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Schwarzeneggerï¿½s First Role As Governor-Elect of California: The
Deregulator

By Jason Leopold

Forget about the Terminator, Arnold Schwarzenegger is taking
on a new role as Governor-elect of California: The Deregulator.

One of Schwarzeneggerï¿½s first political moves as the stateï¿½s
chief executive will be an effort to push the stateï¿½s electricity market
closer toward
deregulation, a move halted by Gov. Gray Davis two years ago
in the wake of Californiaï¿½s energy crisis. Schwarzenegger, while on the
campaign trail,
blamed Davis for his handling of the energy crisis.

Schwarzennegger drafted a comprehensive energy policy, which
can be found at http://www.joinarnold.com/en/agenda/#C1, that went
unnoticed for
much of his campaign during the recall election. He said he
wants to eliminate public oversight on future power supply contracts the
state signs with
energy companies and adopt a design plan for deregulating
Californiaï¿½s electricity market from other states that restructured its
electricity markets,
such as Texas, New Jersey and Maryland.

ï¿½As governor, I will create a working wholesale power market
based on the lessons learned from other states and the (Federal Energy
Regulatory
Commission) standard market design,ï¿½ Schwarzenegger said on
his campaign website. ï¿½California is one of several states that adopted
electricity
restructuring. However, only California's restructuring
caused severe price hikes and energy shortages. It is time to learn from
other successful
restructurings enacted by Texas, the New England states, and
the Mid-Atlantic States of Pennsylvania, New Jersey and Maryland. In
addition,
California should also look to the standard market design
created by FERC.ï¿½

That could be Schwarzeneggerï¿½s first disastrous move as
governor and it may cost him dearly. Hereï¿½s why.

In August, the General Accounting Office issued a report
criticizing FERC, the nationï¿½s top watchdog for electricity and natural
gas markets, because
the agency doesnï¿½t have the power to protect consumers from
the side effects of deregulation, such as soaring electricity and
natural gas prices, which
ended up costing California more than $70 billion and
bankrupted the stateï¿½s largest utility, Pacific Gas & Electric Co.

Sen. Joseph Lieberman, D-Conn., the senior Democrat on the
Senate Governmental Affairs Committee and a contender for the Democratic
presidential
nomination, said the report was disturbing in the wake of
this month's massive electricity blackout, past electricity woes in
California and the West,
and the Enron scandal.

ï¿½Another year has gone by and FERC is still not capable of
effectively protecting consumers,ï¿½ Lieberman said, in a statement.

In response to the California energy crisis and the Enron
scandal, FERC last year announced the formation of the Office of Market
Oversight and
Investigations to scrutinize the electricity and natural gas
markets as they moved from regulated monopolies to competitive markets.

But the GAO report said the OMOI still hasn't defined its
roles and activities and has yet to develop many written procedures that
would ensure its
efforts are "coordinated, systematic, understood by its
staff, and transparent to stakeholders."

In a letter to the GAO, FERC Chairman Pat Wood acknowledged
that FERC faces a "significant human capital challenge" and still lacks
the ability to
prevent another California type crisis.

Under California's ill-conceived deregulation plan,
investor-owned utilities sold most of their power plants and then bought
most of their electricity
from independent generators and other sellers. But while the
prices were subject to fluctuations in supply and demand, federal law
said prices had to be
"just and reasonable" -- a vague term that FERC, the state
and the sellers have spent the past three years debating, the Sacramento
Bee reported in
September.

But Schwarzenegger is unmoved by the GAO report. He still
believes that competition will bring lower electricity prices to
consumers in California.

Schwarzenegger said he will fire dozens of energy advisors
appointed by Davis to various posts in favor of his own energy team, one
that ï¿½respects
free-market economics.ï¿½

Schwarzenegger will also dismantle the California Consumer
Power and Conservation Financing Authority, the public power agency
created by the
state Senate in August 2001 that financed small publicly
owned power plants in California to eliminate the possibility of future
energy shortages.

Schwarzenegger explained on his website, www.joinarnold.com,
that the goal of the Power Authority ï¿½to build and operate publicly
owned power
plants is in direct competition with private industry and
serves only to divert private investment in electricity generation and
transmission away from
the state.ï¿½

Moreover, many of the stateï¿½s other 13 energy agencies, such
as the Electricity Oversight Board, a watchdog agency that monitors the
performance of
the California Independent System Operator, the agency that
balances Californiaï¿½s electricity supply and demand, may also soon be
out of business,
aides to Schwarzenegger said.

One of Schwarzeneggerï¿½s boldest moves, however, will be to
enter into quick settlements with about a dozen energy companies accused
of
manipulating the stateï¿½s electricity market during the
height of the stateï¿½s energy crisis two years ago, aides to
Schwarzenegger said Wednesday.

For three years, California has been engaged in a costly
legal battle against dozens of energy companies it said ripped off the
state by purposely
withholding much-needed electricity from consumers, creating
an artificial shortage while boosting the companiesï¿½ profits.

Federal regulators ordered electricity refunds for
California totaling about $3.3 billion, but Davis said the state
deserves at least $9 billion and ï¿½not a
penny less.ï¿½

Richard Katz, an energy advisor to Davis, told the
Sacramento Bee last month that he thinks the state will have to sue to
recover significantly more
money; the state already has refund cases pending before the
9th U.S. Circuit Court of Appeals.

"The governor has said he'll go to every court, every
venue," Katz said. Litigation "is the only process we have for getting
justice for ratepayers."

But Schwarzeneggeer aides said the lawsuits are deterring
energy companies from building power plants in California, which could
lead to another
energy crisis in 2006, and the legal wrangling alone is
costing the state millions of dollars.

ï¿½Itï¿½s time to settle and move on,ï¿½ a top aide to
Schwarzenegger said. ï¿½We donï¿½t want to inherit litigation.ï¿½

Jason Leopold spent two years covering California's
electricity crisis and the Enron bankruptcy as bureau chief of Dow Jones
Newswires. He is writing
a book about California's electricity crisis.

-- -Kraig Grady
North American Embassy of Anaphoria Island
http://www.anaphoria.com
The Wandering Medicine Show
KXLU 88.9 FM WED 8-9PM PST

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