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Restructuring in the Rearview Mirror:

Revisiting California's Doomed Experiment in Electricity Deregulation, Ten Years Later.

Stories of the Month

Although the formal State of Emergency lasted well into 2003 (when Gov. Gray Davis was facing a recall election that eventually put Arnold Schwarzenegger into power), by early 2002, the Western Electricity Markets Crisis had pretty much played itself out.

"All over but for the shouting," is a phrase that comes to mind.

While California Energy Markets continued to follow all the political recriminations, regulatory proceedings and resulting litigation, I tried to look forward to a time when saner minds might prevail.

This two-part column from January 2002 is based on a special project conducted for the Energy Foundation, in which I interviewed noted economists and thought-leaders about what should be done to restore a stable energy marketplace.

Not surprisingly, six different economists offered six differing solutions -- some of which made sense.

Where Do We Go from Here? January 11, 2002

First Steps to a Stable Energy Market, January 25, 2002

 

Part 1, Part 2 and Part 3 (Originally published July/August 2001)

Still Paying for the Power Crisis a Decade Later (Special to the Sacramento Bee, Dec. 2009)

Energy Crisis Dust Still Settling (Special to California Current newsletter, Nov. 16, 2010)


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From 1989 through 2002, I covered the Western electric and natural gas utility industry as reporter, editor and associate publisher of the California Energy Markets (CEM) newsletter. The era was marked by an almost obsessive desire by politicians and academic economists to break up long-held government regulated monopolies. Think back to the United Kingdom under Prime Minister Margaret Thatcher or the U.S. run by President Ronald Reagan and his neo-conservative followers.

Building upon arguably successful efforts to deregulate air transportation (causing the bankruptcies of dozens of established airlines while opening new routes to low-cost competitors), telecommunications (breaking monolith AT&T into regional quasi-monopolies, but opening the field to new, technologically adept entrants), and natural gas delivery systems, the proponents of deregulation aimed next at the 100-year-old electric utility regulatory structure.

California, as it so often does, plunged head-first to pioneer the restructuring effort, by directing the regulated electric utilities to sell off their generation stations, turn transmission lines over to a new Independent System Operator, and subject themselves to competition from dozens, if not hundreds of new energy service providers all vying for a share of the state's 25 million-metered household and business market for electricity.

In return, the utilities captured tens of billions of dollars in "stranded cost" recovery, underwritten by the same ratepayers who had paid for the initial investments in power plants, transmission lines and other infrastructure.

For a couple of years, the scheme even seemed to be working. A competitive Power Exchange drove daily commodity prices down to rock-bottom levels, making it nearly impossible for most of the new, hopeful competitors to make any profit. So they exited the system quickly and quietly. Other new marketers brought new electric products to customers, including "green power" based on the renewable energy that utilities had previously spurned.

But soon cracks in the system became apparent, as power and gas traders began exercising undue influence over the market prices. Because state regulators had essentially abdicated responsibility to the state Legislature and to a distant, "market friendly" federal regulatory body in Washington, D.C. - with full support of the powerful California Congressional delegation - there was little oversight and less ability to regain control over a system that began to run amok in late 1999.

CEM found itself at the center of this storm, providing weekly coverage of a dysfunctional system that soon turned into a crisis of runaway prices, power outages and a regulatory backlash that, in the end, caused as much damage as the problem it tried to control.

Professionally, the result for my small band of independent journalists was national attention, awards and accolades for being among the few to accurately foresee the impending crisis and for dutifully reporting about it in striking detail every week.

Personally, it represented a stressful time that still burns in memory with anger - a resentment at those who squandered an opportunity to make positive business history, at those who sought political gain by undermining the small good that was accomplished - and a lingering sense of the absurdity of it all. And more than a little guilt that, as journalists, all we could really do was point at the problems, without any power to avert the incredibly costly disaster we could see so clearly approaching.

In this section of The Energy Overseer, I try to exorcise some of the demons of this not-too distant past, by recounting the Western Energy Crisis via summaries of news stories and my Bottom Lines opinion columns from CEM from 1998 when the new system began operations through late 2001.

We'll do this chronologically, for the most part, but set the stage with some early reports of how the restructured system was "supposed" to work, and by paying homage to a few of my professional colleagues who also endured the crisis honorably by identifying the seeds of destruction and sticking with the story as it unfolded.

By the end, we may have something that approximates a first draft of history.

Disclaimer: These reports originated in the California Energy Markets newsletter, copyright held by Energy NewsData Corporation. They are reprinted with permission, or summarized in a fair-use kind of way. Some later appeared in "The Guilty Environmentalist" (Trafford 2003) or served as the basis for documenting "Soul of the Grid: A Cultural Biography of the California Independent System Operator" (iUniverse 2003).

But in every case, these were my own words written during or close to the time of the events they portray (Arthur O'Donnell).

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