Power Crisis Haunts Davis

Josh Higgins is a Republican, yet he voted for Democrat Gray Davis for governor in 1998. He won’t do it again. Not now that his Chino Hills brick factory is paying $40,000 a month for electricity, up from $15,000 before the power crisis.

“Our costs are crushing us now,” Higgins said. “The governor did a horrible job. He hamstrung us on the long-term contracts, which we’ll be paying for forever.”

It’s a widespread impression among voters. No issue hurts Davis’ chances of reelection more than his handling of the blackouts, price spikes and power market meltdown of 2000 and 2001, the governor’s political advisors say. In focus groups, they say, voters complain that Davis procrastinated, failed to grasp the situation and panicked by signing too many expensive power contracts.

His Republican opponent, Bill Simon Jr., has tried to reinforce that impression with television ads that accuse Davis of costing California consumers $11 billion by failing to act on the energy and budget crises.

California’s partly deregulated electricity industry shook apart in a wild ride propelled by free market forces, an upset between supply and demand, and unpredictable politics. More than a year after calm returned, investigators are still trying to piece together why the state could not keep the lights burning and avoid outrageous prices for a basic commodity.

The Davis campaign is quick to point out that power prices have dropped to reasonable levels and that the state has suffered no blackouts since May 2001, despite dark predictions.

“No governor in America has probably ever faced the dire situation he did when our electrical grid was basically in danger of collapsing,” said Garry South, the governor’s chief campaign strategist. “Hindsight is always 20/20, and we have scads of people in the press and electorate who now have the advantage of hindsight to second-guess what the governor did.”

Nobody knows just how many billions of dollars have been siphoned away from California consumers by the unraveling of the state’s deregulation plan -- or how six days of blackouts and the threat of many more have affected the state economy.

But the two-thirds of the state not served by publicly owned utilities paid $7 billion for power in 1999, $27 billion in 2000 and $26.7 billion in 2001. The state treasurer is now in the process of selling $11.9 billion in bonds to pay back the state general fund for electricity purchases in 2001. Utility customers will pay off those bonds through their bills over the next 20 years. That makes it less likely that customers of Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric will see their rates -- now among the highest in the nation -- fall any time soon.

Davis has repeatedly and accurately described deregulation as the brainchild of appointees of his predecessor, Republican Gov. Pete Wilson.

But the market created under that plan faltered on Davis’ watch. Those critical of his response are numerous, from state lawmakers to consumer advocates to academics. Their judgments vary, too, and often conflict.

Some say Davis should have seized control of private power plants to keep electricity flowing. Or he should never have allowed the state to get into the business of buying electricity for financially crippled utilities. Some critics say the governor waited too long to condemn manipulation of the market by private energy sellers. Others say that by doing so, he alienated the power companies capable of solving the state’s supply shortage.

Persistent Complaints

But the most frequent, persistent complaints about Davis’ handling of the electricity crisis boil down to these: He did not raise electric rates on businesses and homeowners early enough, thereby increasing the overall bill for the energy crisis. And he locked up large amounts of power under contract when wholesale prices were still soaring in the spring of 2001, so that those $43 billion worth of contracts -- some lasting 10 years or longer -- became an expensive burden on utility customers.

James L. Sweeney, a Stanford University professor of management science and engineering, recently published a book called “The California Electricity Crisis.” In it he concludes that decisions by political leaders, including Davis, transformed a difficult challenge into a full-blown crisis.

Sweeney argues that if Davis had pushed his appointees on the California Public Utilities Commission to raise electricity rates, the higher rates would have boosted conservation. That would have helped keep power supplies from getting so tight and thus dampened wholesale power prices, Sweeney said.

“By not allowing price increases at the time they were needed, he greatly increased the wholesale prices and therefore greatly increased the total expenditure the ratepayers are going to be forced to bear,” he said.

Sweeney and others also argue that higher power rates could also have helped keep PG&E; and Edison from becoming financially crippled.

The utilities were inadvertently squeezed by California’s deregulation plan. A rate freeze imposed by the Legislature in 1996 kept the utilities from billing customers for their full costs when wholesale power prices jumped. The utilities lost billions of dollars, so much that in January 2001, power sellers refused to deal with them. With much of the state on the verge of blackouts and Davis himself making late-night phone calls to power suppliers across the West, the governor finally signed an executive order that month putting the state’s money and good credit on the line to buy electricity. That role does not end until Dec. 31.

For months before that critical turning point, PG&E; and Edison had asked the PUC to let them charge customers more. In January 2001, the PUC raised rates by a penny per kilowatt-hour, far less than the utilities had sought. Three months later, in a move that Davis said he did not endorse or expect, PUC President Loretta Lynch and other members of the commission approved another rate hike of as much as 46% for some customers.

Severin Borenstein, director of the University of California Energy Institute in Berkeley, called the March rate hikes “the right thing to do when they did do it.”

“It would have been much more helpful had it happened earlier,” he said. “After the fact, looking back, there’s no question we would have been better off had we raised retail rates in the summer of 2000.”

South, the Davis campaign strategist, acknowledges that there was much debate among the governor’s advisors about whether the PUC should raise rates. Many of the people Davis consulted, including Federal Reserve Chairman Alan Greenspan and Citigroup Inc. Co-Chairman Robert Rubin, urged him to propose higher rates.

But Davis hesitated, South said, because only in San Diego, where the rate freeze had been lifted in the summer of 2000, were consumers suffering from market price spikes.

“Until we had blackouts in January, the average end users didn’t see any negative effects from deregulation,” South said. “It’s unrealistic to expect a public official who holds elected office to sacrifice himself essentially for something he can’t explain to the typical voter.”

Sweeney argues that Davis’ unwillingness to make an unpopular decision led to higher power costs that ratepayers won’t begin to pay until after Tuesday’s election, as the state borrows money to cover past energy costs.

“It looked on the surface ... like he was doing something to protect the ratepayers from expenses,” Sweeney said, “but he was wanting to make sure they wouldn’t face the expenses until after the election.”

Davis faces stiff criticism, too, for allowing the state to sign dozens of long-term power contracts.

Most experts agree that California needed such contracts as a refuge from the spot market, and that lack of such stabilizing contracts would have left the utilities exposed to a sharp jump in power prices.

But critics say the Davis administration ultimately signed too many contracts at prices and terms too expensive and cumbersome for the state.

At prices ranging from $59 to $174 per megawatt-hour, the contracts seemed cheap when they were signed, with market prices averaging more than $300 per megawatt-hour. But for many reasons, including the state’s having locked up so much power, market prices plunged to about $60 per megawatt-hour by July 2001, making the contracted power relatively expensive.

Davis initially defended the contracts. But by October 2001, barraged with criticism, he ordered his advisors to renegotiate the deals. His administration also petitioned the federal government to overturn many of the contracts, arguing that they were signed when energy companies were illegally manipulating the state’s power market. That petition is pending.

Some Pacts Reworked

So far, a dozen of 48 contracts have been reworked, for a total savings of $3.6 billion. Another eight contracts have already expired.

“He should never have signed such long-term deals,” said Higgins, the brick factory owner. “I wouldn’t have minded if he had signed five-year deals; I wouldn’t mind if we paid for a certain amount of time.”

But “we got hosed,” he said. “And the ratepayers pay it.”

South said it is not fair to criticize Davis for locking up so much power without remembering that in the spring of 2001, experts predicted that California would suffer many days of blackouts in the hot months to come if it did not arrange ahead of time for power supplies.

The state was paying an average of $64 million a day for power in May 2001, compared with about $10 million a day now. The contracts, South said, “broke the back” of that dysfunctional market.

“We had no power, we had no leverage, we had no legal authority to compel anybody to sign a contract,” he said. “Were the long-term contracts perfect? No. Did they save California from the abyss? I think you have to argue that they did.”