What California's crisis means to the rest of the U.S.

Frequently asked questions:

Q: Why does California's energy crisis matter beyond California?
Q: When did deregulation start?
Q: What did deregulation do?
Q: What went wrong?
Q: No new power plants?
Q: What created the current crisis?
Q: Is there actually a shortage of electricity?
Q: Can federal regulators do anything?
Q: Is anyone investigating?
Q: What are some solutions?

Q: Why does California's energy crisis matter beyond California?

A: As many as 25 other states are considering energy deregulation and are looking at California's approach as a model.

Q: When did deregulation start?

A: The California Assembly voted unanimously in 1996 to deregulate the state's electric industry and to dismantle what it considered a government-regulated monopoly. The state created incentives for the utilities to sell their generating plants to unregulated private companies. They were required to transfer operational control of transmission lines and power grids to a private nonprofit organization -- the Independent System Operator (ISO). The companies retained control and ownership of the distribution system. The California Public Utilities Commission (PUC) transferred pricing to the California Power Exchange, overseen by the Federal Energy Regulatory Commission (FERC). The so-called PX is a private, nonprofit organization that in concert with the ISO buys electricity according to need by auction from in-state power plants and elsewhere on the open market.

Q: What did deregulation do?

A: It forced California's investor-owned utilities to sell most of their power-generating plants to other unregulated private companies. Now they must buy their power on the volatile wholesale market where prices per kilowatt-hour can fluctuate daily. Further, deregulation prevented the largest utilities from passing rising costs on to customers until at least March 31, 2002. Investor-owned utility companies say if they cannot pass the cost on to consumers, they will have to switch off.

Q: What went wrong?

A: Here is what California Gov. Gray Davis says: "I think the people that insisted that we get into deregulation in 1996 made a huge miscalculation. They did not anticipate the huge [economic] recovery California experienced and the needs of the tech companies here in California. Secondly, there was no effort to build new plants to meet the demand."

Q: No new power plants?

A: That's right. "For 20 years or more, no significant increase in the power supply of the region has taken place," says Gary Ackerman, whose Western Power Trading Forum represents electric suppliers. Although six plants are now under construction, and another 11 are planned, it will take from two to four years for the first of these to come online, Davis says.

Q: What created the current crisis?

A: As demand for power peaked during the summer 2000, utilities scrambled to buy enough power from wholesalers, which promptly raised their prices. Unable to recoup these inflated costs from its customers, the utilities rapidly ran out of money, they claim, which made some wholesalers nervous about selling them even more power. "Now the banks are saying [that they] will not lend to the utilities to buy more to keep the lights on. The debt level is too great," says John E. Bryson, CEO of Edison International, parent company of Southern California Edison

Q: Is there actually a shortage of electricity?

A: This is what Bryson says: "A very small part of [the crisis] is associated with a shortage of electricity. The problem is primarily ... between high wholesale costs of electricity ... and low regulated retail rates." In the words of Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, "There is no energy shortage. There is an energy cartel of companies that is manipulating the supply at any given moment in order to manipulate massive market price increase and get high profits."

Q: Can federal regulators do anything?

A: The federal government has so far refused to impose regional caps on wholesale prices for electricity.

Q: Is anyone investigating?

A: The power industry is now the target of at least six investigations by state and federal agencies. Two powerful California politicians, Democratic U.S. Sen. Barbara Boxer and state Senate leader John Burton, are asking the U.S. Justice Department to investigate the possibility of criminal price gouging. "The people of this state are being taken to the cleaners, and billions of dollars are going to out-of-state generators," Burton says. But according to Ackerman, "We have been investigated up and down and sideways and after all these months, nobody has found any evidence that there is any price manipulating, any gaming or any wrongdoing on the part of the generators in California or in the Western region."

Q: What are some solutions?

A: Early rate increases, federal regulation of electric wholesale prices, or the negotiation of long-term contracts between utilities and power generators, so that prices are not set on the volatile wholesale spot market.