The Winter of Our Disconnect
Could we have foreseen the winter of our disconnect? Could we have predicted January’s blackouts and this summer’s promise of more to come or counted in advance the windfall billions collected by Sun Belt power suppliers with shiny, abstract names like Enron and Dynegy or the millions more owed them by California’s near-bankrupt utilities with their plodding 19th-century gas-and-electric names?
The short answer is yes. We should have seen the darkness coming. We saw, instead, the brightness of our beliefs about this golden place. We had mistaken California for a continent-nearly a universe-from which everything we wanted would come endlessly because we expected it to. California at the beginning of 2000 was turning raw aspiration into profit as quickly as post-Civil War America had and with nearly the same confident mixture of technological bravura and financial cunning. In blacked-out, deregulated January, after the briefest of gilded ages, we found that California really is an island on the land, just as its most perceptive observers had said it was, and that California’s energy resources are as fragile and limited as any island’s.
We would have been better served if, in our haste, we had paused to read two timely books on the history of power and its regulation. While they do not foreshadow California’s current electrical mess, they throw some historical light on why we’re in the dark.
In “The Natural Gas Market: Sixty Years of Regulation and Deregulation” by Paul W. MacAvoy, the problem is the inadequacy of the regulatory models that states and federal agencies have applied to natural gas production and distribution since the 1930s. None, MacAvoy says, made natural gas plentiful, cheap and profitable all at the same time, and no one-producers, pipeline operators, retailers or consumers-has benefited from the failed attempts. The current natural gas shortage, driving up household bills and the operating costs of California’s gas-fueled electricity plants, is the result, MacAvoy would argue, of regulatory approaches that can’t work.
MacAvoy believes a rational market could be made for natural gas through complete deregulation, except for the irrationality of consumers. They don’t see natural gas as a substance-less commodity, to be priced and delivered by the workings of the market forces that interest MacAvoy, a professor at Yale’s School of Management. Consumers see gas-and electricity-as something real, like sunlight or air, that flows predictably from a “second nature” of pipelines and transmission towers. The presence in the landscape of these grids-like the grids of aqueducts and highways-is so necessary and expected that ordinary nature is unimaginable without them. Californians have superimposed a man-made “second nature” of energy production and distribution on the state’s unforgiving landscapes too, but our unique problem is a Gold Rush mythology of abundance. Limitless power is part of the myth, beginning with the belief in the 1860s and 1870s that California’s hills, having yielded gold for the taking, would yield coal just as abundantly to power the state’s transition to an industrial economy. California had plenty of gold, it turned out, but almost no coal.
Nor could the state produce enough firewood where people needed it or kerosene to fuel its lamps or manpower to till its fields. Wood, coal, kerosene and labor were “power crises” in the 19th century that were ultimately resolved by technical innovation, resource substitution and historically higher energy costs for California consumers. In the 20th century, new believers preached that the Sierra Nevada foothills would flow with endless hydropower to keep city lights shining, that more oil fields were ready to be discovered to fuel the state’s power plants and that nuclear technology would make electricity too cheap to meter. It hardly mattered that there was no foundation for these beliefs either.
Our resilient faith in a “second nature” of power that is adequate to the myth of California gives James C. Williams’ “Energy and the Making of Modern California” its poignancy. Williams, whose book was published in hardcover in 1997, does not forecast the “deregulation crisis” of 2001, but he might have. Speaking of Americans generally, Williams says: “They have believed each new energy resource to be without fault, to be infinitely abundant, and, therefore, to have the potential to effect utopian societal change. Moreover, people’s faith in an energy resource seems to persist until ... its shortcomings are obvious, and only then do they see it cannot bring utopia. Yet the failure of a resource to live up to their expectations has not seemed to dampen their enthusiasm, as they simply transfer the myth from a fallen energy resource to the next resource appropriated for use.” In 1996, the California Legislature simply substituted a deregulated electricity marketplace as the next energy resource expected to work on utopian principles.
Williams ends his account of California’s energy history at the hopeful moment in the late 1980s when “a diversified, innovative, and less centralized energy paradigm” seemed ascendant. Although not as radical as environmental purists wanted, he says, California’s emphasis on energy conservation and alternative power sources-solar, geothermal, wind and biomass among them-defined a more benign and flexible “soft energy” path paralleling the “hard energy” path of gas-fired steam generators, nuclear plants and hydroelectric dams. Between 1973 and 1988, Williams reports, California’s population grew 37%, and its economy, as measured in goods and services, grew 46%, while the state’s energy consumption grew only 8%, in part because of some of the strictest standards in the world for building insulation and appliance efficiency. Jerry Brown, California governor from 1974 through 1982, was right, after all: Weather-stripping and windmills do make a difference.
Brown’s career needs no rehabilitation now, as he begins his campaign for a second term as mayor of Oakland, but the debacle of electrical deregulation is set to consume other political futures when electricity bills jump 40% in May to a projected 100% by the end of summer. Sen. Steve Peace (D-El Cajon) and Public Utilities Commission President Loretta Lynch will take the fall; Gov. Gray Davis probably will, too.
The blame for the state’s slide into deregulated chaos goes well beyond today’s cast of bewildered politicians, but Californians are unlikely to round up all the suspects-ourselves included-who might be made to answer for it. We were too distracted by the collapse of the state’s old economy in 1990, the L.A. riots, earthquakes and other disasters to attend to the tedium of energy policy. No one seemed to notice how electricity deregulation, launched without much meaningful debate in 1996, recycled the myth of energy abundance that Williams lucidly details decade by decade (beginning in 1850), or that deregulation required a rapid and sustained increase in generating capacity if it was going to deliver the substantially lower electricity costs promised for 2001. That was wishful thinking long before the legislature’s unanimous deregulation vote.
In 1994, John Bryson, chief executive of Southern California Edison, told the California Public Utilities Commission, “Edison does not need any additional power until at least 2005.” Bryson’s declaration that California faced an energy glut-not a shortage-was in response to a controversial decision by the PUC ordering the state’s major utilities to purchase 1,400 megawatts of new power annually beginning in 1998. The PUC order was driven by a 1992 California Energy Commission forecast, fairly accurate it turns out, that Californians would need 55,819 megawatts of electricity in 2000. (The actual usage was closer to 54,000 megawatts.)
To foster competitors to the state’s largest utilities-Pacific Gas & Electric, Edison and San Diego Gas & Electric-the PUC order also required them to buy all this new power from independent suppliers, whose presence in California’s limited energy market would, the PUC believed, not only deliver the required megawatts but also gradually cut consumer electric bills. In addition, the PUC ordered the three utilities to buy part of this new power from suppliers using alternative and renewable energy sources-windmills, geothermal and solar -continuing California’s successful experiment in a parallel industry of “soft energy” supply.
The utilities resisted. With deregulation the goal of the Clinton administration as much as of the power industry, the PUC’s order to buy more electricity-and expand the small-is-beautiful supply model that Williams believed was possible in 1997 when his book was published-looked to the utilities like the subsidization of future competitors. In 1995, Edison and SDG&E; convinced the Federal Energy Regulatory Commission that giving environmentally friendly generators preferential treatment was illegal and that California, in the midst of a business-crunching recession, didn’t need more power anyway. Under pressure from the federal commission, the PUC caved in.
And Edison and SDG&E; got exactly what they wanted-relief from new competition, continued centralization of production within the traditional utility grid and a PUC committed to demolishing the state’s 80-year-old system of utility regulation. The PUC even discouraged the utilities from signing long-term supply contracts at current prices, because the PUC professed to believe that deregulation would generate lower energy prices more quickly than anyone expected.
To show stockholders that they were no longer the dowdy power companies of the old economy, the utilities sweetened short-term profits by refusing to invest in plant construction, spun off revenues from their PUC-regulated divisions into stock buybacks and worked very hard for full deregulation. Their victory a year later was a catastrophe.
The deregulation consumers got-in the ironic words of State Sen. Jim Brulte (R-Rancho Cucamonga), “one of the most far-reaching and forward-thinking pieces of legislation” in California history-was peculiarly Californian in its degree of institutional amnesia. As political cover for legislators who feared prices would immediately climb, the deregulation bill cut electricity rates 10% and froze increases until March 2002. That gave residential consumers and businesses no reason to switch to alternative power sources or conserve more. The bill satisfied the interests of consumer advocates because it promised to break the utilities’ three-way monopoly on electricity production and shrink the power of the PUC (seen as too friendly for too long with the power companies it was supposed to regulate). Deregulation, however, continued to shield profits at Edison, PG&E; and SDG&E; by guaranteeing them $26 billion in revenue to cover their massive debt for nuclear power plant construction. Deregulation also pleased environmentalists because they thought it would take the state further down the “soft energy” path. The deregulation bill encouraged the utilities to sell off their existing fossil-fueled generators, but it failed to offer enough incentives for the construction of environmentally friendly ones, despite the 12-year gap since the construction of the last major power plant anywhere in California.
Finally, deregulation created a power market so fragmented that it was ludicrously easy to manipulate when the thin surplus of power supply in the West began evaporating in the summer of 2000, although the evidence is masked by the effects of a drought in the Northwest (which has reduced hydropower) and an unlucky combination of plant maintenance, air pollution limits idling older plants and higher than expected costs for natural gas.
The price of bad luck, bad weather and the cunning of power suppliers was staggering. At one point in December, electricity that cost $250 a megawatt-hour to produce was priced by the power brokers of the California Independent System Operator at $1,500 a megawatt-hour. That was the negotiated price; the suppliers had asked for $2,000.
Deregulation had set up a divided marketplace, more irrational than any Paul W. MacAvoy picks apart in his analysis of natural gas, in which the California Power Exchange was a clearinghouse where buyers and sellers set the price of electricity and the California Independent System Operator was the “buyer of last resort” if occasional gaps between production and distribution unexpectedly failed to meet daily demand. The arrangement began unraveling in mid-1998, and the Power Exchange effectively collapsed as soon as SDG&E; became fully deregulated in July 2000, leaving the poorly trained bureaucrats of the Cal-ISO in December and January to struggle to buy 30% of the state’s daily power needs at arbitrary prices they passed on to utility company managers.
The spectacle of the Cal-ISO gratefully paying a 500% premium over the cost of production to keep the lights on last winter was a lesson in “market fundamentalism” with a vengeance. Californians, tutored by earnest neo-conservatives such as Peace, believed that a deregulated market would generate abundant low-cost power simply because that’s what a market freed of regulation would do, despite the evidence that this particular market was based on false assumptions and likely to be manipulated by the energy suppliers who designed it.
In an empty contest of metaphors in 1994 and 1995, the dead hand of state regulation had lost to the invisible hand of the marketplace. We’ll never know if gradual expansion of competition within the framework of regulation would have made California’s power system more flexible and environmentally sustainable and less costly to consumers, as Williams suggested it might.
‘Power tends to corrupt,” Lord Acton said. He didn’t mean that the powerful are necessarily brutal or cruel. He was criticizing the blinding power that flows from unexamined convictions, and he was writing about the papacy of Pope Pius IX, who forced the doctrine of papal infallibility on the Catholic Church. The makers of deregulation-state legislators, consumer advocates, PUC commissioners and environmentalists-were convinced that the market they constructed was infallible too. That belief led them to pursue their own self-interest.
In the long run, consumers can expect deregulation’s perverse effects to include significantly higher electricity bills as we pay off $30 billion in new debt, diminished local authority over power plant construction and further disarray among the small-scale producers of renewable energy. The failure of deregulation also will recast the way power is distributed in California, as the state hesitantly moves to control part of the electrical grid in exchange for bonding the utilities’ debt. This first step in creating a state power authority is being resisted by power suppliers, who rightly fear that public anger over mismanagement of the power system has hardened into sympathy for public ownership, as it almost did in the early 1920s.
In the short run, the failure of deregulation will determine if California’s hopeful new economy plays out as something more than the latest of the state’s many booms. There were extractive ones-gold, cattle, wheat, oil, suburban house lots and military hardware. And there were booms that wove myths-health-seeking in the sunshine, tourism, the movies and all the lost dot-coms of last year. Apart from the good and the bad they’ve done our state, our booms have reflected the belief, bordering on religious faith, that what is true about California today will be true permanently. California’s utopian expectations about energy, whose history Williams diligently surveys, are central to that myth. It sustained our optimism about California’s ability to power itself in the past. It’s fueling our pessimism today, as we lead ourselves deeper into the dark.
