Deregulation hits infamy in just five years

By Steve Lawrence Associated Press Writer
Monday May 14, 2001

Californians living with higher rates, rolling blackouts; utilities struggling 


SACRAMENTO – When he signed California’s electricity deregulation law, Gov. Pete Wilson said it would lower rates, spark competition and improve service “so no one literally is left in the dark.” 

So much for predictions. 

Nearly five years later, rates are up for millions of Californians, there’s virtually no competition for electricity customers, the state lives with rolling blackouts and one bankrupt utility, and Wilson says he knew the law was an “obviously flawed mechanism.” 

Few, if anyone, anticipated this in the final days of the Legislature’s 1996 session, when the deregulation bill passed unanimously and few interest groups uttered a word in opposition. 

“It was like a big prayer meeting,” said Nettie Hoge, executive director of The Utility Reform Network consumer group. ”(Almost) everyone signed off.” 

Now, the flaws have become more visible. They include: 

— A rate freeze that initially kept electricity rates artificially high and then, when wholesale prices skyrocketed last summer, drove the state’s biggest utilities deeply into debt. Wilson said the freeze kept the utilities from keeping pace with rising costs. 

— The Public Utility Commission’s decision to discourage utilities from signing long-term contracts to buy power. People on all sides of the issue now say such contracts could have stabilized prices. 

— The creation of a financial incentive for utilities to sell their power plants to unregulated wholesalers, who then could hold utilities hostage by forcing up prices for power. 

— Failure by lawmakers to anticipate the higher energy consumption that accompanied the state’s sharp economic growth in the late 1990s and 2000. 

Assemblyman Bill Leonard, who helped write the deregulation law, said lawmakers didn’t pay enough attention to state Energy Commission predictions in 1998 that power shortages could hit as early as 1999 or 2000 without more power plants. 

“The Legislature in California has never done its oversight responsibility as well as it should,” he said. “It’s always working on new legislation and trying to solve new problems.” 

California’s electricity consumption jumped 9.2 percent between 1996 and 2000 compared to 5.5 percent in the previous four years, according to the Energy Commission. This came as Arizona, Nevada and the Pacific Northwest increased their use as well, which dried up the power surplus of the early 1990s, said Mike Florio, an attorney for TURN. 

If legislators had anticipated the increased consumption, they could have included tax breaks or other incentives to encourage more plant construction, said Leonard, R-Rancho Cucamonga. 

Even so, electricity prices would have gone up without deregulation, said former PUC Commissioner P. Gregory Conlon, who voted for a PUC deregulation order that preceded the law. 

Electricity wholesalers have profited from the state’s power problems, but extreme weather conditions, limited power plant development, and increases in natural gas and pollution control costs for generators are mostly to blame for sharp increases in power prices, Conlon said. 

But the PUC added to the problem by creating too big of a financial incentive for utilities to sell many of their power plants, he said. 

In a recent report, the state auditor said increases in demand, lack of new plants and extreme weather all helped boost electricity prices. But the auditor also said the markets established by deregulation made it easier for generators to withhold power to get higher prices. 

“The whole system was designed by (power) sellers, not by buyers,” said Bill Sessa, a former spokesman for Pacific Gas & Electric Co., the state’s largest utility company. ”(The utilities) were looking at it from the standpoint of being sellers. The buyers of electricity were never truly represented.” 

Along with the flaws in the law, others have identified several possible culprits who helped create California’s current mess. 

Senate Minority Leader Jim Brulte, who helped write the deregulation bill while in the Assembly, said Proposition 9, an unsuccessful 1998 ballot measure, created uncertainty that discouraged plant construction. 

The proposal, backed by several consumer groups, would have ordered a 20 percent electricity rate cut and limited the ability of utilities to charge consumers to recover their noncompetitive investments. 

But Energy Commission spokeswoman Claudia Chandler said the uncertainty surrounding deregulation, not Proposition 9, caused the lull in power plant development. 

“We began getting applications again as soon as the +deregulation+ law went into effect,” early in 1998, she said. 

The commission certified only one plant, a 240-megawatt project that was never built, between 1995 and 1998. Since 1999, commissioners have approved 13 new plants with the ability to produce 8,464 megawatts. Seven are under construction. 

Jan Smutny-Jones, executive director of the Independent Energy Producers Association, a wholesalers’ group, says California’s deregulation approach was too middle-of-the road. 

“California was sort of a guy with one foot on the dock of regulation and the other foot on the boat of markets, and the boat left,” he said. “California did not stay on the dock and did not get on the boat and as a consequence got wet.” 

Sen. Sheila Kuehl, one of 30 lawmakers who voted for deregulation and are still in the Legislature, says the state never should have considered deregulation in the first place. 

“I believe what we’ve learned from this is that free-market principles only work where you can say no to a product,” the Santa Monica Democrat said. “In a critical industry like energy, water, public roads, free-market principles do not work and these industries need to be strictly regulated.”