THE POLITICS OF POWER : A letter from California - deregulatory policies that led to electric energy shortage

Commonweal, June 1, 2001 by Thomas J. Higgins

The role of Governor Davis has been central to the crisis. A man whose political life has been defined by caution and problem avoidance is now widely viewed as largely responsible for allowing a problem to become a catastrophe. For the first eighteen months of his term, Davis enjoyed great political fortune. The budget was running a large surplus and Democrats controlled both houses of the legislature. He is the most prodigious fundraiser in California's history, and two years before his next election already had banked more than $20 million for his campaign committee. The governor's first move was to blame his predecessor, saying that he "had inherited this mess." Then he blamed the FERC for not imposing price caps. It isn't hard to sympathize with both impulses, but that begs the question of what actions the administration needed to take to avoid a worsening situation. Aside from a handful of gestures, the governor did very little from May to December.

His closest advisors urged him to act forcefully to get power under contract and to calm the financial markets by assuring that transactions for power purchases would be creditworthy. But the governor was deeply concerned he would be blamed for even a slight increase in utility rates, and he refused to take action. Indeed, at one point he said, "I could have solved the problem in twenty minutes if I had been willing to raise rates." Much later, he had to.

In retrospect, the eight months between May and December were a crucial lost opportunity. By the time the governor finally began seeking long-term contracts, and conceded the need for utility rates to increase, it was too late to solve the crisis. Few power deals were available under reasonable terms, the premiums being paid for risk had become the largest element in the price of electricity, and Davis's standing in the legislature was so low that his own party was balking at passing his legislative package.

Davis hopes to salvage the situation through a complicated plan to purchase the transmission lines owned by the state's utilities so they can use the net proceeds to pay down their debt. It may still pass, but a lot of political capital has been squandered by the year-long delay, and most legislators are reluctant to approve the bonding required to finance the purchase. Last month the PUC approved an average residential rate increase of over 40 percent, which was greatly magnified by the long delay, but which further erodes the governor's political strength. PG&E's bankruptcy makes the resolution even more difficult.

It is not lost on Californians that much of the rest of the country often takes guilty pleasure when the Golden State is in trouble. But when California's economy stumbles, the rest of the country is also at risk of a fall. The electricity crisis is a cautionary tale about putting faith in markets without fully understanding how markets operate, especially for products with inelastic demand. Suppliers will always act in their own interests. When their interests conflict with the public interest, there are enormous market risks when political leaders won't lead. The price of California's political paralysis will be paid in higher electricity rates and a damaged economy for more than a generation. And the blackouts have already begun.