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Gray Recharged

Gray Davis has caught a few breaks lately. California‘s rattled governor saw electric-power prices blip downward earlier this month. A new federal plan may stop the most outrageous price gouging. And he has concluded a bailout deal with San Diego Gas & Electric, the smallest of the state’s big three private utilities, that looks tougher from a public-interest standpoint than his rejected deal with the now-bankrupt Pacific Gas & Electric and his accepted deal with Southern California Edison, which remains in great jeopardy.

Yet his secret efforts to force out Public Utilities Commission chief Loretta Lynch and to use an unnoticed executive order to give the Department of Water Resources (DWR) powers that should be vested in the finally enacted state Power Authority raise new questions about his leadership, as does the revelation that the state‘s vaunted $43 billion long-term power contracts not only ignore renewable-power generation but also serve to spur the construction of more fossil-fuel plants. ”Where’s the commitment to clean power that is at least as cheap as these plants?“ asks Center for Energy Efficiency and Renewable Technologies director V. John White. And the upshot of a series of tricky maneuvers is that, absent congressional action, electric-power deregulation has been saved at the moment of its greatest vulnerability.

In the latest manifestation of a very complex set of political and economic maneuvers, Davis has just been hit by a new TV ad blaming him for the power crisis, paid for by a shadowy group called the American Taxpayer Alliance, which is fronted by Republican consultant and former Dole for President campaign manager Scott Reed. Time magazine says power companies are behind the group; Reed refuses to identify his funders. The ad, designed to hurt Davis‘ re-election and blunt popular support for price caps and intervention against the industry, points out that Davis could have done much more to head off the crisis. But it falsely claims that he stopped utilities last year from entering into long-term power contracts.

The truth is that the PUC allowed long-term contracting last year, but the anything-but-visionary utilities wouldn’t go forward -- with contracts that would look very good today, at far lower prices than the long-term contracts we‘re finally getting -- without a guarantee that they wouldn’t be second-guessed down the line. And long-term contracting was antithetical to the deregulation scheme successfully pushed by Republican Governor Pete Wilson and the energy industry.

The Big Gouge has become the Big Shuffle, with the fortuitous defection of Vermont Senator James Jeffords, which handed narrow control of the U.S. Senate to the Democrats. Its aim is to preserve both electric-power deregulation and the ability of power companies to expand into new business, as well as the Republicans‘ narrow majority in the U.S. House of Representatives, whose California members are threatened.

Electric-power and natural-gas prices dropped. Power companies said it was the working of the market. Davis credited his conservation policies. But a harder look at his figures, which he juggled to account for weather and growth, shows that actual consumption went down only slightly. Other factors seem more pertinent. Burgeoning U.S. Senate investigations into price gouging, for one.

Still more important is the fact that Southern-power-cartel members had till the end of June to persuade -- or, more accurately, provide a rationale for -- the Federal Energy Regulatory Commission (FERC) to continue to allow them to use ”market-based“ pricing. Avoiding cost-based pricing is the essence of deregulation itself.

There was another major factor leading to the healthier energy climate. Bush buddy Ken Lay, head of Enron, the nation’s biggest electricity marketer, garnered some unwanted press from the San Francisco Chronicle when someone leaked a memo Lay gave to participants in a closed-door meeting with L.A. notables last month. Among those in attendance were Mayor Richard Riordan, Arnold Schwarzenegger and convicted junk-bond-financier-turned-philanthropist Michael Milken. Lay‘s purpose, as the memo made clear, was to enlist high-level support for the continuance of deregulation in California. But he also stressed that deregulation could work, that prices for electricity could begin to moderate from their skyrocketing levels.

As it happens, prices on futures markets began going down around that time. Since no price-control, rate-hike or conservation programs had kicked in to affect those prices, this is an interesting development. One well-placed source says that Lay, Enron and others in the energy business have an interest in cooling the price gouging.

But Enron is interested in more than electricity. Enron is in the commodities business. One increasingly valuable commodity is the broadcast spectrum -- the airwaves over which entertainment and other communications are transmitted. Some of that spectrum goes unused for stretches of time. A spot market is likely to emerge for the utilization of unused spectrum, just as it did for satellite time access. A company that wants to play in this new market can’t afford to be on the bad side of Democrats in a divided federal government.

The Federal Energy Regulatory Commission‘s new anti-gouging policy could help Davis. Price ”mitigation“ is what they call it. We won’t be seeing totally embarrassing, last-minute $1,900-a-megawatt-hour power purchases. But from a practical standpoint, the market floor is now tied to the most expensive, least efficient old generator turned on in a critical power shortage. The policy remains in effect until fall 2002, when absolutely anything goes again.

Prices look to be substantially lower than the state has been paying this year, but much higher than last year. And much higher than power from renewable-energy sources would cost.

What the FERC‘s order actually does is preserve the deregulation system at the moment of its greatest vulnerability. As part of its ”compromise“ order, the FERC rejected the cost-based pricing power companies feared might be ordered at the end of the month.

Davis understands this and, according to advisers, anticipated a fast-shuffle ”solution“ of some kind. Which is why he had already moved secretly to minimize what he sees as his own continuing vulnerability heading into next year’s election.

To shore up support, Davis has tried to force Loretta Lynch to quit as president of the PUC. He fears her efforts to move the rate-increase burden to business could make her a Republican lightning rod. According to insiders, Davis offered her a judgeship, which she has refused. Lynch is on vacation and was unavailable for comment. The Governor‘s Office denied any offer of a judicial appointment.

Davis prefers a very tight shop, evidenced by his long-term power contracts, crucial details of which are still secret despite proclamations to the contrary.

Further expressing this penchant for a tight shop, Davis quietly issued an unnoticed executive order vesting the Department of Water Resources, the agency pressed into power-buying service on an ad hoc and frequently secret basis, with many powers that should reside in the state Power Authority, which the Assembly passed, and Davis signed into law after a substantial delay. Davis will have less control over the Power Authority, since it will be governed by a five-member board of directors consisting of Treasurer Phil Angelides, whom some would like to replace Davis, and four appointees who must be approved by the state Senate. In contrast, the DWR does what the governor tells it to do.

Most experts agree that ad hoc--ism and secrecy have gotten the state into even more trouble and that an accountable agency and openly debated policies are essential. Our $43 billion worth of mostly unexamined long-term power contracts stands as the latest exhibit.

Renewable-energy sources, quite competitive now with conventional energy, aren’t part of the contracts party. Which makes the role of the Power Authority and the shape of California‘s energy policy, both still shrouded in gray mists, all the more critical.


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