

"In California, you're in transition," said Mark Cooper, research director for the Consumer Federation of America in Washington, D.C. "I'm not sure anyone in California yet knows what the future is going to look like."

Deregulation could yet gallop ahead -- only this time, the state may not be the one to initiate it and may not be able to stop it.

Federal regulators appointed by President Bush are moving forward with plans to force utilities to let their transmission lines serve as open-access highways for power to be traded across vast multistate areas. Industry groups are arguing for the breakup of traditional utility systems, which use their own plants to feed juice into their own transmission lines, receive a guaranteed rate of return from regulated rates and face no competition from outside suppliers.

New Majority On FERC

Instead, generators say, the grid should be a common carrier linking competing sellers with buyers who could choose the best deal among them. Congress is considering proposals from both Republican and Democratic leaders for legislation to promote that goal and give the Federal Energy Regulatory Commission more control over the operation of state transmission grids, including California's.

Earlier this year, an adamantly pro-deregulation FERC was among the energy bogeymen as far as many California officials were concerned. Since then, however, a more conciliatory majority has emerged under new chairman Pat Wood. Stung by the perception that the former commission majority almost let California go bankrupt buying power before imposing effective price caps, the panel has backed away from an aggressive schedule for taking away state control of transmission lines.

Some consumer advocates say the commission is showing far more willingness to take time to design market rules that would prevent price spikes.

"FERC has taken at least a 90-degree turn, if not a 135-degree turn," Cooper said. "They've set a course to demonstrate that you can actually create a workably competitive wholesale market."

Nora Brownell, appointed to FERC in April by President Bush, said the commission still backed deregulation, in spite of California's crisis and the flameout of free-trade icon Enron Corp. Even so, she said, the commission recognizes that those failures raised alarms over rapid change.

"What I would say to the people of California is that we had a very, very horrible, painful experience from which we all learned," Brownell said. "Markets do work when they are real markets and when the rules allow them to work."

Still, California officials are waiting for proof that the commission will make the state's best interests a priority.

"We know how FERC regulates," said S. David Freeman, Gov. Gray Davis' chief energy adviser. "They let the marketplace do it."

Overhaul of PG&E

Another push to restructure California's energy economy could come with the overhaul of the state's largest utility, Pacific Gas and Electric Co.

PG&E is proposing to pay off billions in debt from the energy crisis in part by transferring its remaining power plants -- along with its huge natural- gas pipeline system -- to free-market companies that would be regulated by FERC rather than the state Public Utilities Commission. PG&E is asking a federal bankruptcy judge to override state laws that stand in the way.

PG&E Corp. President Robert Glynn Jr. said the plan would make the utility a creditworthy purchaser again, relieving the state of the need to buy power.

"It offers the state a path out of its participation in the energy business," Glynn said.

Consumer advocates say the PG&E plan steers a sharp turn back toward deregulation.

"It basically will determine whether the state has any ability to control its own energy destiny, or whether we're going to be supplicants at FERC for anything important," said Mike Florio of The Utility Reform Network.

Although PG&E's plan would shift a huge block of power into the private market, the company says it will protect California by selling its electricity to utility customers at fixed-rate contracts that would phase out over 12 years.

PG&E says those contracts wouldn't boost power prices, but state regulators and consumer advocates aren't so sure. Assembly Speaker Pro Tem Fred Keeley, D- Boulder Creek, said he would soon announce a rival plan that would put some of PG&E's assets under state ownership.

"It's ironic that their plan of reorganization in bankruptcy is to convince people that what went wrong with deregulation is that we didn't do enough of it," Keeley said.

Future of Power Authority

Keeley's plan would move the state government further into the prominent role it assumed at the height of the crisis in January, when it took over buying electricity and created a Power Authority to spend as much as $5 billion to increase power supplies.

Some Republicans want to go the other way. State Sen. Tom McClintock, R- Thousand Oaks, said California should abolish the Power Authority, undo long- term power contracts signed by the state and try again to set up an effective competitive market.

"Government blunders prolonged the surge in electricity prices and are the sole reason why Californians are now paying several times more for electricity than their neighbors," McClintock said.

Although controversy surrounds the state's power contracts -- and Davis is trying to renegotiate them -- the agreements line up a reliable core supply and may yield stable prices for as long as a decade.

But the state eventually will have to choose a strategy to secure a power supply when all the contracts expire.

Deregulation critics like Freeman think California should rebuild an inventory of power dedicated to serve state customers, perhaps by encouraging the utilities to build plants.

"It needs to be in the hands of people who have the interests of consumers at heart," Freeman said. "The private generators are going to keep us on short rations because that's how they make the big bucks."

Free-market advocates like McClintock say California should just encourage plenty of private plant construction, then reap the benefits by plucking the best deals.

But even deregulation's biggest backers say that strategy will work only if California makes sure there's no shortage of capacity for the state as well as its fast-growing neighbors. Otherwise, California could be scrambling for deals again in the middle of a price boom.

"The first lesson I hope everyone has learned is, you have to have sufficient infrastructure," Brownell said. "No matter what you do, if that imbalance exists, you're going to have a disaster."