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Californians Debate Energy Future - 2001-12-25

During the past year, California slowly emerged from an energy crisis that dimmed the state's lights, threatened its businesses and left taxpayers with a whopping power bill. The electricity is flowing again in the West Coast state but Californians are debating their energy future.

Six days of rotating power cuts between January and May made California the target of jokes around the country. The state was compared to a Third World nation that couldn't keep its lights on.

In a matter of months, electricity rates had soared from $30 per megawatt hour to more than $300. Under a complicated law designed to reform the energy market, wholesale power prices were deregulated but the state's private utilities were prevented from passing their higher costs along to consumers. As the debts of the two largest utility companies mounted, their credit-worthiness sank. The two utilities would have collapsed if the California government had not intervened and bought power on their behalf.

State officials then raised consumer rates and embarked on a program to encourage conservation. And as more power plants came online, Californians avoided predicted blackouts during the summer months. Economist Christopher Thornberg says the state averted a crisis, thanks in part to the weather.

"Demand has come down so much because of a mild summer that as a result, the expenditures on power actually have gone down here in California," he said. "So in terms of the current cost of power, we're pretty much out of the woods on that, but we still have this money issue."

The money issue is the $17 billion debt incurred by state officials through emergency power purchased during the year.

The state has also incurred future costs by entering long-term contracts with energy suppliers on behalf of its failing utilities. California officials say the agreements helped to stabilize prices. Economist Peter Navarro calls them a policy blunder because prices have now dropped far below what the state has agreed to pay.

"What we will have is a fairly significant economic shock because of the set of long-term contracts entered into by the governor of this state," he said. "They were contracts which are going to cost something like $43 billion, five to 20-year contracts."

Governor Gray Davis, who negotiated the contracts, now wants to renegotiate them to save the state money. So does Loretta Lynch, the head of the California board that oversees the utility market. She agrees with Mr. Navarro that the contracts were a mistake.

Ms. Lynch blames the crisis on a poorly designed plan to deregulate the market and on widespread power reductions, caused in part by the need for maintaining generators. She also suspects market manipulation by power suppliers. She says, however, that the state is getting through the crisis.

"It's still going to take a huge conservation effort next summer and an accelerated process of bringing more supply online," she said. "But it's also going to take a reformation of the market rules so that the supply we do have runs when we need it. That was a huge part of our problem last year: We had lots of supply, but the supply didn't run, and that created artificial shortages."

Ms. Lynch and Governor Davis have criticized federal officials for not intervening more forcefully in the crisis. But the Bush administration has offered some help by brokering an agreement with private companies to upgrade the state's clogged transmission lines. U.S. Secretary of Energy Spencer Abraham notes that a blockage on the electrical grid contributed to the problem of getting power where it was needed.

California officials had hoped to reform their electricity market by opening the market to competition. Instead, the energy market came close to collapsing. Analysts say that market reform not a bad thing. In fact, dozens of other U.S. states are pursuing energy deregulation, but they view California is an example of how not to do it.

Part of VOA's Year End Series for 2001