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Electricity: Who's at Fault?

Pete Wilson is a former governor of California (1991-1999). This op-ed was originally published in the Forum section of the Sacramento Bee on June 3, 2001, and is reprinted with permission.

David Freeman: 
Wilson's Monster

David Freeman, former general manager of both the Sacramento Municipal Utility District and the Los Angeles Department of Water and Power, is senior energy adviser to Governor Davis. This commentary, appeared in the June 10 Forum section of the Sacramento Bee and is reprinted with permission.

The plain and simple reason California will inescapably suffer hundreds of hours of blackouts this summer is because California will not have a sufficient supply of electrical power to meet demand. Five years ago, when deregulation was passed by unanimous vote of both houses of the Legislature (and without a murmur of dissent from any Democratic constitutional officer, including then-Lieutenant Governor Gray Davis), California enjoyed an excess of supply over demand amounting to some 30 percent.

Deregulation was enacted to create free market competition; first, to drive down what were then among the very highest power costs in the nation and, second, to attract private power providers to invest in the creation of new generating capacity to meet the exploding power needs of the New Economy and keep in California all the jobs that it would produce.

And deregulation did succeed in stimulating a significant increase in applications to build power plants, especially after the effective date of the legislation in 1998 and the defeat that year by California voters of Proposition 9 (which unwisely sought to repeal deregulation). The total megawattage of the filings for 1998 doubled that for 1997. After the effective date (March 1998) of the deregulation legislation, AB 1890, and the defeat of Proposition 9 (November 1998), removing the threat of repeal, the total for 1999 was double that of 1998 - exceeding the 5,000 MW mark in '99 alone.

Far from causing the problem of energy shortage, as the Davis administration charges, deregulation caused providers to file - by mid-2000 - applications to build new power plants that promised to add 10,000 megawatts to California's power supply.

That's why I signed it.

I did so even though I disagreed with two of the provisions of AB 1890 - just as I (and every other governor in history) signed other bills which, though imperfect, promised significant and needed beneficial change from the status quo, which was certainly true of deregulation.

No one could have anticipated in 1996 the combination of factors - less hydroelectric output in the West, warmer summers, sharply higher electricity demand, constraints on natural gas supply - that turned an electricity surplus into an electricity problem by 2000. The reason we will suffer power blackouts this summer is because the Davis administration has by inaction allowed a problem to become a crisis. Now the power crisis threatens to become a state fiscal crisis.

Governor Davis has been quoted as saying, "If I wanted to raise rates, I could have solved this problem in 20 minutes." Sadly, by temporizing on needed actions to raise rates and other steps required to avert crisis, he made crisis inevitable. As a result, California bonds have suffered two downgrades by Wall Street rating agencies, and he has put in jeopardy state spending for parks, schools, transportation and other capital needs. He has been warned by the state legislative analyst to sharply reduce the state budget.

The administration failed to monitor either the explosive growth in electricity consumption by the New Economy in the last five years, which gobbled up the energy surplus that existed at the time of deregulation, or the curtailment of production of natural gas, which led to price spikes in recent years. It failed also to heed early warnings from weather forecasting agencies that the summers ahead would be among the hottest in a century.

It ignored a 1998 warning by the California Energy Commission of possible energy shortages by as early as 2000. And when possibility became hard, hot reality in San Diego in 2000, it continued to ignore it, putting in place a political, palliative rate cap instead of dealing with the problem.

Fully a year ago, or earlier had he chosen to do so, Governor Davis could have invoked the almost unlimited powers conferred upon the governor of California by the State Government Code to deal with an emergency, including explicitly the sudden and severe shortage of electrical energy. These powers include the suspension of statute and regulation. It was this power that I used after the Northridge earthquake in 1994 to rebuild and reopen Los Angeles' shattered freeways - just 64 days after their destruction, instead of taking the two and one half years that would otherwise have been required by law.

Fully a year ago, Davis could have acted unilaterally, without the Legislature, to suspend operation of the rate cap that the investor-owned utilities (PG&E, SCE and SDG&E) recently complain of but eagerly requested at the time of enactment.

He could have, by decree, suspended the provision that prohibited the utilities from forward contracting with power wholesalers.

He could have, by executive order, suspended and truncated the nightmarish process required by state law for approval of siting. Had he done so early enough, when he might even have made a difference this summer, and done so not just with peaker plants but also with large plants, he might have greatly accelerated construction of the power plants that will be required to allow us to escape from blackouts, power price spikes and the severe job loss and economic injury certain to result from a power supply that is neither reliable nor affordable.

All these actions, Governor Davis could have taken a year ago - or earlier: A governor can foresee the emergency and exercise his extraordinary powers to prevent it. He is not required to wait and compel California to suffer it.

Had the governor heeded the early warnings - about hot weather, or the threat of insolvency to the utilities - and had he acted, using the full range of his extraordinary emergency powers when he should have, he could have prevented the problem from becoming the crisis it has become.

We might have incentivized power providers to build enough new plants fast enough to avoid blackouts this summer.

PG&E would not have been compelled to declare bankruptcy and Southern California Edison would not be teetering on the brink.

Energy costs would not have spiked to the present outrageous levels.

The state would not have burned through billions of taxpayers' dollars.

And California's jobs would not be threatened, as they are, by raiders from other state governments who are aggressively seeking to lure California employers to their states and steal our jobs.

The blame game waged by the governor's office adds insult to injury. It will provide no comfort to Californians sweltering in darkness this summer. But it does do a serious disservice to ratepayers and taxpayers by seeking to mislead those who are not aware of the real, unhappy facts of California's present crisis.

The honest explanation for it is simple, not rocket science: State government cannot ignore the law of supply and demand. It is not the state's responsibility to build power plants. But it is its responsibility to create a regulatory environment that will give incentive to private sector providers to do so. Deregulation, even with imperfections that the governor could have cured by fiat if the need arose, was a significant advance in achieving that incentive as subsequent filings by providers attest.

The problem grew into a crisis not because of deregulation but because of Governor Davis' failure to act. That is the plain, unhappy truth of the matter. I take no joy in saying so. I have been prepared to be helpful to the governor during this very serious challenge to our state's well-being, just as when I responded to his request for my assistance in passing Proposition 39 (the school bond issue) in the most recent election.

Just as my perception of what was best for California caused me to help him then, I am compelled now to speak out to prevent the rewriting of history and a deliberate effort to mislead the public and to discredit deregulation in order to shift the blame for his own inaction.

It is embarrassing that former Governor Pete Wilson is now attempting to absolve himself of blame for the electricity deregulation disaster California is trying to dig itself out of.

When Mr. Wilson signed the deregulation bill with great fanfare in 1996, he called it "landmark legislation [that] is a major step in our efforts to guarantee lower rates, provide consumer choice and offer reliable service, so no one literally is left in the dark."

One thing is for sure: Despite his current who-me? campaign, Mr. Wilson was not in the dark about what has turned into the most expensive and dangerous fiasco ever to confront California.

He campaigned for deregulation. His appointees on the Public Utilities Commission designed and implemented the plan from beginning to end. The legislation that ultimately passed the Legislature provided exactly the structure Wilson demanded. As recently as April, he told the San Diego Union-Tribune, "I take credit for having been the driving force to launch deregulation."

But now that deregulation has turned into Mr. Wilson's - and the state's - Frankenstein, the former governor wants to wash his hands of it, saying it didn't turn out the way he envisioned it. Incredibly, Mr. Wilson last month told The Associated Press he knew when he signed the legislation it was "obviously flawed," but that he "fully expected that . . . my successor as governor . . . would see and remedy a couple of pretty clear faults." So Pete Wilson now expects Governor Gray Davis to clean up his mess.

In fact, the fatal flaws in Mr. Wilson's plan were many. Chief among them was that California's three investor-owned utilities were forced to sell off their fossil-fuel power plants. Most of them were bought by out-of-state energy companies - several in Texas. Unlike the utilities, whose prices charged to consumers were regulated by the PUC, these so-called "merchant" generators were free to charge any price they could get for wholesale power.

Under Mr. Wilson's direct order, the utilities also were prohibited from contracting ahead with these firms for power, forcing them to buy power on the wild spot market, with no limit being placed on the price they would have to pay.

Deregulation envisioned a world in which the utilities would become mere delivery boys, buying power in a supposedly free market from competing sellers and, in turn, providing that juice to their residential and business customers at a fixed rate high enough to ensure they made a profit.

But this free market never came to be. Instead, it has turned out to be a dysfunctional disaster. Under this half free-market, half-regulated hybrid, generators quickly learned how to demand unheard-of prices in what became a sellers' market.

For instance, in the pre-deregulation market of 1998, the price for electricity was $10-$20 per megawatt-hour. Even in early 2000, we were paying an average of only $30 for a megawatt of power. But by the middle of last year, wholesale prices spiked to astronomical levels - up to an average of $200-$300 per megawatt-hour. For a few days in January of this year, the cost reached a staggering $3,880 per megawatt hour from one out-of-state generator - a nearly 12,000 percent increase over the average wholesale price in 1998.

Here was the fly in the ointment: Most experts agree that deregulation works only if a state has a significant surplus of power. Now, Mr. Wilson says the Davis administration overlooked the explosive growth in electricity consumption brought on by the New Economy. But it was the Wilson administration that ignored it and caused our current shortages.

According to the California Energy Commission, during Mr. Wilson's entire eight years in office he licensed only nine new power plants - none of them classified as "major," meaning those producing 300 or more megawatts of power. Two of those plants were never built and one was downsized. So the grand total of new power-generating capacity Mr. Wilson added to the system was exactly 995.5 megawatts - barely the output of one of our largest existing plants.

Mr. Wilson now claims he left the state with a 30 percent surplus of electricity. But the putative power glut he gloats about was gone even before deregulation took effect in 1998. For example, peak electricity demand in the summer of 1998 was 54,648 megawatts, compared to in-state electricity generation of approximately 53,000 megawatts, according to the energy commission. The only way we made it through that summer - Mr. Wilson's last as governor - was with imports from neighboring states.

In fact, it was not until April 1999 under Governor Davis that the energy commission began licensing new major power plants. This increase is directly connected to the governor's new fast-track licensing process that reduced approval time for major plants to six months from Wilson's cumbersome 12-month process. And for "peaker" plants, which run only during times of peak demand, a Davis executive order has cut approval time to just 21 days.

Under the fast-track process, 16 new major power plants have been licensed. Ten are under construction, four will be on line this summer, four next summer. And eight smaller peaker plants are now being built as well. By the end of September the governor will have brought nearly 5,000 megawatts of new power on line, enough to power nearly five million homes.

Beyond failing to plan for needed generation, another fault in Mr. Wilson's plan was the prohibition against forward contracting by the utilities. Had he not blocked the utilities from entering into long-term contracts for power, they could have locked in reasonable prices. It was not until May 1999 - five months into Governor Davis' term - that the PUC overrode the deregulation law and began allowing the utilities to purchase power in blocks of a month ahead.

Then, in a series of actions from the summer of 1999 through the winter of 2000, the commission continued that break with the deregulation law, allowing the utilities to make forward purchases for power up to the full amount they needed. And contrary to Mr. Wilson's charge, the utilities in 2000 did lock down substantial amounts of long-term power under contract.

The third fatal flaw in the Wilson deregulation plan was that it gave control over wholesale power prices to the Federal Energy Regulatory Commission (FERC), which is charged by federal law with ensuring that prices for wholesale power are "just and reasonable." Even though this toothless agency has found the prices charged California over the last year to be unreasonable, it has refused to take any significant action to cap these outrageous prices.

Governor Davis has been joined by the governors of Oregon and Washington and by nationally known economists in calling on FERC to approve temporary price caps to give the new generation we are building time to come on line and to allow the other market reforms he has instituted a chance to work.

Meanwhile, the Davis administration has put in place strong measures to increase energy conservation, including nearly $850 million in incentives. That conservation effort produced an 11 percent reduction in electricity use in May. Additionally, the Davis administration is taking strides toward ensuring long-term power supplies by working to finalize nearly 50 long-term power supply contracts that will provide an average of 9,700 megawatts of reasonably priced power over the next 10 years.

And Governor Davis has also created a California public power authority that can build and own enough generation capacity to ensure a safe surplus even if the private generating companies do not build new plants.

It was the wishful thinking of a free-market ideologue for Mr. Wilson to assert that the botched deregulation law would magically bring a stable, low-cost energy market to California. Make no mistake: He created this disaster by designing and signing a deregulation scheme he himself has since acknowledged was screwed up.

If the former governor truly wants to be helpful, he should cease blaming his successor for this fiasco and add his voice to those calling on the leader of his own party, President George W. Bush, to support the governor's effort to bring sanity to the wholesale power market by cracking down on the gouging out-of-state generators.

It is a critically important effort that needs the cooperation of the former governor and the current president to fix what was broken - and what Mr. Wilson clearly knew was broken - long before the current governor ever took office.