LEGISLATURE MUST FIGHT DAVIS.

Byline: Richard Nemec Local View

FIRST, let's get a few things clear: There will be rolling electricity blackouts this summer, the Legislature and the state regulators will get upset and take even more severe action, the governor will hold a press conference at least weekly, and there will be retail utility rate increases - whether they are officially designated as such or not.

Contrary to the popular perception, the seeds for the state's nagging predicament rest not in the 1996 electricity industry restructuring law, but 18 years earlier in the federal energy legislation of 1978 by President Carter in response to oil embargoes and natural gas shortages nationwide.

We can also blame Gray Davis and his political mentor at the time, Gov. Jerry ``Moonbeam'' Brown, as much as Brown's old political rival, former U.S. Sen. and former Gov. Pete Wilson.

Brown championed the concept of ``small is beautiful'' in moving to a decentralized, rather than centralized, energy infrastructure. The federal act promoted the concept, too, fostering the first power plants built and run by private nonutility companies. It created the many small power plants - called qualifying facilities (QFs) - that were at the center of last week's rolling blackouts throughout the state, and at the center of the political and regulatory proceedings that will unfold this week in San Francisco and Sacramento.

To understand where we are going and how we got to our current ``challenge'' or ``crisis,'' depending upon who is defining the state's current dilemma, it helps to understand the past two decades that nurtured the development of QFs and the state transmission grid's growing reliance on their disparate megawatts from the sun, wind, even wood chips.

This represents only one piece of the increasingly difficult puzzle that makes up the state's electricity crisis. It is a big piece right now, but only one, and its significance lies in how the QFs have been mischaracterized and misperceived as they go through Sacramento's political lens - not unlike what has been happening to each major puzzle piece since last summer.

Traditionally, either the government or vertically integrated, investor- owned utilities were the only owner-operators of power plants in this country until the mid-1980s under federal incentives to get more players, and thus more competition, into the generation part of the electricity industry, which still had two other major segments for transmission and local distribution of power that stayed firmly in the hands of the government or closely regulated private monopoly utilities.

No state pushed the development of these QFs harder than California, and in a sense, they became the first wave of ``merchant generators,'' many of which are scorned today for their avarice and alleged unethical, if not illegal, behavior.

In theory, the new guys were all small entrepreneurs trying to eke out a meager living. In reality, it has turned out in many instances to be something entirely different.

More than half of the 21 QFs contracting with PG&E in Northern California who shut down last Monday, thus helping spark the rolling blackouts, are owned by two large national energy companies and others by multinational oil-gas and forest products corporations.

A state legislative leader, Sen. Debra Bowen, D-Redondo Beach, and Gov. Davis earlier in the week took great pains to characterize the QFs as small, ``good corporate citizens,'' the kind of generators ``the state is proud of'' because they ostensibly bring us nothing but clean, cheap electricity from environmentally friendly renewable resources.

In reality, most of the QFs are medium- to large-size cogenerators who use natural gas to produce power as an offshoot of huge industrial processes, such as oil refineries.

Throughout its history, QF power has never been cheap. That has been the sticking point in the negotiations during the current crisis - lowering exorbitantly above-market, long-term (25 to 30 years) contracts that were ironclad in locking in the utilities as buyers of this power, all in the name of jump-starting a nonutility generation industry.

Judging from the 688 separate contracts the state's three investor-owned utilities are now getting changed on the basis of the crisis, the program worked, but California has historically paid average electricity rates 50 percent higher than the national average as a result.

In the past three months, QFs have not been paid by private sector utilities because the utilities are broke. They are broke because state regulators at the governor's behest refused to raise retail rates - even on a temporary basis - to cover the full cost of wholesale power purchases.

That is supposed to be fixed with several actions on the state regulators' agenda Tuesday.

However, also on the agenda, with a strong bit of public support from the governor, is an item to set up a payment mechanism for the state's Water Resources Department, which has been buying all the excess power needed above what the utilities and QFs could supply. And that method is to give the department first call on all monies collected by the utilities - before the QFs and before the utilities for their own hydroelectric and nuclear supplies. (PG&E argued this is against the new state law, AB 1X, that authorized the Department of Water Resources to buy power.)

So the latest food fight in our unfolding electricity melodrama has the state, QFs and private sector utilities fighting over retail power revenues that will continue to be insufficient unless the California Public Utilities Commission does what the governor has said for months he won't do - raise rates above the levels already contemplated.

The pie needs to be enlarged. It is as simple as that.

Will the regulators exercise some leadership and independence and enlarge the pie? I doubt it. Should they? I strongly think so.

Most likely, it will take more rolling blackouts and a Legislature that turns against the governor before order is restored. That promises to be the messiest food fight yet.

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Photo: (color) California Gov. Gray Davis, front, and Sen. Debra Bowen, D-Redondo Beach, rear center, took great pains to characterize qualifying facilities as small, ``good corporate citizens,'' the kind of generators ``the state is proud of'' because they ostensibly bring us nothing but clean, cheap electricity from environmentally friendly renewable resources.

Rich Pedroncelli/Associated Press