The New Energy Crunch

Acc

ording to the laws of Mother Nature, electricity follows the path of least resistance. Mother apparently hasn't been hanging around California recently, where last week rolling blackouts spread darkness at noon across some of the richest cropland, most complex high-tech factories and busiest streets in America.

The blackouts were the latest and most painful phase of a statewide energy crisis that has been years in the making and continues to worsen, triggered by a spectacularly twisted and shortsighted deregulation plan. It has enraged consumers and businessmen even as it has pushed California's two largest utilities toward bankruptcy. It threatens to undermine the state's $1.3 trillion economy, the sixth largest on Earth, and rock the U.S. overall as it struggles to avoid a recession.

The crisis is also part of a nationwide winter of energy discontent in which natural-gas rates have soared to their highest level in 15 years, and that ever lovable cartel, OPEC, has slashed its oil output again to keep prices up. California's woes are testing everyone from Governor Gray Davis, a moderate Democrat seen as presidential timber, to George W. Bush, who last week stiffed Davis' request for federal aid to the staggering utilities.

At the same time, California has cast its shadow over ambitious deregulation plans being launched in such states as Oklahoma, Nevada and Arkansas (see following stories). Says Daniel Yergin, chairman of Cambridge Energy Research Associates: "The California crisis puts questions about our entire energy infrastructure front and center."

The state's largely self-inflicted energy wounds are rich in irony. A deregulation plan that was supposed to cut electric rates has instead more than tripled what some California consumers pay and has proved powerless to slow a tenfold increase in the state's wholesale prices. And instead of pulling regulators out of the utility business, the plan has plunged Sacramento and Washington ever more deeply into it. Last week Davis, who has called the deregulation plan a "colossal and dangerous failure" while also railing against "out-of-state profiteers," signed an emergency order that empowers the state's water-resources department to spend $400 million to buy electricity--a measure that could keep supplies at adequate levels for a few days at best.

Small wonder that California seethes with anger and accusations as furious consumers, power suppliers, legislators and regulators point fingers at one another. "Consumers are being asked to conserve on power, but suppliers are unwilling to give up a shred of their profits," complains Susan Weisberg, a San Francisco editor whose home office went dark for more than an hour last Thursday. In Sacramento, Republican state representative Keith Richman, a practicing physician, accuses Davis of Hamlet-like indecisiveness as the crisis worsened. "If I had stood by and watched one of my patients decline without taking action," Richman says, "I would be sued for malpractice and have had my license revoked. And I would have deserved it."

The entire mess flows not only from a deregulation plan that did not live up to the word deregulation but also from California's failure to complete a single large power plant over the past 10 years, even as Silicon Valley boomed and the state economy expanded 34%. "This is virtually a crisis by design," says Yergin. "At the heart of the problem in California is the lack of new construction."

Ironically, new construction was one of the aims in 1995 when the state, whose environmental laws make it a utility builder's nemesis, launched the nation's first and most sweeping electric deregulation plan. Enthusiastically endorsing the scheme were utilities, lawmakers and environmental and consumer-advocate groups. The goal enunciated by Republican Governor Pete Wilson was to bust up the monopolies held by utilities like Pacific Gas & Electric and Southern California Edison (SCE). They in turn would be free to purchase and market power in the state as well as to pursue business elsewhere. PG&E, for instance, owns 30 plants outside California.

Conversely, out-of-state operators were supposed to flock to California. These new competitors would help bring down electric rates that were among the highest in the country. "To be charitable," Wilson told TIME last week, "no one fully foresaw the dimensions of the increase in demand."

In sum, California dismantled its private power-generating industry without securing adequate power supplies. The Big Three utilities, which in addition to PG&E and SCE include San Diego Gas & Electric, sold off plants to outsiders like Duke Energy of Charlotte, N.C., and Reliant Energy of Houston and became middlemen. But the state wouldn't allow these new intermediaries to enter long-term purchasing agreements for fear they would be locked into fixed-price contracts as prices dropped. Their purchases had to be made on the so-called spot--or cash--market, and prices were low at the time.