California's uncertain step to fix power woes

Acting to end crisis, lawmakers reassert state's authority over the electricity market.

SAN FRANCISCO

California is now in a full-throttle race to avoid its Winter of Discontent from becoming the Power Outage Seen 'Round the World.

The state's electric utilities are tottering near bankruptcy. Power authorities are regularly warning of blackouts. And the California legislature is galloping to avoid the economic and political damage of either development.

"It's like watching a game of chicken," says consumer activist Nettie Hoge.

And like a game of chicken, the outcome is not apt to be pretty, say a growing number of analysts. The state has backed itself into a problem, this reasoning goes, that probably defies a quick and neat solution.

The legislature has thrust the state into the role of power middleman, with the state Assembly passing a bare-bones bill Tuesday empowering the state to buy power from generators and sell it to utilities, or consumers.

The move is just part of what is apt to be an elaborate plan to reassert state authority in the power market, which was deregulated, at least in name, in 1996.

Underscoring the urgency, Southern California Edison, one of the state's largest utilities, has announced it will not meet payment obligations to power generators. Edison and the state's other major utility, PG&E, say they have accumulated more than $12 billion in costs by buying energy that they are unable to pass along to consumers because residential prices are frozen too low.

Credit agencies have downgraded the debt of each utility to junk-bond status.

"Clearly, the California energy market in its current form is dysfunctional," said Edison in announcing its repayment lapse.

Few would disagree with that assessment. Like a gloomy but irresistible soap opera, California's peril is being closely watched far beyond the state's borders.

British newspapers have warned about the danger to the world economy of an electricity meltdown in California, whose economic output now surpasses Italy and is nipping at the heels of the United Kingdom itself.

If that worry is exaggerated, the danger of a California slowdown to an already-slowing US economy is real, say analysts.

Beyond economics, the California story may hold other lessons. It was the first and largest state to embrace electricity deregulation, and many are now trying to disentangle what went wrong. Deregulation advocates are quick to point out that other states, like Pennsylvania, have benefited from turning electricity over to the free market.

Finally, the state's electricity woes could sink a number of political careers, including that of Gov. Gray Davis, a rising star of the Democratic Party, as well as the state's reputation as a place friendly to business.

IT REMAINS to be seen whether greater state intervention in the power market will enhance or undermine confidence in the market. But few see other alternatives at this point.

The immediate intention, which many analysts applaud, is for the state to backstop the financially wobbly utilities with its own deep pockets. "The stupidest outcome of all this would be to have blackouts just because of the utilities' financial conditions," says Severin Borenstein, director of the Energy Institute at the University of California, Berkeley. "If the state steps in, that would be an extremely powerful signal."

But how the state steps in could be crucial to whether it enhances the long-term stability of the system.

Adrian Moore of the Reason Public Policy Institute in Los Angeles says the state could help by offering guarantees to back utilities' purchase of power. But actually buying and selling power may scare off future investments in power plants, transmission lines, and other components of California's electric grid.

This winter at least, the California electricity shortage is really a collision of economics. The power is available, but at a price. And with the utilities' credit growing shakier by the day, the price is rising even further as power generators want to be compensated for the risk of selling to unstable customers.

The utilities claim the price cap imposed with deregulation, and only recently adjusted upward by about 10 percent, has forced them to sell electricity at a fraction of what it costs them. Market rates are now running about five times what the utilities can charge residential customers.

Having consumer price caps and unfettered wholesale prices is one anomaly that deregulation advocates say made the California approach illogical. Another common criticism is that it discouraged utilities from entering into long-term contracts to buy electricity, opting instead for a spot market that has seen prices

soar by 500 percent since the middle of last year.

The state hopes to change the market dynamics by buying power on long-term contracts at prices below what the spot market commands. The big question is whether Governor Davis, who has taken the lead in solving the problem, can negotiate a price that is attractive to producers and won't require an immediate consumer price hike.

Consumer activists like Ms. Hoge, of The Utility Reform Network, don't object to the state becoming a power purchaser. But they are concerned the state might construct a package that sticks consumers with the costs the utilities have accumulated.

Hoge says the utilities have reaped sizable gains from deregulation, and that these gains should be considered as offsets against the current losses due to power prices.

As the state constructs its elaborate bailout strategy, conservation may be the only short-term hedge against periodic blackouts.

Davis has asked the state government to curtail energy use by 5 percent and has called on consumers for a 7 percent cut.

Power authorities credit public conservation with getting the state through several days this year with dangerously thin electricity margins. Many more days of living on the edge are expected this winter and next summer, until new power plants in the state begin operations.

(c) Copyright 2001. The Christian Science Publishing Society

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