Deregulation California Style

USA Today (Society for the Advancement of Education), July, 2001 by Tim D. Kane

Meanwhile, market participants were responding to the price squeeze in predictable fashion. During the first three years of deregulation, the ISO made infrequent purchases when the morning auction proved inadequate to cover 24-hour periods. Now, facing huge losses on unpaid bills, the generator operators reduced offers to supply power at the daily auction, forcing the ISO into the market to cover an increasing gap between retail demand and wholesale supply. By late December, the ISO was purchasing 50% of all power sold in California--$1,800,000,000 in that month alone. Unfortunately for utility investors, the deregulation bill gave the ISO authority to buy power, not to pay for it. The bills for ISO's afternoon purchases were simply forwarded to the same public utilities that could not pay for their morning purchases!

Guided by the "invisible hand" of the market, private decisionmakers were responding in a positive way. High-electricity users such as aluminum smelters that secured power under long-term contracts temporarily shut down, paid their workers, and sold their power to the highest bidders in California. Miller Brewery shifted production from its California facilities to breweries out of state, thereby freeing up power for other Californians. Silicon Valley CEOs Openly explored relocation to other states with more reliable electric supply.

On Jan. 8, 2001, Gov. Gray Davis, unable to understand why suppliers were unwilling to sell power to buyers who could not pay, threatened to use eminent domain to seize the generating plants of out-of-state owners. Faced with the growing prospect that power wholesalers could force California's utilities into bankruptcy protection, removing the issue from state control, the Governor appealed directly to the U.S. Department of Energy. Pres. Bill Clinton invoked the Korean War-era Defense Production Act, ordering out-of-state generator operators to continue feeding power into the grid in order to maintain supplies to California. The Energy Department's general counsel later told Congress that the "problem was not a scarcity of natural gas but rather [the California utilities'] credit woes" that made the order necessary. Sen. Phil Gramm (R.-Tex.) was not impressed, arguing that "We've got to ask ourselves whether or not there ought to be a higher standard for taking people's property and allocating its price."

Pressured by the frequent blackouts that rippled across the state in January, Davis and state regulators hastily cobbled together a plan to staunch the bleeding. By month's end, the California legislature acted to appropriate $10,000,000,000 in taxpayer funds and authorize the California Water Agency to purchase sufficient power to meet demand. The maze of environmental and regulatory burdens that made new power plant construction in California a 10-year ordeal, compared with one year in other states, was suspended.

On Feb. 26, the Governor announced phase two. The state would purchase Southern California Edison's transmission network, providing the utility with a badly needed infusion of cash. Davis assured consumers they would be protected from rate increases, indicating that taxpayers will cover the $2,760,000,000 cost. Utilities would be authorized to sell bonds to recoup their losses and to pass along the debt service costs to retail customers at some point in the future.