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Flickering lights in the Golden State
Energy expert says 'deregulation' not to blame for electricity woes

By Julie Foster

Prompted by an energy crisis blamed on everything from generator shortages to botched deregulation, Californians have enrolled themselves in "energy policy 101" through their personal research and reading of media reports in an attempt to learn why rates have gone through the roof and threats of blackouts loom.

The most commonly named villain in the California energy drama is "deregulation" -- legislation restructuring the utilities industry, passed four years ago by unanimous votes in the Gov. Pete Wilson-era legislature. But the reality of the voluminous deregulation proposal suggests a more apt name -- "re-regulation."

Yet, can one factor alone be blamed for the state's energy enigma? Jerry Taylor, director of natural resource studies for the Cato Institute, says no.

"Whatever happened in the California legislature in 1996, it was not deregulation," said Taylor. "It was exchanging one set of regulations for another."

And a much more complicated set of regulations at that. Prior to the shift in energy policies, utility companies such as PG&E, Southern California Edison and smaller municipal utilities owned their own power-generating equipment. The energy was distributed through a grid of power lines and the price was regulated by the state.

Under the new system, utilities were forced to sell their generating equipment to private investors, which in turn were required by law to sell the power to a newly formed market exchange -- similar to the stock exchange, except that it trades electricity instead of corporate securities.

Utilities then bid for purchase of the precious wattage through the government-run exchange. However, regardless of what they pay for wholesale power in the market, utilities are still required by the state to cap the prices they charge at 6.5 cents per kilowatt hour until they finish paying down debts incurred before the scheme was developed.

As a result, utilities are going bankrupt.

"Now, what kind of 'deregulation' imposes rigid government dictates on how industries should organize themselves? What sort of 'deregulation' keeps fixed prices on retail providers? What kind of 'deregulation' requires retailers to buy power through a state-run central exchange?" wrote Taylor in a recent column for National Review.

Lack of supply is also being blamed for the power crunch. According to the California Energy Commission, demand for electricity has increased by 12 percent in the last 2 years, while supply has increased only 1 percent. A booming economy leads to increased consumption, including home entertainment systems and computer equipment. And as computer sales increase, so does the demand for Internet access, leading to the creation of more server warehouses that suck enough wattage to rival a small city. Add to that increased home sales in suburban areas where air conditioning is a must and you have the makings of a public-utilities nightmare.

So why not just build more generators? Taylor, an adjunct scholar at the Institute for Energy Research and senior editor of "Regulation" magazine, answers the question in two words: red tape. The California Energy Commission outlines on its website the process for obtaining approval to begin building a power plant:

Once the Energy Commission decides an application [to build a plant] is detailed enough to begin study, the staff conducts discovery and analysis before drafting a Preliminary Staff Assessment of the project. Concerns highlighted by this document are then explored in a series of staff workshops in which other agencies, the applicant and the general public can present information. The staff then prepares a Final Staff Assessment, which is typically published about six months into the siting process.

Once the Final Staff Assessment is completed, an Energy Commission Siting Committee takes responsibility for all hearings and related proceedings on the proposed facility. Again, the Energy Commission seeks active public participation. Based on the evidentiary record and public comment, the Committee prepares a Presiding Member's Proposed Decision. Only after additional hearings and public conferences on this document does the Committee formulate its final recommendations. These are considered by the full Commission, which must vote to approve or reject the application at an Energy Commission Business Meeting.

The process from application to approval can take up to several years to complete and, only then, may construction begin.

While the electricity crisis is extremely complex, and identification and analysis of all the factors involved virtually impossible, many in the news media have blamed the dilemma squarely on the state's new energy policies, known as "deregulation." Both the San Francisco Chronicle and the Los Angeles Times published articles on the subject, the latter of which is titled, "How state's consumers lost with deregulation." The Chronicle spent more than 2,000 words decrying the legislature's "serious policy blunders."

In reality, practically none of the members of the 1996 legislature fully understood the bill they passed that came to be known as "deregulation," and that it has substantially convoluted the state's energy policies and practices. But according to Taylor, it is also true that, regardless of deregulation's faults, it cannot be blamed for the high prices and insufficient supply now being experienced.

So what is to blame? The high market price of natural gas, says Taylor.

"The bottom line is that, because the state is so heavily reliant upon natural gas during periods of peak demand, Californians would be facing the same unpleasant combination of high electricity prices and blackouts even if the old regulatory rules were still in place," he wrote.

Most of California's generators use natural gas to produce electricity. Because the market price of gas has gone up 600 percent over the last two years, energy suppliers must raise their prices to continue profitability. Despite price increases, consumers have not decreased their demand.

Unlike other products, electricity is not replaceable. For example, if the price of peaches goes up in the winter, consumers buy apples instead. But with electricity, there is no alternative, Taylor explained. So, demand stays high -- and even increases -- while prices continue to rise and supply is drained.

But if the price of natural gas is fueling an energy crisis, what has caused gas prices to go up?

"We're not running out of natural gas, but demand has increased at a rate unattainable by natural gas supply," said Taylor.

Natural gas is transported through pipelines which must go either over the Rocky Mountains or through other private areas. Many people oppose pipeline proposals, making transportation of the gas more difficult. Also, one of the pipelines into California blew up in August, cutting supply by 10 percent -- not to mention the fact that Americans are experiencing the coldest winter on record, increasing gas demand to heat homes.

Creating yet another state-regulated energy system will not solve the problem, warns Taylor.

"[Gov.] Gray Davis could turn this into a Stalinist energy enterprise and it won't change the price of natural gas any," he said.

In his State of the State speech last week, Davis pointed a finger at the current energy regulations.

"California's deregulation scheme is a colossal and dangerous failure. It has not lowered consumer prices. It has not increased supply. In fact, it has resulted in skyrocketing prices, price gouging and an unreliable supply of electricity. In short, an energy nightmare," he said Jan. 8 from the floor of the state Assembly.

The governor suggested, among other things, that legislators "require our municipal utilities to sell their excess power to California consumers at reasonable rates. Currently, they're free to sell their power to anyone in or out of the state." He also suggested the law-making body "make it a criminal act to deliberately withhold power from the grid."

"My friends, there is no easy solution," he continued. "But if I have to use the power of eminent domain to prevent generators from driving consumers into the dark and our utilities into bankruptcy, then that's exactly what I will do."

Justifying his statement, Davis explained: "On many days, 10 to 12 percent of electricity generated in California leaves our state in search of even more exorbitant prices elsewhere. On some occasions, the merchant generators have brought the state to the very brink of blackouts by refusing to sell us back our own power because they could find higher prices elsewhere. Think about it: They're refusing to sell us our own power."

Such draconian actions as eminent domain are antithetical to what a handful of legislators would consider a solution, even for the short term. State Sen. Tom McClintock, R-Thousand Oaks, proposes a $5.3 billion rebate to taxpayers out of the $7.3 billion cash surplus the state expects by May.

"The same government that caused this problem is accumulating over $7 billion of cash surplus for the current year -- $10 billion for the budget year -- above and beyond all of its current record spending. This is a surplus that has been paid by these same consumers and that sits idly in the government's treasury right now. At the very least, whatever else happens, this government should at least restore a portion of their earnings to them so they can cope with these price spirals," McClintock said at a press conference.

McClintock's proposal is simple: Every household that has filed a tax return will receive a $530 check. Every single filer who is not head of household will receive a cash rebate of $200.

"To those who say the government cannot provide a $5.3 billion rate rebate, I direct your attention to the $7.3 billion accumulating in the treasury right now," the senator said. "I direct your attention to the $10.3 billion the Legislative Analyst projects to be available above and beyond the demands of current programs. And I direct your attention to the fact that government spending has grown twice as fast as personal income since 1993."

McClintock continued, "I fervently believe that this is something that can be done now -- immediately -- to cushion the crushing burdens about to be heaped upon every family in this state. It doesn't solve the problem. But it helps to get these families through these tough times out of surplus cash from their own earnings that we have sitting in the Treasurer's vault this morning. How can anyone refuse to do so?"

Californians will get the answer to that question when they see what legislators choose to do with McClintock's proposal. It is one of several expected to be considered in the state's special session on the electricity crisis, which began this week.

Editor's note: Readers who would like to express their views to their legislators on this or any other issue may use WorldNetDaily's special communication center.

Julie Foster is a staff reporter for

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