How did we get here? I wrote about the origins of this crisis in January; this article merely chronicles the evolution from that point to today's stunning announcement that the Public Utilities Commission is getting out of the regulatory business.
Phase I: Negotiations In Earnest (Feb-Mar 2001)
For most of the late winter, the State had decided to build its solution to the power crisis on two pillars. The first was the idea that it should enter into long-term contracts whereby the state would buy power from third parties and sell it to the consumer, using the utilities as a distribution arm only. The idea was that this would have the positive benefit of cost-averaging: the price the state would pay per kilowatt over a ten-year contract would be far less than what it would pay on the spot market right now (although presumably, at some point, it would be far more than the spot market --- predictability was the key). So the state set about trying to secure these contracts, negotiating left and right with power suppliers behind closed doors, while demonizing them in public to appease the angry California power consumer and activist crowds. Reportedly, this was successful, although it was hard to tell how successful, as details of the contracts were never made public. In the meantime, the state went on buying on the spot market, and nobody could find out how much that was costing, either; while State Controller Kathleen Connell put the information on the state's web page, it was yanked down upon demand from the Governor, who argued that posting that information would seriously harm the state's ability to negotiate long-term contracts (presumably by allowing the people the state was negotiating with to know how much the state was paying now ... an interesting idea, since they already knew, by virtue of the fact that they were selling the state the electricity whose price the governor didn't want published!). Rumors abounded about the state's burn rate, and the original authorization of $400 million had to be replaced with an even larger authorization, along with a $10 billion emergency appropriation for the long-term contracts, to be paid off by a bond measure later in the year.
The second pillar was a plan to bail out the state's utilities. Southern California Edison and the Pacific Gas & Electric Company were on their last legs; their respective debts were each of the same order of magnitude as the state's immense proposed bond issue, nobody would lend them more money, and they were having trouble coming up with sufficient supplies to sell to their customers. So after much talking about different proposals, the governor and his allies in the legislature settled on a scheme to purchase the transmission grid (which is in bad need of upgrade, with a massive bottleneck between northern california and southern california). Negotiations with the power companies began in earnest, while the governor continued lambasting them in public; everything seemed to be going fine, until the governor and PG&E ran into major stumbling blocks, and PG&E gave up, filing for bankruptcy (immediately after granting a large bonus to its executives and a smaller bonus to its workers). The governor screamed; the public shuddered; activists howled. A few days later, the governor reached an agreement to buy the transmission grid from SCE (the utility of which was unclear without the rest of the grid); the legislature looked bored while activists denounced the bailout of the utilities and called upon the state to turn the screws on them.
Phase II: Confusion and Regrouping (Apr-May 2001)
Exhausted from the negotiating effort and bruised politically, the governor seemed to let the issue fade out of the papers in early April. There were some interesting skirmishes in the news --- the bond issue had to be delayed, so more money needed to be appropriated; the state's credit rating was downgraded; some newspapers sued to demand that data on the contracts be released. But mostly things seemed to quiet down; the purchase of long-term contracts was proceeding apace, the judge was setting the schedule for the bankruptcy proceedings, the bailout for SCE had been worked out, and there hadn't been a rolling blackout since January. All was good, right?
Or so it seemed. Local politicians began mounting pressure on the federal government to impose wholesale price caps throughout the western US --- the idea being that ridiculously high wholesale prices were the cause in the retail price spike, and that much of that increase in wholesale costs was due to profiteering (something the federal regulatory agency agreed with when it released the results of its investigations into alleged price fixing by some of the energy producers). After much political juggling, the feds gave in, and agreed to impose the caps; a few days later, unusually high temperatures resulted in rolling blackouts in northern california (sadly, while there was enough power in southern california to cover it, the bottleneck in the transmission grid meant that this power was unable to help). Worse still, the legislature showed no interest in the buyout of SCE; the state was forced to reveal the contents of some of its contracts (by court order!) and it was discovered that the contracts were on the order of 150% the amount the governor had been officially looking for; and the price of electricity began to plummet throughout the region as the seasonal demand for natural gas shifted. (Most electricity in California is made from natural gas; natural gas prices tend to fall in the spring because as temperatures rise, demand for gas heating decreases). Meanwhile, the president and the governor engaged in a war of words about whether it is necessary to drill for more oil (which wouldn't come online until well after the problem is solved) and whether or not conservation was realistically helpful (a few days after the vice-president blasted conservation efforts as being insufficient, an independant study revealed that electricity demand has gone down 12% in california since last year --- although it's unclear how much of that is from conservation; a large price increase approved in March, combined with decreasing demand from silicon valley caused by the unexpected death of many .com start-ups, may account for much of that figure).
Phase III: Theatre of the Absurd (June-July 2001)
Enter Summer: the season where energy shortages are expected. The time when temperatures soar, everyone turns in desparation to their air conditioners, and electric supplies run out. Only .... temperatures have been unusually low, and what was a winter shortage has inexplicably turned into a summer surplus: the state is now selling the electricity it bought via fixed contracts on the spot market at an immense loss. (OK, to be fair, this was expected at some point --- but not this fast). In response to this, the activists that had demanded that the state do something to solve the problem back in January have taken to attacking the state as having no business being in the electricity market, and being inexperienced traders who were fleeced by the more experienced wolves of the power industry. PG&E has sued the state, demanding compensation for contracts seized in January. And the Public Utilities Commission, which has the authority to regulate rates, has discovered that if the state is buying and selling electricity and requests a consumer rate increase, it is required to authorize the increase and is not allowed to inspect the department of water and power's books; eg., if the DWR decides it needs an increase for any reason, the PUC can't demand that it prove that the increase is needed, and must authorize the increase --- meaning that, while the state got into the power business in part to prevent rate increases, it's now more likely to cause rate increases than anything else. And the legislature still isn't interested in the bailout of SCE, which seems to be dead in the water, and SCE has no other way to recoup the money it lost last year. And the bond sale has been postponed until October ... by which time it's expected that the DWR will need *another* appropriation to pay for continued purchases.
On the bright side: the lights are still on. On the dark side: the state budget surplus has evaporated, our bond rating is shot, and we're losing money by the gallon daily.
In this case, I really hope the rest of the country doesn't follow California's lead.