"F.Y.I. Business World: How California Turned Out the Lights By Holman W. Jenkins Jr. 08/30/2000 The Wall Street Journal A27 (Copyright (c) 2000, Dow Jones & Company, Inc.) Back in the 1970s, National Lampoon proposed a solution for inflation: pay people less in salaries and wages, and charge less for things in stores. Now the state of California has seized upon the identical solution for its electricity woes. By fiat, it has lowered the price that utilities are legally allowed to pay for bulk electricity, and also lowered the price they are allowed to charge for the same electricity to their end users. Wow, we wish someone had hit upon this approach before. Rents too expensive? Make apartment owners put us up for free. Medical bills a nuisance? Require doctors and hospitals to work for nothing. Almost any inconvenience can, in theory, be solved by passing a law compelling others to do what we want. If any state is well situated to make this its comprehensive approach to governing, it's California -- being a state in close geographical proximity to North Korea. Because each year the graduate schools release another class of educated professionals into the readership, we probably need to emphasize why the National Lampoon solution wouldn't work: Lowering the price of electricity creates an incentive for consumers to consume more. At the same time, lowering the price creates an incentive for producers to produce less. Now, for extra credit: Whose idea of a solution is this? California's politicians, most notably State Sen. Steve Peace, have calculated, undoubtedly to a pointillistic degree, that any blame for blackouts will naturally accrue first to the utilities -- because a blackout is an urgent problem demanding an urgent solution. Meanwhile, higher prices are something consumers can resent at their leisure, even unto November, and thus would be more likely to take out on elected officials. Electricity makes an interesting challenge for deregulators, one we've been fumbling heroically. Electricity cannot be stored, except at ridiculous expense. Ever try to run your house on batteries? A second quality is that demand is highly variable, fluctuating by 100% in a day, and often nearly as much seasonally (as measured peak to peak). To meet the highest demand, a utility might easily find itself having to keep an entire generating facility on hand that it would only fire up a couple times a year. A peak plant -- the one that stands between customers and a blackout -- runs only about 200 hours annually. That's a large capital good that sits idle 357 days out of 365. A third quality is that electricity doesn't travel well over long distances, though technologists are working on this. But thanks to the efforts of the New Yorker and other publications scaring people about the unproven health risks of power lines, try building a new set of lines across anybody's neighborhood anyway. These are all reasons why, in the past, it was deemed efficient to produce and distribute power within one company over a large geographic area. ""Monopoly"" is a bad word when used by a newspaper but not when used by an economist. It wasn't monopoly that led utilities to build expensive nuclear plants in the 1970s and 1980s. It was ""cost-plus"" rate regulation. In other words, any utility, as long as it could get a regulator's approval, was guaranteed to collect its construction costs and an operating profit on any plant it built. Is this a good way to encourage the building of expensive power plants, enough so that there would always be sufficient power to go around even on peak days? Yes. Result: To this day we have a system that in no way induces consumers to be rational in their usage. Looking around, your columnist right now is running a fan, two computers and umpty lights, most of which he could turn off with no impact on his comfort and productivity. In fact, the stereo has been switched on but turned down to zero since last Friday. But why get off the couch to shut it off? The sensitive, new age solution: Reward utilities not for how much they invest in construction but how efficiently they meet demand -- which, in the first instance, would mean incentives for consumers to rationalize their usage. The rough-and-ready solution: Free utilities to sock their customers with whatever prices they want, and let customers fight back by turning off lights or seeking out alternatives (which exist aplenty if you look hard enough). But California and other states have opted for a bonehead-with-a-drawing board solution: They call it deregulation but the scheme seems to have been designed with the idea that consumers still shouldn't know how much electricity costs from one moment to the next. Utilities were more or less forcibly stripped of their generation role: Now they would be middlemen, buying power on the open market. The problems with this approach range from a shortage of transmission capacity to the greatly magnified difficulty of preventing grid overloads and other nasty physical effects when the generating plants and the grid aren't under the same control. Even under deregulation, of course, utilities still have an obligation to meet peak demand. But, effectively, it's farmed out to the market, and if the power isn't there, it isn't there. And California has made sure it won't be there in the future by slamming down price controls. Maybe it's time we retired the word ""market"" altogether from the policy debate, since it's become one of those conjuring words that justifies everything and has ceased to mean anything. A modern economy creates or negates markets as it needs to: The real underpinning is property rights and freedom of contract. Would we tell GM to stop making engines and buy them on the open market? No, because we assume that GM has every incentive to make the most efficient decision itself. Yet government planners have decided, based on no evidence, that the age-old vertical efficiencies in the electricity business simply don't exist. By whatever route, California's solution is to allow utilities with the skill and experience to run integrated power distribution networks to get on with the job -- without either the old guarantees or the old heavy-handed restrictions on their freedom to price. Utilities can judge for themselves how much of their demand to contract out to independent suppliers. Undoubtedly there would be a need for residual regulation to protect the most vulnerable consumers and make sure universal service is available to all. But that would be far less intrusive than the ""deregulation"" they've been practicing in California -- and that's now unraveling in California, discrediting the idea of a more market-based electrical system. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.".

"California governor blames utilities for blackouts By JENNIFER COLEMAN, Associated Press SACRAMENTO, Calif. (March 21, 2001 8:10 a.m. EST http://www.nandotimes.com) - Gov. Gray Davis said the state's two largest utilities are partly to blame for this week's widespread blackouts because they failed to pay millions of dollars owed to environmentally friendly power generators. Davis said the utilities took money from customers while failing to pay the alternative plants, which use renewable forms of energy like steam and natural gas to generate electricity. The state has been spending about $45 million a day since January to buy power for customers of Southern California Edison and Pacific Gas and Electric Co., which are so credit-poor that suppliers refuse to sell to them. ""It's wrong and irresponsible of the utilities to pocket this money and not pay the generators, "" the governor said at a Capitol news conference Tuesday. ""They've acted irresponsibly and immorally and it has to stop."" The state lost about 3, 100 megawatts, or enough electricity to power 3.1 million homes, on Tuesday from alternative energy plants that say they can't afford to keep operating because the utilities haven't paid their bills in weeks. Davis said the PUC planned to issue an order next week directing the utilities to pre-pay future bills to the alternative plants. PG&E called Gray's statements ""inappropriate and unjustified, "" adding that it was negotiating a payment plan with the suppliers. Edison said it is intent on paying creditors and working with the Public Utilities Commission to pay the plants for future power sales. Edison and PG&E say they have lost more than $13 billion since last June to climbing wholesale electricity prices, which the state's 1996 deregulation law prevents them from passing on to ratepayers. Keepers of the state's power grid were cautiously optimistic that California might get through Wednesday without another day of rolling blackouts after two idle plants were returned to service. ""Never say never - but it appears we are going to be in better shape tomorrow (Wednesday) and for the rest of the week, "" said Patrick Dorinson, a spokesman for the California Independent System Operator, which oversees most of the state's power grid. About a half-million customers were hit by Tuesday's blackouts, which snarled traffic and plunged schools and businesses into darkness from San Diego to the Oregon border. On Tuesday, Assembly Republican leader Bill Campbell called on PUC President Loretty Lunch to resign. Lynch was appointed by Davis. Lynch couldn't be reached for comment, but a spokesman for the governor dismissed Campbell's complaints. Meanwhile, a leading lawmaker on energy issues said the PUC may soon have to raise rates by about 15 percent to cover the state's costs and its utilities' bills. ""My sense is that people will appreciate having some certainty and being able to plan for it, "" said Assemblyman Fred Keeley. ""They don't have to like it, but I think they'll appreciate it."" Davis has said he is confident the utilities and the state can pay their bills without further rate increases. In the meantime, the ISO is counting on conservation to avoid more rolling blackouts. Dorinson estimated that conservation accounted for about 900 megawatts in savings during Tuesday's peak usage. ""That probably was the difference today in helping us avoid any rolling blackouts late into the evening, "" Dorinson said. Tuesday's outages began at 9:30 a.m. and continued in 90-minute waves until about 2 p.m., when the ISO lifted its blackout order. They were blamed for at least one serious traffic accident. The blackouts were caused by a combination of problems, including unseasonably warm weather, reduced electricity imports from the Pacific Northwest, numerous power plants being shut down for repairs and the loss of power from alternative generators.".

"California's dim bulbs P J O Rourke 04/01/2001 Regulation 64 Copyright (c) 2001 Bell & Howell Information and Learning Company. All rights reserved. Copyright Cato Institute Spring 2001 THE FINAL WORD CALIFORNIA IS IN THE MIDST OF AN ENORmous stupidity crisis. Californians have been sitting in the dark because ... they didn't turn the lights on. They say they're short of electricity. Yes, they are. Between 1988 and 1998, California's electricity consumption increased by 15 percent. Meanwhile California's capacity to generate electricity shrank by five percent, even as the state hesitated to build new power lines to tap into neighboring states' power supplies. Californians didn't want dams across their rivers, derricks on their ocean, power lines across their borders, or fossil fuel smoke in their sky. These might interfere with all the smart things Californians do, such as hang-glide. California was going to rely on ""negawatts"" - dramatic power conservation. (But California regulators put price controls on electricity that lowered prices, and even Californians weren't dumb enough to skip a bargain.) And California was going to rely on alternative power generation. With all the puffery from Silicon Valley dot.com start-ups, wind farms wouldn't be a problem. And doesn't Gwyneth Paltrow's star shine bright enough to operate a solar panel? But it turns out that alternative power generation is an alternative, mostly, to generating power. Californians are people who insist on growing their own vegetables, but they won't dig up the pretty lawn, won't plant anything for fear of getting dirty, and they use fragrant bath salts from The Body Shop instead of smelly compost. Let them make their crudites with crab grass. President Bush was wrong to grant an extension of executive orders requiring out-of-state utilities to supply power to California. And everyone is wrong to listen to Californians whine about electricity deregulation. There never was any deregulation. The California Public Utilities Commission merely changed its regulations, which apparently weren't stupid enough to meet Golden State standards. Under California's 1996 re-regulation plan, electric companies sold their generating plants and became distributors. They were required to buy their power on the wholesale spot market and forbidden to enter into any long-term power supply contracts. Retail electricity prices were lowered by 10 percent and frozen at the new rate until March 2002. This is like requiring A&P to sell you porterhouse at $2 a pound, no matter what the price of beef on the hoof. Imagine how many steaks there would be, and how many supermarkets. Go to one of those boarded-up grocery stores, purchase a phantom T-bone, screw it into a ceiling fixture, and try to light your house. You're in California. Californians devised a system of electricity sales that ignored every dimension of the free market. (Interesting that the ""Information Economy"" is centered in a place that's immune to information.) The free market is a yardstick, and Californians got smacked with it. Mideast oil jitters, cold weather, natural gas price spikes, and the plain unpredictable freedom of the free market caused wholesale electricity costs to rise and California utilities to go $12 billion into the red. California's governor Gray Davis responded with the full force of bikini beach brain. In a January 8 speech to the state legislature, Davis proposed creating a state agency to buy generating plants and build new ones. He threatened to expropriate power generators and transmission grids. He called for laws to allow criminal prosecution of wholesale suppliers who withheld electricity from California markets. And he said the state's universities and community colleges would build co-generating plants and become energy independent. (With gas produced by the cafeteria food?) Gray Davis sounded like Joseph Stalin with the IQ of Keanu Reeves. ""Everyone should understand that there are other, more drastic measures that I am prepared to take if I have to, "" Davis declaimed. ""Take"" is the key word. Grabby Californians tried to regulate themselves into some cheap electricity. Hoggish California power companies went along because the stateimposed retail price ceiling was also a retail price floor. According to the Los Angeles Times, during the first 28 months of the scheme, Pacific Gas and Electric and California Edison made $20 billion from the legally required mark-up between wholesale and retail electric prices. Californians want to snatch that money back. ""Consumer advocates around California... said it did not matter that the utilities were returning investments to their shareholders, "" reported the January 31 Washington Post. ""They took the money and ran, "" said state senator John Burton. As opposed to Californians, who took the electricity and roller-bladed? Now the juice and the jack are both gone, and the California legislature has had to pass a bill authorizing $10 billion to try to clean up the mess. But the Californians could still pull a scam. The bill mandates long-term power contracts at rates that are way above what future prices should be. The hope, one guesses, is that Congress, or the President, or somebody will let the state skip out on those contracts once the costs are lower. It would be wrong to call Californians stupid. They're sleazy, too. R J. O'Rourke is the Cato Institute's H. L. Mencken Research Fellow and is foreign affairs desk chief for Rolling Stone. He is author of several bestselling books, including Parliament of Whores, Give War a Chance, Age and Guile, and Eat the Rich. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.".

"You may have seen this when it first came out a while back ... but it's worth a rerun. ---------------------- Forwarded by Steven J Kean/NA/Enron on 06/13/2001 01:49 PM --------------------------- From: Ann M Schmidt on 06/13/2001 01:49 PM To: Steven J Kean/NA/Enron@Enron cc: Subject: California's dim bulbs California's dim bulbs P J O Rourke 04/01/2001 Regulation 64 Copyright (c) 2001 Bell & Howell Information and Learning Company. All rights reserved. Copyright Cato Institute Spring 2001 THE FINAL WORD CALIFORNIA IS IN THE MIDST OF AN ENORmous stupidity crisis. Californians have been sitting in the dark because ... they didn't turn the lights on. They say they're short of electricity. Yes, they are. Between 1988 and 1998, California's electricity consumption increased by 15 percent. Meanwhile California's capacity to generate electricity shrank by five percent, even as the state hesitated to build new power lines to tap into neighboring states' power supplies. Californians didn't want dams across their rivers, derricks on their ocean, power lines across their borders, or fossil fuel smoke in their sky. These might interfere with all the smart things Californians do, such as hang-glide. California was going to rely on ""negawatts"" - dramatic power conservation. (But California regulators put price controls on electricity that lowered prices, and even Californians weren't dumb enough to skip a bargain.) And California was going to rely on alternative power generation. With all the puffery from Silicon Valley dot.com start-ups, wind farms wouldn't be a problem. And doesn't Gwyneth Paltrow's star shine bright enough to operate a solar panel? But it turns out that alternative power generation is an alternative, mostly, to generating power. Californians are people who insist on growing their own vegetables, but they won't dig up the pretty lawn, won't plant anything for fear of getting dirty, and they use fragrant bath salts from The Body Shop instead of smelly compost. Let them make their crudites with crab grass. President Bush was wrong to grant an extension of executive orders requiring out-of-state utilities to supply power to California. And everyone is wrong to listen to Californians whine about electricity deregulation. There never was any deregulation. The California Public Utilities Commission merely changed its regulations, which apparently weren't stupid enough to meet Golden State standards. Under California's 1996 re-regulation plan, electric companies sold their generating plants and became distributors. They were required to buy their power on the wholesale spot market and forbidden to enter into any long-term power supply contracts. Retail electricity prices were lowered by 10 percent and frozen at the new rate until March 2002. This is like requiring A&P to sell you porterhouse at $2 a pound, no matter what the price of beef on the hoof. Imagine how many steaks there would be, and how many supermarkets. Go to one of those boarded-up grocery stores, purchase a phantom T-bone, screw it into a ceiling fixture, and try to light your house. You're in California. Californians devised a system of electricity sales that ignored every dimension of the free market. (Interesting that the ""Information Economy"" is centered in a place that's immune to information.) The free market is a yardstick, and Californians got smacked with it. Mideast oil jitters, cold weather, natural gas price spikes, and the plain unpredictable freedom of the free market caused wholesale electricity costs to rise and California utilities to go $12 billion into the red. California's governor Gray Davis responded with the full force of bikini beach brain. In a January 8 speech to the state legislature, Davis proposed creating a state agency to buy generating plants and build new ones. He threatened to expropriate power generators and transmission grids. He called for laws to allow criminal prosecution of wholesale suppliers who withheld electricity from California markets. And he said the state's universities and community colleges would build co-generating plants and become energy independent. (With gas produced by the cafeteria food?) Gray Davis sounded like Joseph Stalin with the IQ of Keanu Reeves. ""Everyone should understand that there are other, more drastic measures that I am prepared to take if I have to, "" Davis declaimed. ""Take"" is the key word. Grabby Californians tried to regulate themselves into some cheap electricity. Hoggish California power companies went along because the stateimposed retail price ceiling was also a retail price floor. According to the Los Angeles Times, during the first 28 months of the scheme, Pacific Gas and Electric and California Edison made $20 billion from the legally required mark-up between wholesale and retail electric prices. Californians want to snatch that money back. ""Consumer advocates around California... said it did not matter that the utilities were returning investments to their shareholders, "" reported the January 31 Washington Post. ""They took the money and ran, "" said state senator John Burton. As opposed to Californians, who took the electricity and roller-bladed? Now the juice and the jack are both gone, and the California legislature has had to pass a bill authorizing $10 billion to try to clean up the mess. But the Californians could still pull a scam. The bill mandates long-term power contracts at rates that are way above what future prices should be. The hope, one guesses, is that Congress, or the President, or somebody will let the state skip out on those contracts once the costs are lower. It would be wrong to call Californians stupid. They're sleazy, too. R J. O'Rourke is the Cato Institute's H. L. Mencken Research Fellow and is foreign affairs desk chief for Rolling Stone. He is author of several bestselling books, including Parliament of Whores, Give War a Chance, Age and Guile, and Eat the Rich. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.".

"September 5, 2001 Business World Crisis? What Crisis? By HOLMAN W. JENKINS, JR. The big news this summer is that Californians haven't been reduced to stone-age lifestyles, running naked in the streets and eating each other. The state barely had enough electricity to get through this past winter, when demand was not yet pumped up with air-conditioning. Yet here they are surviving the summer with nary a blackout. Gov. Gray Davis must be some kind of a wizard, pulling 15, 000 megawatts from his pointy hat. He gave every indication of being a hapless cluck, but obviously we underestimated him. Naah. California's summer of surplus demonstrates just how flukey last winter's rolling blackouts were. Power there was aplenty (or at least enough to get by). What there wasn't was anybody to pay for it, thanks to the political system's paralysis as the state's private utilities ran out of cash and used up their credit trying to keep the lights on. We won't rehearse the central pinion of this catastrophe, a ""deregulation"" plan that created scarcity pricing in the absence of true scarcity. A tweak here and there as late as last fall could have saved the state's taxpayers and ratepayers literally billions of dollars at no real cost to anybody. Instead, the utilities were allowed simply to run out of money, accumulating $14 billion in unpayable IOUs to generators. Now, most of us tend to think of power plants as giant coal or nuclear operations that run 24 hours a day, supplying ""baseload"" power. But the majority of plants are part-timers, firing up to meet intermediate and peak demand. Revving up their turbines means incurring fuel, labor and maintenance costs, which means operators like to get paid. The crisis months saw three distinct waves of blackouts, each related to plants dropping off line simply because they feared not getting paid. In January, it was British Columbia Hydro, the big, government-owned operator of Canadian dams, which had kept California afloat on credit for months. In March it was dozens of small California generators, known as ""qualifying facilities, "" which no longer could meet their own fuel and labor bills because they weren't getting paid by their utility customers. In July, it was the federal government imposing impenetrably complex price controls across the West, making it impossible for generators to know what price they were allowed to charge. Some shut down rather than take a chance, and since the federal intervention meant the entire region was on the griddle for California's mismanagement, the blackouts just happened to land in Nevada. There was no shortage, in other words, no ""energy crisis."" There was only the unaddressed credit problems of the utilities. We opined in January that Californians would be surprised at how quickly power prices return to normal. Yup. The state threw open the treasury to pay for the power the utilities could no longer afford and suddenly sellers were everywhere and prices fell. In the teeth of peak air-conditioning season, electricity prices are now back to normal. In retrospect, what's amazing is that so many plants not only kept operating month after month despite being stiffed by the state, but produced 62% more power than they had the year before to keep California lit. Yet they've gotten nothing but abuse from the governor, who is still turning over every legal stone to try to avoid paying the IOUs. There is no question that Western supplies were tighter than usual thanks to low water levels in Northwest river systems. But the evidence shows that Western markets were flexible enough to accommodate the glitches. All they needed was a creditworthy customer to deal with. Unfortunately, Californians won't be benefiting from the return of normal pricing. In the throes of an ""energy crisis, "" Gov. Davis signed $43 billion in long-term power contracts at ridiculously high prices. Hardly was the ink dry on these deals before he was forced to begin selling this unneeded power back into the market at losses of 80 cents on the dollar. It gets worse. Last week came the most humiliating revelation of all. Officials have ordered one of the state's most efficient suppliers, a coal-fired plant that delivers power at a cost of two cents per kilowatt-hour, to dump its power into the ground so consumers can use Mr. Davis's high-cost power instead. The truth being too gruesome to acknowledge, politicians have devoted themselves to peddling false lessons from all this. The state's new energy czar, David Freeman, insists the mess points up the advantages of socialism to protect the public from shortages. Less insanely, others blame California's rampant not-in-my-backyardism, but even this wasn't really the cause of the meltdown. It's true California didn't build a major power plant during the 1990s, thanks to lingering surpluses and a raucous debate over the future of deregulation. But a regional wholesale market was already in full swing, allowing the West's existing complement of plants to be used more efficiently. And California actually did manage to add about 6, 000 megawatts of output in the 1990s from small plants, thanks to joint federal-state rules that guaranteed a market for every erg they could churn out. Never mind. The one thing politicians of every stripe can't let voters understand is that there was never any ""energy crisis, "" only a grotesque act of fiscal mismanagement. Some $25 billion in annual power consumption was transformed into a bill for $50 billion for no good economic reason that anybody could possibly defend. By refusing to look this fact in the eye, Californians have set themselves up to keep paying inflated prices for decades to come. URL for this Article: Copyright ? 2001 Dow Jones & Company, Inc. All Rights Reserved. Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws. For information about subscribing, go to http://wsj.com".

"Commentary: Things Get Even Worse in California Although it hardly seems possible, the California wholesale electric market is getting worse. And rapidly. Power prices are high across the board and the California Independent System Operator has taken to declaring simultaneous stage one and stage two emergencies every morning, right along with brewing the morning coffee. On Thursday afternoon, the ISO declared the first stage three emergency, although it was not necessary to implement rolling blackouts. Demand hit 31, 600 MW during the day, far from a peak for the state. But planned and unplanned outages meant that the statewide capacity margin was a bare 1, 000 MW. The chief culprit appears to be the state's price caps, which are driving generation out of the state, and the politicians appear poised to make matters worse. The caps combine with soaring natural gas prices to drive electricity out of the California market. Because of gas prices in the $7 per million Btu range, the price caps are simply not enforceable. They are, in short, a joke. With price caps of $250/MWh in place through the California Power Exchange, and with bids hitting the caps for every hour of the market, generators are fleeing the state. That's because prices in the Pacific Northwest are running in the neighborhood of $375/MWh, and generators are selling into Oregon and Washington instead of California. Dow Jones reports that utilities in the Northwest last week showed up as buyers in the Cal PX, buying power at $400/MWh -- $250/MWh for the juice and $150/MWh for transportation. Just how wacky has the California market become? In order to protect reliability, the Cal ISO has been quietly purchasing power in bilateral deals from out-of-state generators at prices above the cap. The price cap rules apparently allow the ISO to buy above the cap if needed to supply an emergency. But it can only buy from out-of-state companies, not the California generators. Last Wednesday, the ISO paid some $10 million to buy 1, 000 MW -- most likely from BC Hydro, although the ISO isn't talking -- or about $900/MWh. Los Angeles Department of Water and Power, sitting in the catbird seat with excess capacity, sold the ISO some 1, 200 MW at the capped rate of $250/MWh. A civil suit charges that LADWP has been -- shock! -- profiteering by selling its low-cost juice from Bonneville Power Administration into the California market at an order of magnitude above what it paid. How are the state's politicians responding? They don't seem to understand the short-term consequences of what is going on. They are talking about banning exports of power made in California (can you say ""Commerce Clause""?), or forming a state power agency (not in this decade), or re-regulating the utilities (ditto). There is only one action that California can take to protect itself against blackouts this winter. The state must get rid of the price caps entirely. Immediately. California's choice is simple and stark. Does the state want to ensure that its citizens have not enough power at an artificially low price, or enough power at a politically unpopular high price? The need for power trumps the price issue.".

"BY MARK GOLDEN A DOW JONES NEWSWIRES COLUMN NEW YORK (DOW JONES)--THE CALIFORNIA SENATE IN SACRAMENTO PASSED A WINDFALL-PROFITS TAX ON SALES OF ELECTRICITY INTO THE STATE'S WHOLESALE ELECTRICITY MARKET MONDAY AFTERNOON AT 4:50 P.M. PDT. AT ALMOST EXACTLY THE SAME TIME, CALIFORNIA INDEPENDENT SYSTEM OPERATOR INITIATED ROLLING BLACKOUTS FOR THE FIRST TIME SINCE MARCH. COINCIDENCE? PROBABLY, BUT THE CONNECTION SHOULDN'T BE IGNORED. ""THE POLICY DECISIONS THAT HAVE BEEN ADOPTED IN CALIFORNIA TO DATE HAVE ACCELERATED AN ALREADY SERIOUS MARKET COLLAPSE, "" SAID A HARVARD UNIVERSITY STUDY OF CALIFORNIA'S ENERGY CRISIS LATE LAST MONTH. THIS WEEK'S WINDFALL-PROFITS TAX BILL IS THE LATEST BLUNT INSTRUMENT WIELDED WITH POTENTIALLY DISASTROUS RESULTS. GOV. GRAY DAVIS WANTED IT AS A STICK WHEN (CONT) MEETING WITH EXECUTIVES FROM THE STATE'S MERCHANT POWER COMPANIES WEDNESDAY. THE MANEUVER WAS LESS THAN ADROIT, AND THE GENERATORS WEREN'T IMPRESSED. AFTER THE MEETING WITH DAVIS, RELIANT ENERGY'S (REI) JOHN STOUT SAID THAT IF THE TAX WERE IMPLEMENTED IN CALIFORNIA, IT WOULD ""INSTANTLY BLACK OUT ALL THE GENERATION IN THE STATE."" THE STATE'S LEADERS MIGHT KEEP IN MIND WHO WIELDS THE BIGGER STICK AT THIS POINT. CALIFORNIA SET UP A MARKET IN WHICH SELLERS HAVE BEEN ABLE TO CHARGE VERY HIGH PRICES FOR ELECTRICITY SINCE SUPPLIES STARTED GETTING TIGHT A YEAR AGO. SELLERS SAY THEY HAVE PLAYED BY THE RULES THEY WERE GIVEN, AND NOBODY HAS PROVED OTHERWISE WITH THE ONE EXCEPTION OF A FINE PAID BY WILLIAMS COMPANIES (WMB) FOR ONE PARTICULAR INSTANCE OF VIOLATING A CONTRACT. ""IT'S LIKE SOMEBODY INVENTED A NEW GAME, INVITED YOU OVER TO PLAY AND THEN CHANGED THE RULES A COUPLE OF TIMES IN THE MIDDLE OF THE GAME. THEN, AFTER YOU BEAT THEM, THEY INSIST YOU CHEATED, "" SAID ONE WESTERN ENERGY TRADER. ALMOST EVERY ATTEMPT BY THE BUY SIDE - THE UTILITIES, THE ISO AND NOW THE (CONT) STATE TREASURY - TO LOWER PRICES HAS RESULTED IN HIGHER PRICES OR BLACKOUTS OR BOTH. THE WINDFALL-PROFITS TAX IDEA IS THE MOST RECENT EXAMPLE, BUT THOSE WHO INSIST ON PRICE CAPS SHOULD KEEP THIS IN MIND: THE ISO HAS HAD PRICE CAPS SINCE IT BEGAN OPERATION MORE THAN THREE YEARS AGO. OBVIOUSLY, PRICE CAPS HAVEN'T WORKED, JUST AS THEY HAVE NEVER WORKED EXCEPT DURING WARTIME. IN FACT, PRICE CAPS HAVE BEEN A QUESTIONABLE MEDICINE PRESCRIBED FOR THE WRONG DISEASE. AT BEST, PRICE CAPS MIGHT RESTRICT PRICE SPIKES. CALIFORNIA'S PROBLEM IS PERPETUAL HIGH PRICES. IT CAN'T AFFORD THE GOING RATE AT NIGHTTIME, LET ALONE THE HIGHER MARKET PRICES DURING THE AFTERNOONS IN A HEATWAVE. CALIFORNIA MUST FIGURE OUT HOW TO PLAY BETTER THE GAME IT INVENTED. THE INSANELY COMPLICATED COMPUTER-BASED PURCHASING OF POWER ENDED A FEW MONTHS AGO, AFTER THE CALIFORNIA POWER EXCHANGE WAS CLOSED DOWN BY FEDERAL REGULATORS AND THE ISO LOST ITS FINANCIAL ABILITY TO BUY POWER. THE MATCH BETWEEN THE PROGRAMS AND THE ENERGY TRADERS WASN'T EXACTLY IBM'S ""BIG BLUE"" VERSUS GARRY KASPAROV. ALMOST EVERYONE IN THE MARKET AGREES THAT THE UTILITIES' HUMAN TRADERS COULD (CONT) HAVE BOUGHT NEEDED POWER FOR BILLIONS OF DOLLARS LESS THAN THE PROGRAMS THAT THE UTILITIES WERE REQUIRED TO USE BY STATE LAW. SINCE THE DEMISE OF PROGRAMMED PURCHASING, THE COMPUTERS HAVE BEEN REPLACED BY HUMANS, BUT WITHOUT MUCH BETTER RESULTS. THE TEAM ASSEMBLED TO BUY TENS OF MILLIONS OF DOLLARS WORTH OF SPOT POWER EVERY DAY CONSISTS MOSTLY OF FORMER EMPLOYEES OF THE POWER EXCHANGE AND ISO, AS WELL AS EXPENSIVE CONSULTANTS WITH NO ENERGY TRADING EXPERIENCE. ONE OF THE LEADERS OF THE TRADING TEAM, FOR EXAMPLE, IS A FORMER PUBLIC RELATIONS DIRECTOR FOR THE POWER EXCHANGE WITH NO TRADING EXPERIENCE PRIOR TO THE CURRENT JOB. AS ONE ISO EMPLOYEE WAS WONT TO SAY: ""IT'S LIKE WATCHING A FOOTBALL GAME BETWEEN NOTRE DAME AND ST. MARY'S SCHOOL FOR UNWED MOTHERS."" AND THE SIGNING OF TENS OF BILLIONS OF DOLLARS OF FIVE- AND 10-YEAR CONTRACTS IS BEING EXECUTED MAINLY BY FORMER EXECUTIVES OF SOUTHERN CALIFORNIA EDISON - PEOPLE THAT LEFT THE UTILITY YEARS AGO TO BECOME CONSULTANTS AND ALSO DON'T HAVE TRADING EXPERIENCE. GOOD IDEAS, MEANWHILE, HAVE LANGUISHED. (CONT) ""WE ARE GOING TO INSTALL METERS IN EVERY MAJOR COMMERCIAL CONCERN IN THE STATE THIS SUMMER AND GO TO REAL-TIME PRICING, "" DAVIS TOLD WALL STREET ANALYSTS ON FEB. 28. THAT PROPOSAL WAS GREETED BY MANY OBSERVERS AS THE MOST CONSTRUCTIVE IDEA FROM THE GOVERNOR'S OFFICE TO DATE. WHAT HAS HAPPENED TO REAL-TIME PRICING FOR CALIFORNIA'S BIG BUSINESSES SINCE THEN? NOTHING. ""THE PROBLEM IS THAT EVERYBODY IN CALIFORNIA IS 'SPECIAL', "" SAID STANFORD ECONOMIST AND CALIFORNIA ISO CONSULTANT FRANK WOLAK. EVERY INDUSTRY FROM OIL REFINERS TO INTERNET SERVER FARMS HAS HAD LOBBYISTS IN SACRAMENTO SUCCESSFULLY SECURING EXCEPTIONS TO THE RULE. ""MY POINT HAS BEEN THAT IF WHAT THEY DO IS SO VALUABLE, THEN THEY SHOULD BE ABLE TO HANDLE THE HIGHER PRICES. BUSINESSES WITH ABOUT 10, 000 MEGAWATTS OF LOAD HAVE REAL-TIME METERS. EVERY ONE OF THEM SHOULD BE GETTING MARKET PRICES, "" SAID WOLAK. (CONT) ONE OF THE GREATEST ADVANTAGES THAT SELLERS OF ELECTRICITY TO CALIFORNIA HAVE HAD IS THAT CONSUMERS HAVE FIXED PRICES, SO DEMAND IS INFLEXIBLE. SELLERS KNOW EXACTLY HOW MUCH ELECTRICITY THE UTILITIES MUST BUY BASED ON TEMPERATURES AND THE TIME OF DAY, WOLAK SAYS, AND THEY SIMPLY SUPPLY THE MARKET JUST ENOUGH POWER AT HIGH MARGINAL PRICES. REDUCING OVERALL CONSUMPTION THROUGH HIGHER RATES WILL HELP THE STATE SOME, BUT MAKING 25% OF DEMAND FLEXIBLE BASED ON PRICE WOULD GIVE THE STATE A FIGHTING CHANCE IN THE MARKET, ACCORDING TO WOLAK. BUT THAT, APPARENTLY, IS TOO COMPLICATED OR POLITICALLY DIFFICULT. PRICE CAPS, A WINDFALL-PROFITS TAX AND POLITICAL PATRONAGE JOBS FOR BUYING BILLIONS OF DOLLARS OF POWER MAY NOT SAVE THE STATE FROM BANKRUPTCY, BUT THEY ARE EASIER TO SELL - OR SLIP THROUGH - IN SACRAMENTO. -BY MARK GOLDEN, DOW JONES NEWSWIRES; 201-938-4604; MARK.GOLDEN@DOWJONES.COM".

"Content-Transfer-Encoding: quoted-printable Date: Fri, 18 May 2001 08:40:43 -0500 From: ""Tracey Bradley"" To: ""Justin Long"" , ""Paul Fox"" Cc: ""Deanna King"" , ""Ronald Carroll"" Subject: Scheduled blackout plan gaining favor Mime-Version: 1.0 Content-Type: text/plain; charset=ISO-8859-1 Content-Disposition: inline FYI Scheduled blackout plan gaining favor LIMITING PRICES: 3-state buyers' cartel with Northwest could create leverage Lynda Gledhill, Chronicle Sacramento Bureau Thursday, May 17, 2001 , 2001 San Francisco Chronicle URL: More blackouts but no ransom payments for energy gougers -- that's a deal looking increasingly attractive to California lawmakers and consumer advocates. The idea, which has attracted the support of some key lawmakers and the cautious interest of Gov. Gray Davis, is for the state to set a firm ceiling on what it will pay power producers for electricity this summer -- and not one dime more. The trade-off would be certain blackouts, possibly more than if the state continues to pay any price electricity sellers demand. Some advocates of the idea think that California could minimize the number of blackout hours and gain a measure of control over the energy crisis by scheduling service interruptions. ""We need to stop this game of electricity chicken, "" said Michael Shames, director of the Utility Consumers' Action Network, which first proposed the idea. ""We are likely to see blackouts this summer; we should use them to our advantage rather than be victimized by them."" The plan calls for creating a ""buyers' cartel"" of California, Oregon and Washington. Essentially, the states would decide at what price they were willing to buy power and refuse to purchase once it tops that level. The state has spent $6 billion on energy purchases since January, and at one point during last week's power shortage was spending $1, 900 per megawatt hour -- more than 10 times what Davis has planned on for this summer. That kind of spending cannot go on, Democratic Assemblyman Fred Keeley of Boulder Creek said yesterday. ""The question is, can we sustain the level of spending we have and have the state maintain economic stability? I believe the answer is no, "" said Keeley, the lower house's main figure on energy policy and author of the bill that put the state in the power-buying business. ""To get this problem solved, we have to think in bold terms, "" said Keeley, who introduced a resolution along with fellow Democratic Assemblyman Paul Koretz of West Hollywood that urged Davis to form a cartel. THREE STATES ARE BETTER THAN ONE Davis said last week that ""my bias would be to keep the lights on at any price."" But yesterday, the governor said a temporary price limit is ""certainly a matter we've talked about and considered at some length. The next step will be to see how the governors of Oregon and Washington respond to it."" A spokesman for Gov. Gary Locke of Washington said the matter is being considered. Calls to the office of Oregon Gov. John Kitzhaber were not returned. The idea has appeal among some consumers who believe, as many state officials do, that California is being gouged for electricity. ""I can see if our bills were $20 or $30 more, but this is ridiculous, "" said Kimberly Chambers, an 18-year-old fashion design student from Oakland. ""Whatever it takes, I don't think we should have to pay for more."" But Yunah Kim, 36, who moved to the Bay Area from New York a month ago, said blackouts should not even be considered. ""The infrastructure of government is coming apart, and it's the basic service government is able to provide, "" she said. ""Businesses are not going to put up with that. It's very shortsighted. We just have to pay until there's a solution."" Severin Borenstein, director of the University of California Energy Institute in Berkeley, said blackouts might be worse than supporters of price limits believe. ""I think they (power companies) would call our bluff, "" and sell their electricity elsewhere, Borenstein said. ""I don't think the state has the ability to credibly commit to paying no more than 'X.' That would be a very controversial decision."" Legislation is already in the works to give Davis the ability to enter into a West Coast buyers cartel. A bill sponsored by state Sen. Dede Alpert, D- Coronado, would allow the Independent System Operator to refuse to buy power if it is too expensive. The maximum the state would pay would be set by a formula, based on such things as the cost of natural gas. A reasonable profit for power producers would be built in, supporters said. LOOKING FOR SOME CONTROL Alpert said everyone wants to avoid blackouts, but that seems unlikely. ""Everybody I talked to -- once you establish that there will be blackouts -- both businesses and residents say, let's have control, "" Alpert said. The California Manufacturers and Technology Association, which commissioned a recent report that said unplanned blackouts could cost the state economy $21. 8 billion and 135, 000 jobs, is considering whether scheduled interruptions would be less harmful. ""The problem if we do (scheduled blackouts) is that we may have an inordinate amount of blackouts, "" said Gino DeCaro, a spokesman for the group. NO EASY TASK The ISO, which runs the state's power grid, is scheduled to issue a report tomorrow on how scheduled blackouts might work. Sen. Debra Bowen, D-Marina del Ray, said that planning blackouts is not as easy as it sounds. ""The difficulty is a pragmatic one -- the circuits are not wired to deal with choices like we are having to make, "" said Bowen, who has been holding hearings on how the state might better manage blackouts. ""Maybe we should be paying people to turn off their fuse box, "" Bowen said. Chronicle staff writer Marsha Ginsburg contributed to this report. / E-mail Lynda Gledhill at lgledhill@sfchronicle.com. , 2001 San Francisco Chronicle Page A - 1".

"How California Spread Its Electricity Shortage by William Tucker For six months, President George Bush, Jr., resisted putting price controls on California electricity, saying they would only make matters worse. Finally, in June, the Federal Energy Regulatory Commission (FERC) succumbed to public pressures and imposed wholesale electricity price controls on the whole Western region. Two weeks later there were blackouts in Las Vegas. ""The perverse effect of price controls is that they seem to have made things worse, "" complained Nevada officials. Will George Bush get credit for resisting price controls? Will the Las Vegas experience mean an end to federal intervention? Don't bet on it. The more likely answer is -- more price controls and government regulation. California's power problems arose not from natural disasters or bad weather but from failing to build any major power plants since 1987. As a result, the state is woefully short of electricity. The resulting price increase to consumers would have been the first step in correcting the situation. But no politician wants to be responsible for a rate increase on his watch. So the state tried to force the utilities to swallow the extra costs. This quickly drove the utilities to bankruptcy. Next the state tried buying electricity itself. No one knows exactly how much this has cost, but rumors put it at about $8 billion. California taxpayers will pay the bill for decades. Finally, the solution became to spread the pain to other states. The mechanism was price controls. California knew it couldn't get anywhere by imposing price controls on its own wholesale electricity. That would simply divert power to its neighbors. So the goal became to impose price controls on the entire Western region. This would force Nevada, Arizona, Oregon, Washington, and New Mexico to share the shortage. In fact California did one better. While persuading FERC to impose price controls on the Western grid, state officials also persuaded FERC to insert a clause saying that, in the event of a power emergency, the Golden State could pay 10 percent higher prices. This would divert emergency supplies into California. Sure enough, less than two weeks later, while enduring 112-degree temperatures, Las Vegas suffered rolling blackouts. More than 10, 000 homes were without power for forty minutes. Casinos were forced to douse lights and turn off air-conditioning. Meanwhile, California -- plagued by the same weather -- dodged the bullet. ""Why would power merchants sell to us when they can get 10 percent more in California?"" asked Paul Heagan, vice president of Sierra Pacific Resources, which provides Las Vegas's electricity. Meanwhile, California crowed. ""Please note that the energy crisis has officially spread to a state not exactly noted for its environmentalism or its antipathy to growth, "" announced the Riverside (Cal.) Press-Enterprise. Price controls have produced similarly perverse results for 4, 000 years. In Forty Centuries of Wage and Price Controls (1979), Robert Schuettinger demonstrated how politicians and the public have never given up the illusion that price controls can make things cheap and plentiful. Hammurabi's Code, written in 1750 B.C., is basically a long list of price controls. The Decline of the Roman Empire was sealed when the Emperor Diocletian imposed price controls on the entire Roman economy. They are history's longest running magic show. By holding a price below market level, price controls encourage consumers to demand more while encouraging producers to produce less. The result is an economic ""shortage."" When the government heeds producers and holds prices above their market level, the result is the opposite -- an economic ""surplus."" Since the 1930s, Congress has imposed agricultural price supports to help farmers. Ever hear the term ""farm surpluses?"" Yet no one ever gives up. Just a little more manipulation will solve everything. ""California and Nevada officials said they still have faith that price limits can stabilize Western electricity markets, "" announced the San Francisco Chronicle two days later, ""but that federal regulators may have to tweak the system."" The other grand illusion is that price controls are only ""temporary."" In fact, they inevitably create such disruption that a frustrated public only demands more price controls. New York City's rent controls, imposed temporarily during World War II, are still going strong. Paris still has rent controls from World War I. After 40 centuries, why quit now? William Tucker is a writer and columnist in New York. (Posted 7/10/01)".