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Energy crunch adds to deregulation doubts

The crisis in California, a leader in lifting government controls, may deter other states.

It's become an article of faith in American economics over the past 20 years that less government and more competition - also called "deregulation" - is a good thing.

It's also becoming clear that the juggernaut of deregulation may have met its match in attempting to disentangle decades of monopoly and control in what has become an essential of 21st-century living: electricity.

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Midway through a national attempt to deregulate electricity, consumers are grumbling about higher prices and shortages. Former regulators are looking to reenter the fray. And politicians' ears are tuned in.

Here in California, Gov. Gray Davis has not yet been seen wearing a cardigan sweater. But he's facing a politically dangerous energy crisis that has analysts recalling former President Jimmy Carter's sweater symbolism in his energy-conservation campaign during the late 1970s.

Governor Davis already has had to scrimp on lighting the state Christmas tree. More seriously, he has criticized the effects and methods of California's deregulation process. Powerful California Democrats, like state Sen. John Burton, are introducing legislation to reimpose government oversight of power generation, currently unregulated.

This week California is in a dance with states in the Northwest, with whom it shares electricity, to see if there will be enough to go around as winter temperatures drop.

And California's woes, which last week pushed the state to the brink of rolling blackouts and an unprecedented low level of reserves, are being watched nationally because this state has been the most aggressive deregulator since 1996.

Already, states like Nevada and Oklahoma have slowed the march to electricity deregulation because of what has unfolded in California.

"What's happening here could potentially create a national backlash against deregulation," says Adrian Moore of the pro-free-market Reason Public Policy Institute in Los Angeles.

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"California was the first state to try it, so they didn't have anyone to go to school on," says Bill Brier of the Edison Electric Institute in Washington. While Mr. Brier and others embrace deregulation, they know California is giving the philosophy a black eye and worry about the rising antideregulation rhetoric in political circles. "Some of the political conversation is discouraging to those that support deregulation. It could cause investors to hesitate," says Brier.

Investors aside, consumers are learning the hard way that deregulation may not work for every industry. "By traditional performance indicators like price and quality, a massive market failure is occurring," says Gene Kimmelman of the Consumer Federation of America in Washington.

"States like California, Nevada, and Oklahoma are having the debate that should have taken place in the 1990s - not a debate about when or how to deregulate electricity markets, but whether parts of the market should be deregulated at all," he noted last month as the federation released a report critical of electricity deregulation.

Times have certainly changed the mood in California.

Deregulation sailed through the California legislature in a unanimous vote in 1996, spearheaded by former Republican Gov. Pete Wilson.

But as the complicated deregulation process was put into place, it ran headlong into a changed market. It was crafted during recession, but the implementation phase found a booming California economy with soaring demand. Computers on nearly every desk made electricity an increasingly vital part of everyday life.

Demand growth here has been twice the national average, the equivalent of needing electricity for a new city of nearly 1 million people annually, for each of the past several years.

Yet even as demand soared by 25 percent over four years, power-plant expansion remained restricted under California's stringent environmental controls and prevailing "not in my backyard" attitude. The net result was a growth of supply of only 6 percent.

Last summer, rolling blackouts beset the San Francisco Bay Area, and this winter promises to be nip and tuck. Consumers are being asked to curtail their holiday lighting and other uses of electricity.

But Mr. Moore says he'd call California's plan "restructuring more than deregulation." He contends that California's deregulation legislation was so loaded with concessions, to so many special interests, that it ended up creating a "hash of a micromanaged, planned market."

One mechanism of California deregulation that has been criticized is the way power is bought. When utilities were divested from owning power plants, they were forced to buy power daily, with no long-term contracts. This amounts to getting all the power supply on the spot market, says Brier.

"No other state has done anything like that. They all insist on long-term contracts to avoid spikes in demand and prices," he says.

California has kept consumer electric prices controlled as deregulation is implemented. But the first city to complete the deregulation process was San Diego, which got a rude shock last summer when, overnight, electricity rates doubled.

That, coupled with the danger of outages, sent shock waves all the way to the state capital.

The cap on consumer rates has generated what the utility industry says is nearly $6 billion in costs it has incurred but has not been able to pass along to customers. A ruling this week by the Federal Energy Regulatory Commission lifted limits on the price for wholesale electricity that utilities can pay, a move that could increase supply but make the accumulated cost problem even more severe.

Twenty-three other states are in the process of electricity deregulation, but analysts say the process is uneven and not apt to gain speed given the experience so far in California.

Opponents of deregulation here are already gearing up for a March 2001 ballot initiative to scrap the process entirely.

(c) Copyright 2000. The Christian Science Publishing Society