THE BLOG
07/02/2008 05:12 am ET | Updated May 25, 2011

How Can We Miss You If You Won't Go Away: The California Energy Crisis

The California energy crisis is seven years gone - but not forgotten. This month the U.S. Supreme Court is expected to issue its first decision on the hundreds of cases rising out of the ashes of the exploding rates, rolling blackouts and economic chaos that came from this country's first major utility deregulation in 1996.

This decision could change for generations the way we buy and sell energy in America. So the stakes are high.

Here are the basics: The 1996 "deregulation" law forced large California utilities to sell their power plants and buy energy in the so-called spot markets.

As a former member of the California legislature when this disaster of a law was passed unanimously (yes, I voted for it), I saw first hand how bad regulators turned this consensus law into such an epic disaster.

Among their first acts was to impose price controls that set retail prices lower than the wholesale cost of electricity.

You do not need to be an economist to understand what happened next: If a farmer sells apples for $10 each and regulator tells the grocer he can only sell them for $1 apiece, the grocer will lose $9 for each apple he sells. The farmer will then have two choices: Keep selling apples to the grocer who cannot pay for them and go broke himself, or stop selling apples.

In California, we had both: Rolling blackouts and the bankruptcy of our largest utility.

Soon the energy producers refused to extend credit to the insolvent utilities, forcing the State of California to purchase long-term energy contracts at what turned out to be precisely the wrong time: When prices were at their peak.

As grateful as officials were for the power when the state was running out, that is how angry they were when prices fell. Some energy producers renegotiated their deals under intense pressure, but other refused, saying their contracts were negotiated by a sophisticated buyer (the state) who should have known what it was doing. Relying on Supreme Court precedent over 50 years old, the federal agency in charge of electricity sales upheld the sanctity of the freely negotiated contracts.

Just when it seemed the energy crisis could not get more muddled, America's most overturned federal court got into the act.

By stroke of a pen, the Ninth Circuit Court of Appeals undid the Supreme Court precedent and decided two years ago that the federal government should have voided the long-term contracts once it turned out in hindsight they were not a good deal for the buyer.

And now this unprecedented decision is back at the Supreme Court. The Associated Press reported two months ago that most of the justices at the Court were unsympathetic to requests to force the energy producers to retroactively re-negotiate their deals. A deal is a deal.

To undo that would create a new kind of chaos all over again.

Fortunately, it looks as if the Supreme Court is going to stop this foolishness. But that will not be the end of the story.

At the same time that the litigation over the long-term contracts has been going on, the state has also pursued a scorched earth litigation strategy to extort the sellers of short-term power to refund most of what they were paid for their spot power during the crisis.

State officials accused the energy companies of engaging in illegal practices. They pointed to Enron, an easy whipping boy. But despite all the hoopla, very few examples of manipulation were ever proven.

Nonetheless, the utilities asked for - and received - refunds from many sellers to the tune of $6 billion, mostly from outfits that felt they needed to stay on the sunny side of California's lawmakers or who simply did not have the stomach for a protracted fight with a deep pocket litigator - the state of California.

But $6 billion is apparently not enough. The state continues to hound energy producers as if suing someone is a real substitute for bringing clean, safe and cheap energy to our state.

It is not. And the Supreme Court may send that message this month. Regulators all over the country have already heard it loud and clear. Now the only question is whether California regulators will as well.

Or if adult supervision from the Governor's office will be required to make sure they do.