Out of the Frying Pan: The energy crisis that dominated the California Legislature's 2001 session subsided as the year came to a close, but it left behind a debilitating financial hangover that could hamper the state's economy for years to come.

The blackouts that were predicted for the summer never materialized. California's second largest utility did not, as many lawmakers feared, slip into bankruptcy. And prices on the volatile electricity spot market not only leveled off, they declined to near historic lows.

Those developments brought a sense of relief to California's 120 lawmakers, who faced what some termed the most serious, and complicated, crisis the state had ever encountered. But their joy was tempered by the knowledge that the state, with its back against the wall, had locked itself into long-term contracts that will force consumers to pay high electricity prices for the next decade. And $6 billion drained from the state's general fund--to pay for energy purchases on behalf of the nearly insolvent utilities-still hadn't been replenished by year's end.

These lingering problems left some lawmakers and observers questioning whether the Legislature erred last winter when it granted Governor Gray Davis a blank check to buy power from the same private energy providers that had already driven two of the state's investor-owned utilities to the brink of financial disaster. Even some of those who supported that decision say the Legislature, the governor or state regulators, had they acted sooner, could have averted the worst of the crisis.

SEIZING THE PLANTS

Senator Joe Dunn, a Democrat from Orange County, is one legislator who is certain the state was wrong to stand in for the utilities. Dunn, who chairs a special Senate committee examining the conduct of the private energy generators, voted against the measures that permitted Davis to buy electricity. Dunn feared the treasury would end up in the same shape as Pacific Gas & Electric and Southern California Edison.

The same problem that plagued the utilities--having to buy power at high wholesale rates and sell it at lower, regulated rates to retail customers--would also face the state.

What was the alternative? Dunn thinks Davis should have refused to pay the skyrocketing prices of last January and February and dared the generators to darken the state. If they had, the senator argues, the governor could have used his emergency powers to seize the plants, pay the owners a "reasonable" rate of return and keep the power flowing.

"That would have been a bold statement that would have initiated an immediate meeting of all the stakeholders," Dunn says. "The generators, the traders, the governor's office and the utilities would have come together at that point and figured out a different route out of this problem."

Davis did threaten to seize power plants. But he never did so. Instead, his request for $400 million from the general fund became $1 billion and then $6 billion--for daily buys of electricity beginning in January and continuing, although in diminished amounts, to this day. He also approved more than $40 billion in long-term contracts that will give the state most of the power it needs for the next three or four years and much of its juice for a decade. But the average price in those deals is roughly twice what electricity was selling for before the crisis began and again once the panic faded last summer.

Assemblyman Keith Richman, a Los Angeles County Republican, would not have wanted Davis to seize private power plants. But Richman was among many who complained that Davis locked down far too much power at prices that were far too high.

"Many of us were saying at the time that this was a short-term or medium-term problem. It was not the time in March or April or May to be entering into long-term contracts, when the market was at its high point," Richman said. "There is going to be a tremendous long-term economic impact because of the higher electricity rates that we're going to be paying."

But Assemblyman Darrell Steinberg of Sacramento says that while the governor's contracts look expensive in hindsight, the deals made sense at the time they were signed.

"We all engage in second guessing," Steinberg said. "But you have to look at whether the decisions made at the time, under the circumstances, were reasonable. Given our range of choices, we did the right thing. You had utilities that were not credit worthy. The operative question was how do you keep the lights on? I think that was the right question. We were very conscious of the fact that there was a potential trade-off between stability and price. And stability is vitally important for Californians and for our economy."

CONSERVATION AND NEW PLANTS

While the governor worked to secure power for the state, the Legislature debated and passed two bills to boost conservation and speed the construction of new plants. The conservation measure, along with a 40 percent rate increase, was credited with causing a steep drop in consumption that eased pressure on the spot market and helped bring prices under control. Most of the new power plants that were rushed through the approval process were not on line in time to help last summer, but several thousand megawatts worth of new generation have either been built or are under construction now. The Legislature also created a new public power authority that plans to build "peaker" plants that will give the state an extra reserve on the hottest days next summer.

But even as the energy side of the crisis began to fade, the financial problems loomed large. Pacific Gas & Electric, the state's largest utility, declared bankruptcy in April. Davis quickly reached agreement with Edison, the second-largest utility on a memorandum of understanding meant to keep that firm from also seeking refuge in the courts. The governor's proposal called for the state to buy Edison's transmission lines as a way to give the utility a cash infusion to pay its debts. It also would have allowed the utility to raise money by floating a bond to be repaid by a dedicated portion of the rates.

The governor's plan faced strong opposition in the Legislature, however, and it languished all summer. Some lawmakers didn't like the idea of the state getting into the electricity transmission business. Others thought the deal was too generous to Edison. And the utility's credibility suffered as deadline after deadline for getting the deal came and went without the dire consequences that Edison predicted.

Finally as the session drew to a close in September, the Assembly passed a compromise measure that both the utility and the governor's office said they could live with. The bill dropped the governor's proposal to buy the transmission lines and would have allowed Edison to float about $3 billion in bonds to repay creditors. But the bill died in the Senate, which had earlier passed its own version that the utility said was unacceptable. The Senate bill would have forced the utility's shareholders, rather than ratepayers, to shoulder more of the burden.

In essence, the Legislature, or at least the Senate, was telling Edison to go ahead and file for bankruptcy. PG&E had already been in that condition for months without causing any problem for consumers. With that in mind, many lawmakers concluded that it made more sense to try to hash out that sort of complicated financial deal in bankruptcy court rather than on the floor of the Assembly or Senate.

HAUNTED BY 1996

Douglas Heller, a consumer advocate with the Santa Monica-based Foundation for Taxpayer and Consumer Rights, thinks the Senate was more reluctant than the Assembly to pass a deal for Edison because more of its members remembered the 1996 legislation that was blamed for triggering the crisis.

"You couldn't help but feel they were haunted by 1996," Heller said. "It made people nervous. There was this sense that we may be making the same mistake again."

Even after the regular session ended in mid-September and lawmakers left the Capitol for their districts, Davis threatened to bring them back again in a special session to deal with the Edison mess. They were scheduled, in fact, to return to Sacramento just as Davis was completing work on the hundreds of bills lawmakers sent him at the end of the session--a timing that more than one lawmaker concluded would give the governor added leverage over the Legislature. But just before the Legislature was scheduled to be back in the Capitol, Edison concluded 10 days of secret negotiations with the Public Utilities Commission that produced an agreement that would get the company back on its feet. The deal, reached in the context of a settlement in a federal court case, apparently can be implemented without the approval of the Legislature, at least according to the PUG and the utility.

The agreement was blessed by Davis and has attracted hardly any comment from lawmakers, who more than anything seem happy to have a messy and controversial question off their agenda.

"There's a sense of relief," Steinberg said. "Part of the phenomenon of this year was not only the impact of the energy crisis on the economy, on our budget, but it was the preoccupation with time and attention it took. Other issues got pushed to the side."

ANGER AT REGULATORS

There was also some anger at the PUC for not stepping in sooner. Assemblyman Rod Wright, a Los Angeles Democrat and chairman of the Assembly Utilities Committee, said regulators could have saved the state a lot of trouble by giving the utilities the same leeway to sign long-term electricity contracts that the state later granted itself.

"This should never have come to the Legislature," Wright said.

"The purchase of power and the structure of rates is not a legislative function. And the Legislature is wholly ill-equipped to handle that. You had decisions being made as to the day-to-day operation of the utility. That's not what a legislature is designed to do. That's why you have a PUC."

Wright said the Legislature still has several big energy issues to tackle when it returns. One, he said, is establishing what California's energy industry will look like once the state phases out of the power-buying business and gives that authority back to the utilities. While the kind of wide open, unregulated system envisioned by the 1996 legislation now seems inconceivable, it probably isn't possible to return to the old regulated monopoly framework, either. At a minimum, Wright said, he would like to see the Legislature give the utilities the right to secure electricity through long-term contracts that would face up-front regulatory approval, but could not be second guessed later. He also thinks the state's new power authority needs a clearer mission from lawmakers.

But by far the biggest issue still on the table is what to do about the state's general fund. An impasse between the treasurer and the PUC has kept the state from selling a bond measure that is needed to repay the $6 billion of taxpayers' money spent on electricity. State law--written at the height of the crisis and designed to make it easier for Davis to secure the long-term contracts--says that the private energy providers will be paid first out of the money utilities collect from ratepayers. But now that those contracts are coming under increasing scrutiny, and criticism, the PUC has refused to approve an order implementing the law. In the meantime, the bonds can't be sold.

Until that issue is resolved, the hole in the general fund is $6 billion and growing. And that's on top of an estimated $8 billion to $14 billion revenue shortfall that the governor's finance department is projecting because of the economic downturn. If something isn't done soon, the Energy Crisis of 2001 might yet morph into the Fiscal Crisis of 2002.

Dan Weintraub is the California columnist for the editorial pages of the Sacramento Bee. He has covered the Legislature since 1987.

RELATED ARTICLE: LESSONS LEARNED.

Here are some lessons learned by California lawmakers who dealt last year with an electricity crisis that consumed their time and resources. Many of them are applicable to legislators anywhere who might face an unexpected and overwhelming crisis or who want to prevent one:

* Divide the question. Use separate committees to deal with the immediate crisis and any attempt to investigate events that brought the crisis upon your state.

* Do your homework. Use informal, bipartisan working groups to supplement the committee process, explore the problem and draft legislation that is needed on the fly.

* Don't panic. Legislation approved in the heat of battle without a full appreciation of its consequences can do more harm than good.

* Think for yourself. Fast-moving crises are times when legislative leadership assumes an even more influential role than usual. But individual members are still responsible for their own votes and will be held responsible at election time.

* Ponder the worst case. Examine the seemingly obvious assumptions that underlie major legislation. In California's case, it was the idea that a surplus of electricity could not become a shortage. If more people had questioned that assumption when the original deregulation legislation was passed, the crisis might have been averted.

* Oversight. California's electricity crisis might have been prevented if the Legislature had been more vigilant in tracking the effects of its deregulation legislation.

* Be prepared. Examine your legislature's subpoena powers and consider expanding or clarifying them to put you in a better position to investigate the underlying causes of crises.

WINNING WITH ENERGY EFFICIENCY AND CONSERVATION

Troy Gagliono, NCSL 

This year millions of Californians participated in what many experts are calling the most successful energy conservation campaign in history.

The Legislature, Governor Gray Davis and the California Energy Commission devised an abundance of programs and incentives that citizens are using to greatly reduce their electricity consumption. The magnitude of energy savings and levels of customer participation are exceeding many original estimates.

Senate Bill 5X and Assembly Bill 29X collectively allocate more than $850 million for energy efficiency incentives in nearly every area of the state's economy. Some specific measures and appropriations include:

* Supplementing low-income energy assistance programs--$120 million

* Supporting renewable energy and distributed power generation- $95 million

* Reducing energy consumption in agriculture--$70 million

* Giving incentives for efficient commercial lighting--$60 million

* Granting rebates for purchasing efficient air conditioning and appliances--$50 million

* Installing sophisticated meters to measure electricity consumption--$35 million

* Creating more efficient oil and gas pumping projects--$12 million

* Educating the public--$10 million

* Teaching school children about energy efficiency--$7 million

One especially successful effort has been the 20/20 rebate program. Customers earned a credit worth 20 percent of their bill for each month they reduced their energy consumption by 20 percent or more. The Public Utilities Commission administers the program and estimates that nearly one-third of the customers of the state's three largest utilities have qualified for these rebates. Much of the success of these conservation initiatives is being credited to an extensive and innovative media campaign that uses television, radio and print advertisements to reach an estimated 85 percent of the state's population.

Many basic conservation measures are proving to be effective in California. State government facilities reduced their energy consumption by increasing thermostats to 78 degrees last summer and encouraging employees to turn off unnecessary lights and office equipment. As a result, energy consumption in some major state office buildings decreased by more than 20 percent compared with last year.

The table illustrates the decreases in both peak demand and total electricity consumption that occurred from January to September 2001 compared with the same months in 2000. The percentages are adjusted to factor in economic growth and weather conditions.

Many state officials believe that these new programs have allowed the state to take back some control of its energy situation and avert further blackouts. Based on the cost of electricity per kilowatt-hour, California is conserving electricity more cheaply than it would cost to purchase it. Furthermore, the California Employment Development Department indicates that the state's economy continues to grow in the midst of these conservation efforts.

2001 DECREASES IN CALIFORNIA PEAK DEMAND AND TOTAL ELECTRICITY
CONSUMPTION (Compared with 2000)

        Jan.   Feb.  March  April     May    June    July    Aug.  Sept.

Peak   -6.2%  -8.0%  -9.2%  -9.0%  -10.4%  -14.1%  -10.7%   -8.9%  -8.0%
Total  -5.4%  -7.3%  -9.0%  -6.9%  -11.0%  -12.4%   -5.2%   -7.1%  -5.4%

Source: California Energy Commission