- The Washington Times - Wednesday, February 7, 2001

The Bush administration and California's mostly Democratic leaders parted company yesterday with the expiration of federal emergency orders diverting tight energy supplies to California.

President Bush, in providing the temporary reprieve two weeks ago, said that in the future it would be up to California, whose "flawed" policies led to rolling blackouts in recent weeks, to keep the power flowing in the state.

Mr. Bush advised the state to focus its efforts on increasing supplies of electricity while fixing the flaws in its deregulation law.

But Gov. Gray Davis and state legislators have been moving away from the market solutions advocated by the administration, instead enacting bills that already have set in motion a partial state takeover of the power system.

One measure Mr. Davis signed into law last week provides $10 billion for the state to purchase power on behalf of its nearly bankrupt utilities. Some power suppliers had been withholding electricity and natural gas out of concern they wouldn't get paid, which is the reason the state sought the federal emergency orders.

The new law addresses that immediate financial problem by assuring payment to suppliers in the future. The Legislature also is considering a bill to help the utilities finance $12.5 billion of unpaid power bills and debt in exchange for taking over some of their stock or generating assets.

The state's Independent System Operator, which maintains the state's power grid, went to court yesterday to force three major electricity suppliers to continue selling to California.

Despite the flurry of legislative activity in the past two weeks and the commitment of considerable state taxpayer funds, analysts say little has been done to restore the state's dysfunctional power market or ensure that worse energy shortages do not occur this summer.

Two separate independent studies one state and the other federal found that California's refusal to take the practical steps needed to solve the energy shortage and its repeated pleas for help from the federal government in the form of emergency orders and price controls have only worsened the crisis.

"California spent the entire summer embroiled in controversy over the price-cap level and lost precious time to identify and deal with the true problems facing the market," concluded the staff of the independent Federal Energy Regulatory Commission in an analysis for the Western Governors' Association last week.

As the chief federal power regulator, the commission has urged the state for the past year to let its utilities lock in lower prices through long-term contracts with power suppliers a simple and practical solution, used by other states, that would have averted many of California's problems today.

Instead, California continues to require its utilities to purchase power on the spot market where prices were low when the deregulation law was enacted in 1996 but have skyrocketed since shortages developed last year.

"If California had negotiated forward contracts last summer, or even last fall, it is likely that billions of dollars would have been saved and its two largest utilities might not be facing bankruptcy today," said the commission staff.

A separate analysis last week signed by 28 business professors and former public officials convened by the University of California at Berkeley reached a similar conclusion.

"California has a crisis which has been deepened by inaction and by political trade-offs trumping good public policy," said the group's "Manifesto on the California Electricity Crisis."

The state's refusal to let utilities recoup their soaring costs for wholesale power by raising consumer electricity rates led to the utilities' insolvency and turned a power shortage into a financial crisis, the group said.

Each day that passes without addressing this basic imbalance only compounds the problem and causes prices to skyrocket further, they said.

The state group warned that the partial state takeover of the power system being contemplated by legislators will not restore a functioning electricity market and may only engender further problems.

"State ownership is not a solution at all, merely a guarantee that the taxpayers will be saddled with additional obligations for decades to come," they said.

Like the Bush administration, the state experts concluded that "in the end, new power plants are needed and the state should focus on creating a supportive environment for necessary new private investment."

In the meantime, the group said, the state must allow electricity rates to rise to reflect the true cost of power. "There is no other way out. Either retail prices must go up, or blackouts will continue with the consequent high costs to the California economy."

Like the federal energy commission, the state experts said negotiating long-term contracts for power would go a long way toward resolving the crisis.

"Long-term contracts provide generators the confidence that they can recover their investments, while granting utilities and their customers protection against price spikes."

Nevertheless, the state continues to defy the commission's recommendations and orders. State leaders are demanding instead that the commission impose controls on wholesale prices throughout the West.

President Bush and Curtis Hebert, commission chairman, have ruled out such price controls, saying they don't work.

The commission's staff study found, in fact, that temporary price caps the commission imposed at California's request last summer actually backfired.

"Artificially depressing spot prices exacerbated supply shortages" and "turned a pricing problem into a reliability problem," the analysis said. Price caps also discourage conservation by shielding consumers from the true cost of power, it said.

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