- The Washington Times - Wednesday, October 29, 2003

SAN FRANCISCO - California Gov.-elect Arnold Schwarzenegger hopes to sell the state on electricity deregulation for a second time, despite the expensive legacy of the first attempt.

Mr. Schwarzenegger’s energy advisers say they will bring a fresh approach to deregulation this time, avoiding mistakes that led to rolling blackouts, insolvent utilities, market manipulation and a $20 billion debt customers must spend the next decade repaying.

“We have a system that is broken, with pieces laying on the ground that need to be picked up and put back together again,” said James Sweeney, a Stanford University professor who helped write Mr. Schwarzenegger’s energy plan.

Deregulation critics are unnerved by Mr. Schwarzenegger’s proposal, arguing it would expose California to major risks at a time the financially strapped state can’t afford to gamble.

“It looks like he wants to put us back on the roller coaster of a very dangerous experiment,” said Public Utilities Commissioner Loretta Lynch, who dealt with California’s energy turmoil in 2001.

In his campaign, Mr. Schwarzenegger depicted electricity bills as a drag on the state’s economy, a problem he thinks he can alleviate by loosening energy regulations.

“High energy rates are an unacceptable burden for people who live and do business in California,” Mr. Schwarzenegger says in an energy policy statement on his Web site, joinarnold.com. “The current bureaucratic rules are making the crisis worse, instead of better.”

Mr. Schwarzenegger’s aides say his proposed reforms are mostly the work of three men: Stanford’s Mr. Sweeney, who wrote a book analyzing California’s electricity crisis; Sean Randolph, president of the San Francisco-based Bay Area Economic Forum, a group that represents business and government interests; and Lawrence Makovich, a senior director for Cambridge Energy Research Associates, a Massachusetts research firm.

The men met with Mr. Schwarzenegger last month and then drew up an energy policy based largely on their research, Mr. Sweeney and Mr. Randolph said in interviews. Mr. Makovich didn’t respond to a message.

Based on what Mr. Schwarzenegger has disclosed, “It’s an encouraging plan, one that seems to be very forward looking,” said Severin Borenstein, director of the Energy Institute at the University of California at Berkeley. Mr. Borenstein isn’t working with Mr. Schwarzenegger but is listed in the acknowledgments of Mr. Sweeney’s book.

It’s unlikely electricity deregulation will be at the top of Mr. Schwarzenegger’s agenda. He has an $8 billion budget deficit to deal with and may have to defeat a legislative bill and a ballot-box initiative proposing to reregulate the electricity market.

Still, California will probably need to adopt more reforms to lower the highest electricity prices in the continental United States and address an inadequate power supply, Mr. Borenstein said.

The first overhaul was signed into law in 1996 by Gov. Pete Wilson, now a Schwarzenegger adviser. The changes were hailed as a way to lower costs by fostering more competition and investment in the state’s electricity market.

But the deregulation effort went only part way — eliminating the restrictions on wholesale energy costs but continuing to regulate the prices paid by consumers. Many analysts, including some of Mr. Schwarzenegger’s advisers, say California’s energy crisis resulted from this mismatch, and the system was doomed to fail as long as deregulation was imposed on only one sector.

Whatever the reason for the botched 1996 effort and crisis that ensued, California households through June paid electricity rates 44 percent above the national average and 64 percent above the average in 10 neighboring Western states, according to the most recent data from the U.S. Energy Information Administration. The disparity is greater for businesses, with average rates 57 percent above the national average and 91 percent above neighboring states.

California lacks enough power plants to meet long-term needs. Without more market incentives to expand generating capacity, energy shortages could strike between 2006 and 2008.

Mr. Schwarzenegger believes new and improved deregulation will avert another electricity shortage and eventually drive bills down for many customers. His plan envisions a market in which customers pay a little more to provide generators with an incentive to build more plants and increase the state’s reserves.

To lower their costs, big businesses would be allowed to buy power from other sources besides California’s major utilities. Major power customers also would be forced to install metering equipment so they could be charged higher prices during peak-demand periods.

Meanwhile, most households would still get power from closely regulated utilities: Pacific Gas and Electric, Southern California Edison and San Diego Gas and Electric. Their prices wouldn’t fluctuate much, except in unusual circumstances.

The PUC’s Miss Lynch, a Democrat appointed by recalled Gov. Gray Davis, depicts Mr. Schwarzenegger’s blueprint as a rehash of the Wilson administration’s old ideas.

Architects of Mr. Schwarzenegger’s plan say it’s unfair to compare it with the 1996 package of changes, which they said were flawed and mismanaged by the Davis administration. Mr. Schwarzenegger’s advisers contend deregulation would work under a decisive governor.

But Mike Florio, a staff lawyer for the Utility Reform Network, a consumer group, said it will be an even tougher sell this time.

“It’s like we blew up the house, then got it rebuilt and now we are thinking about putting some dynamite around the foundation all over again,” he said.

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