Gov.-elect Arnold Schwarzenegger is preparing a push to deregulate the state's electricity markets -- a move embraced by business leaders and some energy analysts but criticized by many Democrats and consumer advocates as a return to the failed policies that sparked California's energy crisis.

Also See: Schwarzenegger’s First Role As Governor-Elect of California: The Deregulator Jason Leopold CommonDreams.org 10/10/2003

Although the new Republican governor-elect will be consumed at first with tackling the state's budget woes, his advisers say he will push changes next year aimed at lowering energy costs for industry and large power users while encouraging energy firms to build more power plants to help meet rising demand.

The actor-turned-politician made little mention of his plan to reduce state regulation of energy markets during the recall race, devoting his time instead to bashing Gov. Gray Davis for saddling the state with expensive long-term contracts for power. But with many of those contracts set to expire in the next two years, the governor-elect will have to present his solutions or risk facing his own energy crisis.

"We will need more power, and we have to make some serious decisions about how that's going to happen," said Severin Borenstein, director of the University of California Energy Institute. "For the next six months or so, we're in good shape, but if we put it off for a year or a year and a half, then we're going to be under real pressure."

Schwarzenegger's energy strategy is being driven by some of the same members of former Gov. Pete Wilson's team who led the push for energy deregulation in the mid-1990s. The governor-elect, for example, picked for his transition team Jessie Knight, a former Wilson appointee to the Public Utilities Commission and a leading proponent of deregulation.

Consumer groups already are warning that the proposals made by Schwarzenegger during the campaign would expose electricity users to greater fluctuations in prices while limiting state oversight of power trading -- a combination that could allow the type of market manipulation that plagued California during the state's energy crisis in 2000-01.

DEREGULATION HAS BEEN COSTLY

"Deregulation has already cost the state $50 billion, give or take," said Mike Florio, senior attorney for The Utility Reform Network. "Why on earth anyone would want to do that again is mystifying to us."

Florio also said he was suspicious of Schwarzenegger's idea because former Enron Corp. Chairman and CEO Ken Lay met with the actor and others in the spring of 2001, when Lay was pushing deregulation in California. Schwarzenegger has said he doesn't remember details of the meeting.

But supporters of Schwarzenegger's energy proposals say they steer clear of the flaws that bedeviled the 1996 deregulation plan passed by the Legislature and signed by Wilson. Most importantly, the governor-elect would not restrict utilities from entering into long-term contracts for power. The restriction imposed by the 1996 deregulation plan forced Pacific Gas & Electric and other utilities to buy at peak prices on the spot market. The earlier deregulation scheme also included a rate freeze that barred utilities from passing along the increased costs to customers.

Under Schwarzenegger's plan, large industrial and commercial energy users would be allowed to sign contracts and buy cheap power from private generators instead of the utilities. Called "direct access," this central provision of the Wilson plan was abandoned during the energy crisis. While large users who were in the program were allowed to stay, the state barred any new businesses from contracting out for power.

2 MARKETS FOR ELECTRICITY

The proposal would create two markets for electricity: Residential users and small businesses would continue to get power from the state's utilities, while large users could take their chances with private energy firms.

Erik Saltmarsh, director of the state's Electricity Oversight Board, said the plan carries risks for large users if they make deals with energy-trading firms that later go belly up -- such as Enron.

"There is a certain amount of fairness in saying, 'Let them take the risk,' " Saltmarsh said.

PUC Commissioner Jeff Brown opposes the plan, saying it would leave residential users and small businesses to pay off the billions of dollars of debts racked up by PG&E and other utilities during the energy crisis.

"If you have customers, usually large-scale customers, depart from the utilities, it leaves everyone else behind paying the bill," Brown said.

Jan Smutny-Jones, executive director of the Sacramento-based Independent Energy Producers, an industry group, said any business that joined the "direct access" program would likely pay a surcharge to cover the past debts.

Republicans have long argued that consumers would have reduced their power usage during the energy crisis if they had been forced to pay the high prices that utilities were incurring on the wholesale market. So Schwarzenegger is calling for a system of "real-time pricing" where large users would pay more for power during peak periods and less during off-peak times. Sophisticated meters already installed at most industrial sites could even shut off power when supplies are too tight.

BUFFER AGAINST BLACKOUTS

The plan would also mandate that utilities meet minimum reserve requirements to provide a buffer of extra energy in the system to avoid blackouts.

"Most of the plan is quite encouraging," Borenstein said. "It seems to recognize that there are benefits from using market incentives in some places, but it also recognizes that there are risks and those risks need to be dealt with."

The Republican governor-elect also embraced a proposal by the Federal Energy Regulatory Commission to consolidate local grid operators -- such as California's Independent System Operator (ISO) -- into a regional organization that would oversee power transmission across a number of Western states. Proponents claim that standardizing the transmission system would encourage energy firms to invest in new plants, preventing supply shortages.

But the proposal, which has been debated as part of the federal energy bill in Washington, has faced heavy resistance from lawmakers in Western and Southern states, who fear a loss of control over the power grid.

"The states don't want to go there," said PUC Commissioner Loretta Lynch, a Democrat. "The Western governors are against it, the Southern governors are against it. The only people who are for it are the energy companies and deregulation ideologues."

Democratic lawmakers in Sacramento are already warning that they would block any effort to push another deregulation plan through the Legislature.

"Not only is the Legislature in no mood for it, the Legislature's position is really a reflection of the fact that the public is in no mood for it," said state Sen. Joseph Dunn, D-Garden Grove (Orange County), who is planning an initiative for the November 2004 ballot to regulate energy firms that do business in California. "The polling shows that 75 percent of Californians want to re-regulate the electricity system."

Schwarzenegger will also face opposition from the state PUC, which is stacked with five Davis appointees. However, two of the most pro-regulation commissioners -- Lynch and Carl Wood -- end their terms at the end of next year, allowing the governor-elect to shake up the commission.

©2003 San Francisco Chronicle

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