If Davis Fails, Bush May Be White Knight

They are the daily narrative of a crisis: soaring utility bills, ratepayer anger, increased demand for uncertain supplies of electricity, near-bankrupt utilities and threats of rolling blackouts. Yet, these components of California’s energy quagmire only hint at the political hazards associated with a botched attempt to deregulate the state’s utility industry.

The essence of the problem is this: California deregulated the wholesale price of electricity, not the retail price, under the assumption that the wholesale price would remain low. It did not remain low, in large measure because a growing population caused the demand for electricity to increase at a time when California’s ability to generate it remained static. In addition, the California Public Utilities Commission prevented investor-owned utilities such as Southern California Edison from entering into long-term contracts to buy electricity when the sale price of that electricity was still fixed by regulation.

Politically, this crisis is a textbook example of what happens when economic forces gang up on a politician, notably, Gov. Gray Davis, who now must provide leadership to correct the situation. If he does not, someone else--say, George W. Bush--likely will. Either way, Davis risks seeing his career sink into the Big Muddy if he fails.

Although Davis has taken pains to distance himself from blame, he cannot avoid responsibility. True, he was not present at the creation, but as governor, he is poised to gain stature or take the fall. There is virtually no middle ground. A comprehensive solution must increase energy supplies, reduce the cost of electricity and keep investor-owned utilities solvent by devising a politically acceptable way to pay the billions of dollars they owe to energy producers.

Davis is, by nature, a wary politician absorbed with fund-raising and heavily reliant on polls. Unfortunately, he now is in a position where his campaign coffers are irrelevant and his cautious style self-defeating.

Until last week, Davis’ approach didn’t

inspire much confidence. When the problem first appeared last summer in San Diego, the sudden doubling of utility bills from investor-owned San Diego Gas & Electric should have launched signal flares over the governor’s desk. But Davis misread those signals and backed a tepid plan to temporarily hold the line on rates. Essentially, he chose to contain the problem, rather than solve it, by ignoring the utilities’ accruing debt and the supply shortage.

What action would have been more forceful? Some argue that Davis should have bullied the PUC into allowing SDG&E; and its investor-owned brethren--Pacific Gas & Electric and Edison--to enter into long-term contracts for electricity, a condition required by several other states, including Texas. This action alone would have averted the utilities’ current financial crisis, even though it did nothing to ease the supply shortage. As a result, the utilities have been forced to buy in a spot market where price fluctuations are marked in nanoseconds, and all sales are pegged to the highest bid of the day.

Davis also failed to follow through on a reported promise to spend political capital on the Federal Energy Regulatory Commission (FERC), pressuring it to set a hard regional cap on the wholesale price of electricity. Instead, FERC, part of the Democratic Clinton administration, placed a “soft cap,” which merely established a ceiling or “bidding target,” with no penalty for those who ignored the target. FERC’s reluctance should have come as no surprise to Davis, for the commission traditionally has viewed its role as protecting markets rather than consumers.

It has been suggested that Davis’ fund-raising precluded the governor from acting boldly because he had taken contributions from utilities and energy producers. But, in a sense, the breathtaking scope of the governor’s donor list and the size of his campaign war chest, now said to be in excess of $21 million, liberates him. He’s literally taken money from everyone involved and thus is beholden to no one. Davis’ political instincts may have immobilized him, but not his donor list.

To his credit, Davis has acted more boldly of late. In his State of the State address, he leveled the state’s most potent howitzer at energy producers who gouge California: the power to take away their property (eminent domain). If the alacrity with which various factions came together in Washington last week to attempt a solution is any indication, Davis’ message came through loud and clear.

As well it should, for know this: Davis will do whatever it takes, not necessarily to solve the problem, but to survive politically. In this case, the two--a solution and his hide--are inextricably linked.

Davis is not alone in the soup. Anyone with the word “incumbent” attached to his or her name will feel the wrath of voters in 2002 if California settles into a permanent state of high utility bills, rolling blackouts and a short-circuited economy starved for energy. So, the Legislature has every incentive to help the governor.

But California’s energy crunch also presents an intriguing opportunity for another politician, and those who have come to depend on him for their salvation--Bush and California Republicans. To say that the state GOP is in trouble would be an understatement. Its standard-bearer has been shellacked in three consecutive statewide elections, and Republican representation in both the Legislature and the state’s congressional delegation has shrunk to near irrelevancy. Bush, who fared poorly in California despite a heavy investment, wants his party to be more competitive here, and state Republicans are counting on him to help.

To make inroads in Democrat-dominated California, Republicans need an issue and a voice. Energy provides an issue, and Bush as president could be the voice, much the way Bill Clinton was for Democrats. Davis already has set up the scenario by blaming the federal government--namely, FERC--for much of the state’s energy ills.

The crisis and Davis’ reactions to it give Bush an opening if Davis stumbles. In the short run, Bush, a free-marketeer with extremely close ties to big energy producers such as Texas-based Enron Corp., could urge a temporary hard cap in all Western states below the high-end variant currently being discussed in Washington. By putting the public force of his administration behind such a move, he could score some much-needed political points for himself and his party by taking an action no one at this point expects him to take and one that would affect a vast number of rate-paying voters.

Democrats and Republicans alike argue that Bush will never spend political capital on this kind of anti-free-market gesture, especially so early in his presidency. To do so would require that he pull off a domestic version of “Nixon-goes-to-China” and thus stiff-arm some of his most powerful financial and political allies. But it may not be that tough to convince those allies that their best interests lie in providing relief to California ratepayers rather than contributing to the demise of deregulation. If deregulation fails in California, it likely will fail everywhere, and that will be worse for producers than a temporary price cap. The question--and risk--for Bush: Is it worth bucking a few friends in Texas if it gives his party a political boost in vote-rich California?

In exchange for a temporary cap, Bush could insist that California complete its deregulation by removing nonsensical constraints on the retail price of electricity once the cap is lifted, thus allowing the free market to flow. The risk here, of course, is immediate soaring rates. To help solve the supply problem, Bush could use the power of the federal government--and the bully pulpit of the presidency--to ease environmental impediments for building new generating plants in California.

Thus do risk and opportunity rest side by side for both Bush and Davis.

In T.H. White’s “The Once and Future King,” young Arthur is crowned king of England after performing a magical feat that had eluded the best and strongest knights of the realm. A more complex problem faces California, yet the result will be similar. For whoever crafts a solution to the energy mess--or at least, gets political credit for it--will reap the benefit of having pulled the sword from the stone.