State Critical as U.S. Tries to Keep Power On

Calling deregulation of California’s electric power industry a worthy effort that has unfolded disastrously, the Federal Energy Regulatory Commission on Friday launched a multipronged effort to calm a crazed electricity market and keep the lights on across the state.

The commission issued a complex order that allows the state’s utilities to save money by bypassing the soaring market. It allows utilities to keep the power they generate--rather than buy it back at inflated prices--and to sign long-term contracts with other suppliers.

But the commission’s attempt to lower prices while preserving the deregulation movement was immediately attacked by utilities, consumer groups and state officials. Gov. Gray Davis accused the commissioners of acting “to ensure unconscionable profits for the pirate generators and power brokers who are gouging California consumers and businesses.” He called a special session of the Legislature to craft a swift state response.

U.S. Sen. Dianne Feinstein (D-Calif.) offered a similarly harsh appraisal. The commission’s order was “too timid, too weak, too uninspired to do what is necessary in this crisis,” she said.

Consumer advocates said the real solution to the state’s energy crisis--which so far has not been felt by most consumers--is to reregulate the electricity market by setting a firmer cap on prices than the one imposed by the federal commission. The five commission members, appointed by President Clinton, oversee wholesale electricity rates nationwide.

The order--some provisions of which require state action before they take effect--was applauded by energy wholesalers, who had feared tougher restrictions.

The chief of the California Independent System Operator, a key component in the statewide energy grid, also welcomed the action but warned that it is no cure-all. Kellan Fluckiger said the state shouldn’t expect any significant relief until the summer of 2003, when several major power plants--the first built in more than a decade--are finished.

“None of the changes today create any megawatts,” he said.

The commission’s order changes the market in several significant ways. It allows the state’s three largest utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric--to keep a total of 25,000 megawatts of electricity that they had been required to sell into the state’s power marketplace.

The order also allows Edison, PG&E; and SDG&E; to buy power at fixed prices directly from generators without going through that marketplace--a move that power sellers contend will save utilities and their customers money over the long run.

Under deregulation, the utilities were forced to sell off their oil- and gas-fired power plants, but kept their nuclear and hydroelectric plants. That energy, which they had been required to sell on the open market, will now go back to the utilities with prices to be set by the state Public Utilities Commission.

Several large municipal utilities, including the Los Angeles Department of Water and Power, are exempt from deregulation and have not been severely hurt by the crisis.

Utility officials were not happy with the federal commission’s actions, particularly its failure to order power sellers to make refunds to the utilities for the sky-high electricity prices paid this year. Edison and PG&E; have amassed debts of $8 billion between them because they can’t pass these electricity costs on to customers, who are protected by a rate freeze.

The commission acted two days after federal Energy Secretary Bill Richardson stepped in to keep electricity flowing to California utilities and head off rolling blackouts across much of the state.

In part because of Richardson’s actions, Friday was the first day in more than a week that the state didn’t have to declare an electricity emergency, and energy officials said they were cautiously optimistic that they could get through the weekend without the threat of blackouts.

Although some have put the blame for the crisis on deregulation, approved by the Legislature and then-Gov. Pete Wilson in 1996, the federal commission seemed at pains Friday to defend the idea of freeing up energy markets while criticizing the way it was carried out in California.

“In my view, competition has not failed in principle . . . because it was never well-conceived or fully tried,” FERC Chairman James Hoecker insisted.

California’s first stab at deregulation, he acknowledged, “was a disaster in its application--no question about it.”

The overall aim of the federal commission’s order is to shift electricity purchases out of the state’s main power market, where prices have soared so crazily.

While the order sets a “soft” cap of $150 per megawatt hour, it does not require that power sellers stick to that price. They must be prepared to justify any higher price they charge.

Experts say the cap may be meaningless, given the skyrocketing price of natural gas, the main fuel burned to produce electricity. Frank Wolak, a Stanford University economist, called the price cap “largely irrelevant. The prices will go wherever they will go.”

For that reason, among others, consumer groups reacted with fury to the commission’s action, saying it offers little assurance of more reliable or cheaper electricity.

“As expected, the federal regulators have failed to protect California consumers and have forced this issue squarely and firmly into the hands of Gov. Davis,” said Doug Heller, consumer advocate with the Foundation for Taxpayer and Consumer Rights in Santa Monica.

“He can no longer hope for a federal way out of this problem. He has to immediately begin to configure a way out of this deregulation mess.”

Davis said he would do so by convening a special session of the Legislature to regain some state powers given up under deregulation.

Such a special session would run concurrently with the Legislature’s regular session, which resumes Jan. 3. In such a session, rules are waived to allow laws to take effect more quickly.

Davis also said he would earmark $1 billion in next year’s budget for energy conservation and power plant construction.

And he gave his strongest indication yet that consumers will be expected to share at least some of the $8-billion burden now saddling Edison and PG&E.; The utilities, warning of bankruptcy, have asked the California PUC to allow them to begin to recoup costs from their customers through a rate hike of at least 10%, to take effect next year. The PUC is scheduled to consider the issue Thursday.

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Times staff writers Nancy Rivera Brooks, Dan Morain, Carl Ingram and Terence Monmaney contributed to this story.