Calif.'s Davis Lacked Legal Ability to Solve Energy Crisis
Meltdown May Have Generated a Political Power Failure
By Peter Behr
Washington Post Staff Writer
Sunday, August 24, 2003; Page A04
"Electricity is the pulse of our economy, and as governor, I refused to stand idly by and watch profiteering power generators gouge . . . families and businesses."
-- Gov. Gray Davis (D),
in August 2000, as the California
energy crisis began
"I know many of you feel that I was too slow to act during the energy crisis. . . . I accept that criticism. I played the hand I was dealt as best I could."
-- Davis, in a speech Tuesday
during his campaign
to head off his recall
As chief executive of the nation's richest state, Gray Davis has borne the brunt of the blame for the California energy crisis that caused power costs to quadruple from the summer of 2000 to the summer of 2001. The crisis drained $40 billion from consumers and businesses and triggered blackouts up and down the state. The erosion of public support that began with his handling of the energy meltdown has grown into the recall referendum that threatens to throw Davis out of office.
Of all the central players in the drama, the one with the least direct legal authority to resolve the crisis turns out to have been Davis himself. "Really, a peripheral player," said Christopher Weare, who analyzed the crisis for the Public Policy Institute of California. But Davis was the state's leader with the ultimate political responsibility for handling the crisis.
From the start of the crisis in the summer of 2000 Davis pinned the blame on outsiders -- greedy energy suppliers based in Texas and other states and myopic federal regulators who refused to clamp price caps on the state's soaring electricity costs. He also would hurry new power projects through to completion and urge consumers to conserve power.
His role was primarily defined, however, by a futile battle with the Federal Energy Regulatory Commission, a Washington agency whose commissioners regulate wholesale power prices.
When power shortages began in the summer of 2000 and wholesale power prices tripled, Davis immediately accused generators of gouging electricity customers. State regulators cited indications of price manipulation and deliberate withholding of power supplies by generators. In response, the governor demanded that FERC impose price ceilings on generators' prices.
His pleas went unanswered for more than a year. A solid majority of FERC's commissioners, Democrats and Republicans chosen by then-President Bill Clinton, were ideologically committed to California's electricity deregulation program, the first in the nation. Imposing price controls would brand the California plan a failure.
FERC's position in 2000 and the first half of 2001 was that high prices were not caused by marauding generating companies but by power shortages compounded by serious flaws in California's electricity program. In California's system, two state power agencies purchased electricity for state utilities within a day of when it was needed. The purchases were mostly made in volatile auction markets where the highest bidder set the price for all power delivered each hour.
Out-of-state generators, including Duke Energy Corp., Williams Cos., Reliant Resources Inc. and Dynegy Inc., had bought most of the utilities' power plants under the state deregulation plan. Power traders such as Enron Corp. bought generators' electricity output to resell it to the state agencies.
A crucial portion of the generators' power sales to the agencies was not limited by state price controls, and FERC had given those companies freedom to charge whatever they could.
"Beginning in October 2000, when it became clear it was not just a supply problem, the state and feds stared at it for months, pointing fingers at each other. FERC kept saying, 'It's supply and demand,' " said Paul L. Joskow, head of an energy policy group at the Massachusetts Institute of Technology. The state kept saying that it was gouging.
FERC is still investigating how much of the overcharging by power generators violated state or federal law. The stalemate over price controls lasted a year, until June 2001. Faced with a political revolt in Congress and with two new commissioners appointed by President Bush in the lead, FERC slapped price controls on wholesale power transactions in California and 10 other western states. Price caps, combined with energy conservation by California consumers, new generating plants and long-term power contracts -- and perhaps the threat of state and federal investigations -- abruptly ended the crisis, and power prices fell.
It took another year before Davis could say "I told you so" about the energy companies. The disclosure of Enron Corp.'s "Death Star" memos in May 2001 exposed strategies that Enron and others used to manipulate power prices and reap profits from the crisis. "The price gouging abounded," FERC Commissioner William L. Massey concluded.
Joskow and some other experts calculate that about one-third of California's increased electricity prices was because of generators' market power that enabled them to charge excessive prices. But three years after the crisis started, FERC is still investigating possible violations of state regulations forbidding manipulation by power suppliers. Courts and regulators have not settled how much of the price escalation broke laws or regulations, and how much was permitted under California's rules.
Davis and his supporters can only wonder how it might have been if FERC had imposed price caps in 2000 and if aggressive investigators had smoked out the Death Star memos earlier.
"People said, he should have acted sooner. I don't get it," said Davis ally Michael Kahn, a San Francisco attorney who heads the state's independent power grid. "He believed in government. He believed in regulators. He believed that responsible people would respond to the problem. The only significant thing maybe we failed at was recognizing in the summer of 2000 we were getting [cheated] by FERC," he added.
But Davis's decision to rely on FERC flew in the face of a crucial reality. FERC is responsible for assuring "just and reasonable" wholesale power prices, but it is not the Justice Department with FBI agents at its disposal and threats of prison time to unlock tongues. Its traditional approach was to arbitrate disputes among suppliers and customers and wait for opposing parties to bring in their evidence. Seeing power shortages as the core problem, FERC's commissioners concluded that California had to get more power plants built. It saw the generating companies as a key to the answer, not the problem.
James J. Hoecker, a Clinton appointee who was FERC's chairman in 2000, said Davis's demands for a fast rescue were not realistic.
"The fact is that FERC, even had it possessed the remarkable foreknowledge of matters that nearly three years of investigation and debate have brought to light, was not in a position to provide instant or unilateral solutions that would have eliminated the pricing," Hoecker said.
There were two remedies that Davis and California were urged to try. One was an increase in long-term purchase contracts for power at fixed prices. The other was an increase in consumer electricity rates, which were frozen in most of the state in 2000 under the complex deregulation plan.
Duke Power wrote to Davis in July 2000, offering to sell 2,000 megawatts of electricity to California's utilities at a wholesale price of $50 a megawatt hour. The contract would have lasted five years.
The price was more than the utilities had been paying in 1999, but a fraction of what they had to pay in 2000.
The offer went nowhere. California's regulators -- members of the Public Utility Commission -- were unwilling to give advance approval to the prices in the proposed contract, and without a guarantee the utilities wouldn't take the risk, Kahn said.
Leaders of California's legislature wouldn't permit the commission to approve the contracts in advance, fearing that consumers would be stuck if prices dropped to less than $50 in the latter years.
"They all thought utilities were con artists," Kahn said.
"I think those contracts would have been much cheaper and the blackouts in January and February wouldn't have happened," Joskow said.
Likewise, the idea of an increase in consumer power rates was shelved until late in the crisis, in 2001.
"We were told it was political death by the consumers groups," Kahn said.
"All the king's horses and all the king's men said that was wrong," he said.
Davis's advisers were convinced that some or most of the power suppliers were ripping off the state. How could Davis support a rate increase in those circumstances, they asked.
But without a rate increase, the big utilities -- Pacific Gas and Electric Co. and Southern California Edison Co. -- were in a fatal vise, taking in hundreds of millions of dollars from ratepayers but spending billions to buy power.
"They lost the chance to raise rates enough to keep the utilities solvent," Joskow said.
When the utilities did become insolvent in January 2001 and couldn't purchase power on their own, Davis had to direct a state agency -- the Department of Water Resources -- to buy power, shifting the costs to California's taxpayers.
The state spent $42 billion to purchase long-term power contracts in 2001. Those contracts appeared favorable early in the year, but then looked increasingly like a bad deal as power prices fell later.
Davis's political opponents seized on the opportunity, running ads that blasted the governor for doing the deals. "He was pilloried as an idiot, for getting taken," Kahn said.
Could Davis have played a bad hand into a winner? His close adviser doesn't see how.
"It would have taken an heroic exercise of leadership," Kahn said. "I don't know how Gray Davis became popular in his first two years and unpopular after that. Was it his methods of communications, his external leadership? Would Ronald Reagan have projected stronger leadership, or Churchill? I don't know."
"He did everything he could do," Kahn said.
It wasn't enough. |
