California Electric Woes May Impact Nation

Jan. 19, 2001 -- There is a saying going around the energy industry these days that the story behind California’s current crisis is a tale akin to the Titanic.

"It was designed never to have sunk and here it is sinking," said Michael Shames, executive director and co-founder of Utility Consumers' Action Network (UCAN), a non-profit consumer watchdog group based in San Diego.

And it's a dilemma that could sweep the nation.

State energy experts across the nation are now taking a closer look at California — which was supposed to be the leader for deregulation of the electric energy industry when it moved to partial market deregulation four years ago.

They say what is happening in California could potentially happen elsewhere if the right conditions exist. Now, industry experts say, the more than two dozen states moving toward deregulation will be looking more closely at California, not as a model, but to learn what not to do.

"For some, it says that deregulation doesn't work," said Adrian Moore, an executive director with the Reason Public Policy Institute, a policy research center in Los Angeles, Calif. "For others, it is an example of how you can mess up a really good idea."

The lessons from California, experts say, are important for other states, including Texas, New York and Ohio, which are also undergoing deregulation. In some cases, states have changed their approach after seeing California's crisis begin to unfold in recent weeks.

Pennsylvania and Texas, for instance, took the same general approach as California in its deregulation of their electric utilities, but "without all the micromanagement and rules and created a market where exchanges could occur voluntarily," Moore said.

In Pennsylvania, considered by many to be the most successful deregulation effort thus far, open competition has brought 130 different utility suppliers to the state, including the environmentally friendly "green power" that did not thrive before deregulation.

Lessons from California’s Deregulation Blues

California led the country in 1996 when it decided on a compromised deregulation plan that freed wholesale power prices but kept tight caps on prices it could pass along to consumers. The change initially brought profits to the utilities, but a sharp increase in demand has sent wholesale prices soaring — 100 times higher in some instances — forcing California's two largest utilities to buy at steep prices and sell back to the consumer at far lower rates.

The state saw its second day Thursday of rolling power blackouts that left 2 million customers without power for a short time, in an energy crisis that has drawn national attention much like the state's oil crisis first did two decades ago.

Gov. Gray Davis on Thursday declared a state of emergency to save the two utilities, Pacific Gas & Electric and Southern California Edison, from bankruptcy. Industry experts say the two utilities are currently holding as much as $12 billion in debt, and are now without enough credit to buy the power the state needs.

"They are losing so much each day that it is hard to keep track of how much they are in the hole," said David Nemtzow, president of The Alliance to Save Energy, a bipartisan, nonprofit coalition of businesses, government, consumer and environmental agencies, of the utilities' losses. "The stock prices are way down and their credit ratings are being pounded. It is an explosive situation."

California Sen. Feinstein Warns of ‘Ripple Effect’

Speaking during a Senate energy committee hearing Thursday, California Sen. Dianne Feinstein warned that if the two utilities declared bankruptcy it could lead to thousands of job losses in the state have a "ripple-effect" on the national and world economies. "It is that big," Feinstein warned fellow senators.

"Anybody that thinks this is going to stay just with California is dead wrong," Feinstein said. While the state must take action to resolve the crisis, "there clearly is a federal responsibilitiy here" to cap wholesale prices of power being shipped into the state. The Senator plans to introduce a bill Monday that would give the secretary of energy the power to place caps on wholesale electricity prices.

"The problem is going to get worse before it gets better," said Nemtzow, pointing out that the state's energy demands are at peak in the summer months — not in January.

If you were to break off California from the rest of the country and make it its own nation, it would have the sixth-largest economy in the world. Industry experts worry the energy crisis could send the economy in California spiraling downward, and as a result, cause economic calamities elsewhere in the West and farther East.

State officials said Thursday that the state was already beginning to feel an economic pinch as the power problems caused a shutdown of state's main gasoline pipeline and forced farmers todump milk because the dairy plants were operating on reduced hours.

What Went Wrong?

In hindsight, industry experts say, California moved too quickly in restructuring the state's electricity industry, and it may have actually created regulations that hamstrung the utlities it was trying to deregulate. It may have also been a bit of "bad luck," said Ashok Gupta, a senior energy economist with the Natural Resources Defense Council in New York City.

"There were complicating factors upon complicating factors," Gupta said.

A rapid increase in the state's population and a hot summer last year forced demand up even higher than expected, aging and rundown power plants made it difficult to keep up with consumer demand, and the utilities, tied to state legislative price caps, could not pass the increase on to consumers.

A decrease in the state's energy efficiency programs and the lack of incentive for private companies to build new power plants as the rules of the game were still in flux also contributed to the failures, experts said.

"Regulation has its own problems and different challenges, but there are risks when you go to a competitive model," Gupta said. "We're going through some growing pains."

In the short term, California may have to take drastic measures to help stem the dramatic losses of the utilities. Though not politically expedient, the experts say, that may mean passing on the cost to consumers.

The long-term solution, say experts like Nemtzow, will involve building more power plants while pushing energy conservation efforts.

"You cannot keep growing and plugging in and forget to preserve without producing more power."

Ultimately, he said, the state has a tough road ahead now that it has sunk into a crisis.

"At least the Titanic went down with its lights still on," he said.