Bright Lights Cannot Hide Energy Woes

It was a year ago this month that the meltdown of California’s deregulated energy market hit crisis stage. Gov. Gray Davis plugged in the official state Christmas tree last December, then had it turned off 30 minutes later as a message to Californians to go easy on the strained electricity grid.

“Tonight while some Californians are going without power,” the governor said at the time, “let the light in our hearts represent the true spirit of the season.”

This year, when Davis powered up the thousands of bulbs on the capitol Christmas tree he let them glow until 10 p.m.

One year after a crisis of high prices crippled the state’s utilities and destroyed its dream of creating the most comprehensive, deregulated power market in the nation, California has a jury-rigged, temporarily stable electricity industry and a financial hangover.

But political leaders don’t have a plan for the industry’s ultimate shape. Various branches of government are trying to fix assorted problems, with no common vision.

“We don’t have a market right now; we don’t have a structure that is viable going forward,” said Severin Borenstein, director of the University of California Energy Institute in Berkeley. “We have to figure out, are we going to try to reregulate the whole system? Are we going to have a working deregulated system? Right now we’re not doing anything. We’re adrift, and the Legislature has turned its attention elsewhere because it isn’t a day-to-day crisis.”

There’s no desperate call for conservation now, no midafternoon warnings of blackouts. Power is downright abundant--sometimes even surplus--and as low-priced as it was before the crisis.

But so much is reordered. The electricity market is dead, and its antithesis, a government-controlled power agency with vague duties, has been born. The biggest private utility in the state, Pacific Gas & Electric, is in bankruptcy, and so is the world’s largest electricity marketer: Enron Corp. California’s Department of Water Resources, once a minor player in the electricity business, now dominates the Western transmission grid.

The state has eaten a $6.1-billion hole in its budget buying electricity. It has utility rates that are up to 46% higher than a year ago and a passel of long-term power contracts that critics call too expensive.

Experts tick off a litany of knotty policy problems--some of which helped destroy California’s experiment with deregulation--that remain unresolved.

They say the rules under which the California Independent System Operator buys electricity must be overhauled. California has yet to resolve whether businesses and homeowners should be allowed to buy power from companies other than their designated utility. There’s no plan for how long the state, bankrolled by taxpayer money, should stay in the power-buying business. The transmission grid needs to be expanded. The Davis administration is trying to renegotiate some of its long-term power contracts. And PG&E; is in Bankruptcy Court seeking to shift its assets out from under state regulation.

With little input from Davis or the Legislature, the job of making stopgap fixes--some with long-term consequences--has fallen to the Public Utilities Commission, the Department of Water Resources and Cal-ISO, the agency born of the state’s 1996 deregulation plan.

“All the PUC is doing is putting pieces into the puzzle,” said PUC President Loretta M. Lynch. “How big the puzzle is and what the shape of it is still lies in the bailiwick of the Legislature and the governor.”

“Whether our energy system looks like a camel or an elephant is not up to the PUC,” Lynch said.

Senate Leader John Burton (D-San Francisco) said lawmakers can’t be expected to lead the way.

“The people that are experts in this--i.e. the PUC, i.e. Cal-ISO, i.e. the Energy Commission--if they’ve got solutions, they should bring them to us,” he said.

“The Legislature deals with a host of things from education to public safety to highways to agriculture to natural resources,” Burton said. “The legislators are not experts in energy.”

Davis does have a vision for the state’s industry, said the governor’s spokesman Steve Maviglio: “Bring more power on line, keep the conservation momentum and restore the utilities’ health.”

Paramount, Maviglio said, is getting enough new power plants built by 2004 to give the state a 15% reserve in its electricity supply.

But even achieving that goal wouldn’t make a host of other financial, legal and technical troubles go away, experts say. And with electricity prices relatively low, blackouts a distant threat and a November election on the horizon, there’s less political will than before to deal with tough energy questions.

‘There’s Enough Blame to Go Around’

“It’s poison politically,” said Matt Freedman, an attorney with the Utility Reform Network, a consumer group in San Francisco. “Everybody knows the energy crisis was mishandled. There are different views as to how. But there’s enough blame to go around, and nobody comes out of this looking good.”

Ray Hart, who spent seven months in the center of the electricity maelstrom as a deputy director for the Department of Water Resources, said his experience has convinced him that the way Cal-ISO buys power makes California vulnerable to price spikes. But high-level officials are not looking at such root troubles, he said.

“There’s been an absolute lack of a fruitful discussion of how we’re going to fix everything that’s been broken that caused us to get to where we’re at,” said Hart, who oversaw the state’s emergency power-buying operations from January to August. “Nobody’s looking at the future. It’s very disturbing.”

When Cal-ISO buys electricity to balance the transmission grid, the agency pays all sellers--regardless of what they offered--the price of the highest bid accepted.

Last winter, energy companies exploited Cal-ISO’s market. Rather than offer to sell their power a day or more in advance in the state’s main electricity market, companies waited until Cal-ISO grid operators desperately needed last-minute power. By waiting, they sometimes collected as much as $750 per megawatt-hour. Such high prices helped to bleed the utilities of cash, pushing them toward bankruptcy.

When the water resources agency took over the buying of electricity on behalf of the utilities in January, Hart said, it tried to save money by steering last-minute power purchases to out-of-state generators. Under Cal-ISO market rules, those generators, such as British Columbia’s public utility, get whatever price they bid.

But the owners of California power plants, such as Houston-based Reliant Energy, protested the water resources agency’s practice. Last month, federal regulators ruled in their favor. As a result, Cal-ISO last week took back its job of buying all of the last-minute electricity needed to balance the transmission grid. Hart said he fears that prices of such power will jump again.

“It’s really easy to all of a sudden realize, hey, I can make more money in the real-time market than in the hour-ahead or day-ahead market, withdraw the energy and wait,” Hart said. “They did it. And they’re doing it again, as far as I can tell. They’re gearing up to game the system.”

‘Direct Access’ Remains Sticky Issue

Cal-ISO officials recently launched an effort to make structural reforms before a federally imposed price cap is lifted in September. An order issued Wednesday by the Federal Energy Regulatory Commission also requires Cal-ISO to set up a market for buying and selling electricity a day or more in advance. California once had such a market, the keystone of its deregulation plan, but it collapsed in January.

“It is the missing piece of the puzzle,” said Gregg Fishman, Cal-ISO spokesman.

One of the stickiest issues still gumming up California’s electricity works is called “direct access.” It is the ability of utility customers, from steel mills to homeowners, to buy electricity from a company other than the utility designated to serve them. Also called retail choice, it was a key goal of the state’s original 1996 deregulation plan.

But retail choice never blossomed in California as intended. And when the market began to melt down in January and the state intervened in a drastic way, the Legislature banned customers from leaving utilities. The rationale was that allowing some customers to cut their own energy deals would stick every other customer with a greater share of the state’s power bill.

Many businesses took advantage of uncertainty in the law banning direct deals with energy companies. Today, customers who account for more than 10% of the total electricity used in PG&E;, Edison and San Diego Gas & Electric territory have cut deals for electricity outside the utilities. The PUC is expected to vote early in the new year to ban such deals retroactively to July.

Big businesses say they’ll be hurt--possibly costing California jobs--if they don’t get the freedom to shop for cheaper electricity. But consumer advocates fear that homeowners will get stuck paying for most of the $43 billion in long-term power contracts the state has signed if big industrial utility customers are allowed to abandon PG&E;, Edison and SDG&E.;

Experts say there’s a way to share the cost of the contracts and still allow retail choice. Businesses could be forced to pay a tax, such as a penny per kilowatt-hour, to cover their share of the contracted power. Or, they could pay the state a lump sum for the right to leave the utilities.

Who’ll Pay? Residents or Big Business?

That’s a tricky political calculus that risks offending big employers or millions of homeowners. Lawmakers last summer debated how to find a fair way to allow businesses to leave the utilities, but they disbanded before passing any bills.

“Right now we’re leaving it to the PUC to make default judgments that are really misguided,” Borenstein said. “They’re doing it in a policy analysis vacuum because the Legislature has moved on.”