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Energy plan: Flawed, in hindsight
Energy plan: Flawed, in hindsight

Problems apparent five years after California decided to deregulate power

SACRAMENTO - When he signed California's electricity deregulation law, Gov. Pete Wilson said it would lower rates, spark competition and improve service "so no one literally is left in the dark."

So much for predictions.

Nearly five years later, rates are up for millions of Californians, there's virtually no competition for electricity customers, the state lives with rolling blackouts and one bankrupt utility, and Wilson says he knew the law was an "obviously flawed mechanism."

Few, if anyone, anticipated this in the final days of the Legislature's 1996 session, when the deregulation bill passed unanimously and few interest groups uttered a word in opposition.

"It was like a big prayer meeting," said Nettie Hoge, executive director of the Utility Reform Network consumer group. "(Almost) everyone signed off."

Now, the flaws have become more visible. They include:

A rate freeze that initially kept electricity rates artificially high and then, when wholesale prices skyrocketed last summer, drove the state's biggest utilities deeply into debt. Wilson said the freeze kept the utilities from keeping pace with rising costs.

The Public Utility Commission's decision to discourage utilities from signing long-term contracts to buy power. People on all sides of the issue now say such contracts could have stabilized prices.

The creation of a financial incentive for utilities to sell their power plants to unregulated wholesalers, who then could hold utilities hostage by forcing up prices for power.

Failure by lawmakers to anticipate the higher energy consumption that accompanied the state's sharp economic growth in the late 1990s and 2000.

Assemblyman Bill Leonard, who helped write the deregulation law, said lawmakers didn't pay enough attention to state Energy Commission predictions in 1998 that power shortages could hit as early as 1999 or 2000 without more power plants.

"The Legislature in California has never done its oversight responsibility as well as it should," he said. "It's always working on new legislation and trying to solve new problems."

California's electricity consumption jumped 9.2 percent between 1996 and 2000 compared to 5.5 percent in the previous four years, according to the Energy Commission. This came as Arizona, Nevada and the Pacific Northwest increased their use as well, which dried up the power surplus of the early 1990s, said Mike Florio, an attorney for TURN.

If legislators had anticipated the increased consumption, they could have included tax breaks or other incentives to encourage more plant construction, said Leonard, R-Rancho Cucamonga.

Even so, electricity prices would have gone up without deregulation, said former PUC Commissioner P. Gregory Conlon, who voted for a PUC deregulation order that preceded the law.

Electricity wholesalers have profited from the state's power problems, but extreme weather conditions, limited power plant development, and increases in natural gas and pollution control costs for generators are mostly to blame for sharp increases in power prices, Conlon said.

But the PUC added to the problem by creating too big of a financial incentive for utilities to sell many of their power plants, he said.

In a recent report, the state auditor said increases in demand, lack of new plants and extreme weather all helped boost electricity prices. But the auditor also said the markets established by deregulation made it easier for generators to withhold power to get higher prices.

"The whole system was designed by (power) sellers, not by buyers," said Bill Sessa, a former spokesman for Pacific Gas & Electric Co., the state's largest utility company. "(The utilities) were looking at it from the standpoint of being sellers. The buyers of electricity were never truly represented."

Along with the flaws in the law, others have identified possible culprits who helped create California's current mess.

Senate Minority Leader Jim Brulte, who helped write the deregulation bill while in the Assembly, said Proposition 9, an unsuccessful 1998 ballot measure, created uncertainty that discouraged plant construction.

The proposal, backed by several consumer groups, would have ordered a 20 percent electricity rate cut and limited the ability of utilities to charge consumers to recover their noncompetitive investments.

But Energy Commission spokeswoman Claudia Chandler said the uncertainty surrounding deregulation, not Proposition 9, caused the lull in power plant development.

"We began getting applications again as soon as the 'deregulation' law went into effect," early in 1998, she said.

The commission certified only one plant, a 240-megawatt project that was never built, between 1995 and 1998. Since 1999, commissioners have approved 13 new plants with the ability to produce 8,464 megawatts. Seven are under construction.

Jan Smutny-Jones, executive director of the Independent Energy Producers Association, a wholesalers' group, says California's deregulation approach was too middle-of-the road.

"California was sort of a guy with one foot on the dock of regulation and the other foot on the boat of markets, and the boat left," he said. "California did not stay on the dock and did not get on the boat and as a consequence got wet."

Sen. Sheila Kuehl, one of 30 lawmakers who voted for deregulation and are still in the Legislature, says the state never should have considered deregulation in the first place.

"I believe what we've learned from this is that free-market principles only work where you can say no to a product," the Santa Monica Democrat said. "In a critical industry like energy, water, public roads, free-market principles do not work and these industries need to be strictly regulated."

Ex-governor says he knew of flaws

By Associated Press

SACRAMENTO - When he signed California's electricity deregulation law in 1996, then-Gov. Pete Wilson touted it as landmark legislation that would lower rates and provide a "powerful new stimulant" for business.

But Wilson says now he knew the measure was an "obviously flawed mechanism" that would need corrective surgery in subsequent years.

"I have said, and will say again, I signed (the bill) knowing that it was not a perfect free-market mechanism simply because I thought it was imperative to get California launched on deregulation," he said in an interview.

"I fully expected that in the future my successors, both my successor as governor and the successor to the Legislature or Public Utilities Commission, would see and remedy a couple of pretty clear faults."

A spokesman for Gov. Gray Davis, Steve Maviglio, said it was irresponsible for Wilson to leave the bill's flaws for his successor to deal with.

Wilson describes himself as the "driving force" behind deregulation. He was the "catalyst" that brought about a deregulation agreement among the state's second biggest investor-owned utility, Southern California Edison, businesses that use large amounts of electricity and independent power producers.

The state's three large investor-owned utilities - Edison, Pacific Gas and Electric and San Diego Gas and Electric - were "not especially interested" in deregulation until they saw it as a way to be compensated for their so-called stranded costs: nuclear power plants and other noncompetitive investments sooner than they would have, Wilson said.

Then "they did not simply acquiesce," Wilson said. "They eagerly embraced and lobbied for passage of the legislation."

Wilson called a cap on the rates, the law's most obvious flaw. Utilities have blamed the cap for helping them run up nearly $14 billion in debts since last summer.

Wilson said the utilities must have understood they were running at least a theoretical risk by supporting legislation with the cap but weren't concerned because at the time the cap was higher than wholesale power prices.

Asked why he didn't use the threat of a veto to demand a better bill, Wilson said he thought the flaws "could easily be remedied."

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