Master of Disaster

Unlike Britain, which had had a wheezy public-power system, California had a system that worked. Power cost more here, on average, than elsewhere in the U.S., but far less was used per capita than elsewhere, too, because of energy-efficiency improvements begun during Jerry Brown‘s governorship.

Initially, the only real constituencies for deregulation in the early ’90s were such old-economy industries as steel and cement, eager to reduce their production costs. In addition to his ideological motivation, say a number of his associates from that time, Fessler thought his mandate was to deal with California‘s “competitiveness crisis.” A decade ago, there was much rhetoric about the Golden State’s losing substantial portions of critical new-economy industries such as entertainment and high-tech to low-cost, non-union states such as Nevada -- a notion that proved to be a lot of talk. When it comes to energy, these industries are more concerned with reliability than marginal price issues.

In time, though, Fessler‘s view of a reconfigured utility industry would strike a powerful chord with utility leaders such as Edison chief John Bryson. The utilities themselves ultimately emerged as the crucial backers of deregulation -- a deregulation, that is, which suited their purposes.

The tight relationship between Fessler and the utilities that was clear from their English pilgrimage was reflected in the daily dealings between the PUC and the utilities. According to one study of the agency’s logs, eight in 10 visitors to the PUC during the crucial October 1993--to--October 1994 period, in which deregulation was brewing, were utility representatives. Consumer groups were out of the loop and viewed with hostility. “I find it shocking that TURN [the Utility Reform Network, one of the state‘s leading consumer groups] uses members only for money,” Fessler once declared.

Fessler’s first version of deregulation, which he attempted to issue as a sort of PUC decree, wasn‘t entirely to the utilities’ liking. He was still reacting in part to the initial complaints from the steel and cement industries, which wanted a lot of direct access to power generators other than the utilities. But the ball was rolling now, and Fessler and the utilities were destined to achieve a mind-meld.

Fessler opposed government efforts to promote conservation, and regarded renewable energy skeptically. To him, the price signal was all that was needed to spur greater energy efficiency. Fatefully, he strongly favored turning over regulation of the power grid to the federal government, which has barely regulated it at all, thus placing California in its present thicket. Through a variety of means, he moved the PUC away from the regulation of power generators. And he claimed that great benefits would accrue through the elimination of utility reserve margins, emphasizing savings at the expense of reliability.

“Rather than focus on public governance and planning, Fessler preferred instead to turn things over to the market,” notes Center for Energy Efficiency and Renewable Technologies director V. John White. But not, despite his market ideology, a truly open market.

Instead, Fessler and the utilities worked together to craft a market in which there were considerable barriers to entry for firms other than the utilities themselves and other big power generators, which already had big built-in advantages. The pot was sweetened in other ways as well. The utilities were granted a multibillion-dollar bailout for their investment in nuclear power. And in exchange for selling off their in-state generating facilities, the utilities would be set free to roam the country, indeed the planet, buying and building power plants where they could seek the highest return, exempt from California‘s regulatory reach while still able to count on California ratepayers for their crucial cash flow.

This is precisely what the utilities have done.

“Deregulation and the Fessler-led PUC’s insistence that California utilities sell off their power plants left the Southern cartel [such out-of-state power generators as Enron and Reliant Power] with the swing capacity,” says Ed Smeloff, former president of the Sacramento Municipal Utility District. Over the past year, these companies have used this edge to jack up wholesale electric prices and enjoy record profits.

Fessler‘s biggest blunder was to place the consumer in the easily manipulated wholesale spot market -- just as in the British model he so admired. In the Thatcherized U.K., electric prices have been 70 percent higher than in the U.S. over the past decade, service has decayed, and blackouts have become more frequent. Sound familiar?

Once Fessler had put his package together, it was time for the Legislature to get into the act -- but the template was already laid down. With Wilson re-elected in a landslide, the Assembly in Republican hands and the utilities lobbyists roaming the Capitol, California’s electric-power industry was deregulated in 1996.

His work in government done, Fessler moved on to an energy practice at his big international law firm (which, it turns out, had worked on power deregulation in Britain), a poor law professor no more. His patron, Governor Wilson, unceremoniously left office two years ago, to become a Hoover Institute fellow and to work for a Beverly Hills investment firm.

Like Fessler, Wilson has not returned repeated phone calls to his offices requesting comments on his central role in the failed deregulation scheme which, he declared in 1998, would provide a “lasting energy legacy” for California. Which it most certainly has.