Oil&Gas Journal Volume 99, Issue 3 (Jan 15, 2001)
Regular Features [Editorial]

Gov. Gray Davis of California, seeking cover in a political storm, has declared war on electricity deregulation. Last week, as he proposed a desperate and unconstructive response to an energy crisis, officials from other states watched with horror. Producers of natural gas, for whom electricity represents an important growth market, should assure them that California's problems are peculiarly Californian.

The problem-and it's a big one-is the state's approach on many levels to matters involving energy. The permitting process for anything having to do with conventional energy, for example, is tortuous and time-consuming. Power-generating capacity, therefore, has fallen far behind demand for electricity.

Similarly, antipetroleum zealots have turned otherwise promising California into one of the world's least appealing political environments in which to drill for oil and gas. So the state has insufficient supplies of natural gas with which to fire power-generation turbines.

Consumers shielded

As if self-inflicted supply problems were not bad enough, the state's scheme for deregulating the electricity industry has shielded many consumers from a price increase inevitable under recent market conditions. Absent natural incentives to conserve, demand has risen steadily. And this year, competition intensified for external supplies of gas and electric power.

California's electricity market can't handle shortage. Its deregulation program not only caps retail prices but also channels wholesale transactions to an extremely volatile short-term market through, until recently, a single power exchange.

For consumers of San Diego Gas & Electric, which was quick to escape retail price caps by dispensing with stranded costs, power bills zoomed when supplies tightened and wholesale prices rose. For consumers of the state's other two large investor-owned utilities, Southern California Edison Co. and Pacific Gas & Electric Co., prices stayed low until a recent emergency rate hike, but state and federal officials had to impose emergency measures to ensure supply.

Now, Socal Edison and PG&E are smothering in debt from buying power at wholesale dear and selling at retail cheap. And while the political activists who overpopulate California protest rate hikes, the utilities' credit ratings plummet, and power suppliers worried about payment and political uncertainty look elsewhere for business.

It's a mess. And it's the fault more of California politics than of deregulation.

Imperfection is understandable. The state was a pioneer in the uncharted realm of electricity deregulation. Pioneers make mistakes. California's main mistake was forgetting that deregulation means getting governments out of markets.

What the state now should do is identify and repair the flaws-the price caps, the market shapers, the permitting impediments. In other words, it should truly deregulate.

Instead, Gray excoriated deregulation and called for implementation of the energy equivalent of martial law. In his annual state-of-the-state speech he called deregulation "a colossal and dangerous failure," promised not to let big utilities go bankrupt but didn't specify how, blamed "out-of-state energy companies and brokers" for the crisis, and proposed a 10-point program heavy on state intervention, power-sale mandates, and criminal punishment. Davis thus resorted to bogey-man politics and insularity when he should have been correcting mistakes.

Short-term activism by the state government is indeed in order. Chronic problems, such as cumbersome permitting schemes and capacity shortages, take time to fix. Yet the crisis is immediate. The state needs to step in.

But the steps must be measured and temporary. Overall, the direction must be toward less regulation, less intervention by the government, and more regional cooperation. Davis's speech turns California onto the opposite course. And his heavy-handedness with out-of-state suppliers of power, on which California has allowed itself to become chronically dependent, is foolish.

Retreat elsewhere

Because of California's crisis, several other states have delayed or retreated from electricity deregulation. They should understand that California's crisis stems not from deregulation but from faulty and incomplete deregulation in a permitting climate hostile to energy supply.

Deregulation has worked in some of the other early starters, most successfully so far in Pennsylvania. It can and will work elsewhere. The key to success is remembering that the basic purpose of deregulation is to get governments out of markets. For consumers of energy, that's always the best protection available. California will demonstrate the concept disastrously if Davis succeeds with his proposal to socialize the state's power market and criminalize economic choice by energy suppliers.

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