Will Schwarzenegger Deregulate California Energy?

by Jason Leopold

One of Schwarzenegger's first political moves as the state's chief executive will be an effort to push the state's electricity market closer toward deregulation, a move halted by Gov. Gray Davis two years ago in the wake of California's energy crisis. Schwarzenegger, while on the campaign trail, blamed Davis for his handling of the energy crisis.

Schwarzennegger drafted a comprehensive energy policy (see: campaign website) that went unnoticed for much of his campaign during the recall election. He said he wants to eliminate public oversight on future power supply contracts the state signs with energy companies and adopt a design plan for deregulating California's electricity market from other states that restructured its electricity markets, such as Texas, New Jersey and Maryland.

"As governor, I will create a working wholesale power market based on the lessons learned from other states and the (Federal Energy Regulatory Commission) standard market design," Schwarzenegger said on his campaign website. "California is one of several states that adopted electricity restructuring. However, only California's restructuring caused severe price hikes and energy shortages. It is time to learn from other successful restructurings enacted by Texas, the New England states, and the Mid-Atlantic States of Pennsylvania, New Jersey and Maryland. In addition, California should also look to the standard market design created by FERC."

That could be Schwarzenegger's first disastrous move as governor and it may cost him dearly.

In August, the General Accounting Office issued a report criticizing FERC, the nation's top watchdog for electricity and natural gas markets, because the agency doesn't have the power to protect consumers from the side effects of deregulation, such as soaring electricity and natural gas prices, which ended up costing California more than $70 billion and bankrupted the state's largest utility, Pacific Gas & Electric Co.

Sen. Joseph Lieberman (D-Connecticut), the senior Democrat on the Senate Governmental Affairs Committee and a contender for the Democratic presidential nomination, said the report was disturbing in the wake of this month's massive electricity blackout, past electricity woes in California and the West, and the Enron scandal.

"Another year has gone by and FERC is still not capable of effectively protecting consumers," Lieberman said, in a statement.

In response to the California energy crisis and the Enron scandal, FERC last year announced the formation of the Office of Market Oversight and Investigations to scrutinize the electricity and natural gas markets as they moved from regulated monopolies to competitive markets.

But the GAO report said the OMOI still hasn't defined its roles and activities and has yet to develop many written procedures that would ensure its efforts are "coordinated, systematic, understood by its staff, and transparent to stakeholders."

In a letter to the GAO, FERC Chairman Pat Wood acknowledged that FERC faces a "significant human capital challenge" and still lacks the ability to prevent another California type crisis.

Under California's ill-conceived deregulation plan, investor-owned utilities sold most of their power plants and then bought most of their electricity from independent generators and other sellers. But while the prices were subject to fluctuations in supply and demand, federal law said prices had to be "just and reasonable" -- a vague term that FERC, the state and the sellers have spent the past three years debating, the Sacramento Bee reported in September.

But Schwarzenegger is unmoved by the GAO report. He still believes that competition will bring lower electricity prices to consumers in California.

Schwarzenegger said he will fire dozens of energy advisors appointed by Davis to various posts in favor of his own energy team, one that "respects free-market economics."

Schwarzenegger will also dismantle the California Consumer Power and Conservation Financing Authority, the public power agency created by the state Senate in August 2001 that financed small publicly owned power plants in California to eliminate the possibility of future energy shortages.

Schwarzenegger explained on his website that the goal of the Power Authority "to build and operate publicly owned power plants is in direct competition with private industry and serves only to divert private investment in electricity generation and transmission away from the state."

Moreover, many of the state's other 13 energy agencies, such as the Electricity Oversight Board, a watchdog agency that monitors the performance of the California Independent System Operator, the agency that balances California's electricity supply and demand, may also soon be out of business, aides to Schwarzenegger said.

One of Schwarzenegger's boldest moves, however, will be to enter into quick settlements with about a dozen energy companies accused of manipulating the state's electricity market during the height of the state's energy crisis two years ago, aides to Schwarzenegger said Wednesday.

For three years, California has been engaged in a costly legal battle against dozens of energy companies it said ripped off the state by purposely withholding much-needed electricity from consumers, creating an artificial shortage while boosting the companies' profits.

Federal regulators ordered electricity refunds for California totaling about $3.3 billion, but Davis said the state deserves at least $9 billion and "not a penny less."

Richard Katz, an energy advisor to Davis, told the Sacramento Bee last month that he thinks the state will have to sue to recover significantly more money; the state already has refund cases pending before the 9th U.S. Circuit Court of Appeals.

"The governor has said he'll go to every court, every venue," Katz said. Litigation "is the only process we have for getting justice for ratepayers."

But Schwarzeneggeer aides said the lawsuits are deterring energy companies from building power plants in California, which could lead to another energy crisis in 2006, and the legal wrangling alone is costing the state millions of dollars.

"It's time to settle and move on," a top aide to Schwarzenegger said. "We don't want to inherit litigation."