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Powerless: We're Still Paying for the Energy Crisis of 2000-2001

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The history of California at the end of the last century and the beginning of this one is, in Lemony Snicket's fatal words, a series of unfortunate events. The most unfortunate of them -- and still underway -- was the state's catastrophic misadventure in energy deregulation.

As Colin Hale, writing recently for Neon Tommy, notes:

For over two years, the nearly predictable lack of affordable electricity (or electricity at all) forced huge rate hikes, caused rolling blackouts during summer months, and played a major role in the recall of Governor Gray Davis and the election of The Governator, Arnold Schwarzenegger. Ask anyone here during that time, especially Davis, and they'll tell you: California has never quite been the same.

California played at a rigged roulette wheel that jacked up the wholesale price of electricity from $30 per megawatt to as much as $600 by mid-2000. By the end of the year, the spot price of a megawatt-hour of electricity hit $1,500. And that was the negotiated price; wholesalers were asking $2,000 a megawatt-hour.

The state's electricity distributors -- excepting the LADWP -- were soon an estimated $12 billion in the hole to wholesalers.

As the crisis worsened in 2000, I lamented in a Los Angeles Times book review essay:

Deregulation had set up a divided marketplace in which the California Power Exchange was a clearinghouse where buyers and sellers set the price of electricity and the California Independent System Operator (Cal ISO) was the "buyer of last resort" if occasional gaps between production and distribution unexpectedly failed to meet daily demand. The arrangement began unraveling in mid-1998, and the Power Exchange effectively collapsed ... in July 2000, leaving the poorly trained bureaucrats of the Cal ISO in December and January to struggle to buy 30 percent of the state's daily power needs at arbitrary prices they passed on to utility company managers.
The spectacle of the Cal ISO gratefully paying a 500 percent premium over the cost of production to keep the lights on [in December 2000] was a lesson in "market fundamentalism" with a vengeance. Californians, tutored by earnest neo-conservatives like [now former] State Senator Steve Peace, believed that a deregulated market would generate abundant, low-cost power simply because that's what a market freed of regulation would do, despite the evidence that this particular market was based on false assumptions and likely to be manipulated by the energy suppliers who designed it.

Likely? Manipulation of the market was assured.

Today, a fraction of the wealth stripped from California ratepayers is dribbling back. Attorney General Kamala Harris reached a "no fault" deal with the Canadian power company Powerex Inc. last week that will cost the company $750 million.

Utilities in California and the state's General Fund will split $273 million in cash while $477 million still owed to Powerex will be struck off the books, according to the Daily News. But the agreement also wipes out $3 billion more in fraudulent dealing by Powerex that AG Harris claimed in the state's suit.

In announcing the settlement, AG Harris blamed Powerex for gaming the California energy market "by purchasing and exporting to Canada huge quantities of electricity and then selling it back to California at exorbitant prices."

That game had many players. According to news reports, 47 other electricity sellers have already made settlements worth about $4 billion. Altogether, the Federal Energy Regulatory Commission has suits underway against 60 trading companies involved in California's electricity crisis of 2000-2001.

It turns out everyone except the state legislature knew how easy it would be to stick energy hungry California ratepayers with grossly inflated electricity prices.

That includes the big utilities that are getting the rebates. Utilities manipulated the rush to deregulation in the mid-1990s. They argued against the development of alternative energy sources, and the PUC backed down. And the utilities sweetened their bottom line by selling off power plants, diverting revenue to non-energy enterprises, and deferring system maintenance, all of which worsened the effects of the state's energy drought.

Energy deregulation was designed to fail Californians at the moment when California's emphasis on energy conservation and alternative power would have defined a more flexible and sustainable "soft energy" path. Between 1973 and 1988, for example, California's population grew 37 percent and its economy, as measured in goods and services, grew 46 percent, while the state's energy consumption grew only 8 percent, due in part to some of the strictest standards in the world for building insulation and appliance efficiency.

Governor Jerry Brown was right in his days of "small is beautiful." Weather-stripping and windmills did make a difference.

The deeply flawed energy deregulation consumers got in the 1990s -- in the ironic words of [now former] State Senator Jim Brulte, "one of the most far-reaching and forward-thinking pieces of legislation" in California history -- was peculiarly Californian in its excess of wishful thinking and predatory salesmanship.

(In 1994, John Bryson, then CEO of Southern California Edison, actually told the PUC, "Edison does not need any additional power until at least 2005.")

Crow if you want about a cash settlement with the Canadians, but we're still paying for the phony energy crisis of 2000-2001 and will be for a very long time.

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