Published Thursday, February 15, 2001, in the Miami Herald

California power crisis may affect Florida's future BY GREGG FIELDS gfields@herald.com

It seemed like a good idea at the time.

As California set yet another national trend by deregulating its electric power industry in the mid-1990s, many other states looked on with envy.

With good reason. The most populous state, whose growth was one of the 20th Century's great economic stories, seemed to have devised a system to guarantee affordable and reliable electric service for the next millennium.

But today's power outages and soaring prices have state and federal officials scrambling to keep the lights on in California.

The California experience could happen here in Florida, experts warn. Indeed, some believe it ultimately will unless the state effectively deals with the economic, political and social forces making deregulation, in some form, virtually inevitable.

Florida lawmakers may consider next month a plan to allow construction of merchant plants -- power plants built solely to feed into the wholesale channel, which FPL and other utilities could draw on as needed. Florida is not considering deregulation at the consumer level -- not yet, anyway.

``Sooner or later, other states are going to be tested along California's lines,'' said Jerry Taylor, a Cato Institute economist and early critic of California's approach.

CAUTION SIGNALS

For now, California's foibles have dimmed deregulation's appeal. Some states aggressively pursuing it are scaling back. Others, like Florida, which has moved cautiously, are unlikely to speed up soon.

That wouldn't necessarily be bad, except that the old system -- an inefficient patchwork of regulations from the federal government and all 50 states -- is in need of an overhaul, too. Furthermore, the nation's electricity needs are only going to grow, as will the likely cost of reform the longer it's delayed.

``No other nation has such a diverse and complex regulatory system, and the reality is, we can only change this by degree,'' Peter Fox-Penner, one of the nation's top energy experts, told Congress recently.

Electricity so dominates our lives that it's hard to believe how recently it was a novelty.

``Electricity was available at fairs in the 1870s, but many Americans only got electricity in the 1930s and 1940s, with the Rural Electrification Agency programs,'' noted historian David Nye, author of the book Electrifying America.

It was especially important to the development of Florida, which only boomed after the advent of air conditioning.

Many industries produced one major nationwide company, like AT&T in telephones and John D. Rockefeller's Standard Oil. But utilities became the province of the states. Each set up a public service commission to set rates for a local monopoly power company.

It was hardly a model of a free market. But it worked. Utilities were so predictably profitable that their shares were known as ``widows and orphans stock'' -- safe enough for the most risk-averse investors.

By the mid-1970s, however, Washington began reducing its oversight of regulated industries. The thinking: Regulation reduced competition and produced unfair protection.

Trucking, airlines and telephone service were early examples. Though the results were decidedly mixed -- deregulated savings and loans in the 1980s were a costly debacle -- the stage was set for California's electricity experiment.

To understand the California crisis, it's important to know this:

Its utilities weren't deregulated. They were reregulated. The state's plan created as much government involvement as it did away with.

``To deregulate you have to get rid of old regulations and not substitute new ones,'' says David R. Henderson, the Reagan administration's energy economist, now a research fellow at the Hoover Institution.

INCENTIVES TO SELL

The state's power companies were given big incentives to divest their power plants, but kept their transmission networks and retail customers.

The state deregulated the wholesale prices that utilities paid for electricity, but kept a tight lid on the retail prices they could charge.

In the contentious climate of electricity regulation -- public interest groups vs. the industry -- retail price controls forged a rare consensus. The power companies feared deregulation would lead to lower prices, like with airlines, and wanted the protection of fixed rates. Consumer groups saw set rates as protection against higher prices during shortages, like with gasoline in the 1970s.

``The main lesson Florida can learn is, don't have price controls,'' says Henderson.

The impact of price controls wasn't the only unknown.

For instance, California assumed that power would be available on the open market. The state essentially stopped approving new power plants. The benefit: a sharp reduction in sulfur dioxide emissions. The cost: vulnerability to supply disruption.

California barred utilities from making long-term contracts with power suppliers. Instead, they had to buy constantly on the open market. The theory: Vigorous competition among suppliers would lead to lower prices.

Having placated the main constituencies -- consumers, companies, environmentalists and the state -- California's reregulation went forward.

The scheme fell apart quickly last year. A particularly hot summer led to a spike in demand. Then, a critical natural gas pipeline in Southern California ruptured. A drought led to a sharp reduction in hydroelectric power. And finally, prices for natural gas -- the main fuel for power plants in California -- broke out of a long slump and soared.

``This is like the Perfect Storm for power companies,'' said Cato's Taylor.

California's huge utilities had to pay sharply higher wholesale prices for electricity but couldn't pass them on to consumers. They started running out of cash. Power supplies ran low, leading to blackouts. The state took wholesale electric suppliers to court, to force them to continue selling to the state. They have succeeded -- for now.

But the court injunctions won't last forever, and meanwhile the clock is ticking.

What's clear is that any solution will be expensive. California lawmakers this week are debating a proposal to buy the sprawling electrical transmission grid and build and operate state-owned power plants.

More ticklish is who will pay the more than $10 billion owed by utilities. Several are on the verge of bankruptcy. And there's still no legal way to cover high wholesale costs.

It's a clear contrast to deregulation's early promise of lower costs and better service.

``We are at a crossroads in the power crisis,'' said Medea Benjamin, a spokesman for the Coalition Against Utility Rate Hikes in San Francisco. ``In California, the legislators are caught between a path that will lead to the bailout of the utility companies at taxpayer and ratepayer expense, and a solution that will lead to the protection of consumers and greater public control of our energy system.''

But perhaps the greatest lesson of the California debacle is that simple choices are not a simple matter.

``Until a forum exists for improving our demand and supply infrastructure,'' said Fox-Penner, ``the rest of the nation will slowly reach the same limits of energy service that California has reached to disastrous ends.''

http://www.herald.com/content/today/news/national/digdocs/083644.htm

-- Martin Thompson (mthom1927@aol.com), February 15, 2001