07/13/2008 05:12 am ET | Updated May 25, 2011

The California Energy Crisis: Surprise. Guess Who Did and Didn't Do It.

Howard Kaloogian: Now we know who really created Calif. energy crisis
From the Providence (Rhode Island) Journal

July 3, 2008



GITMO AND GUNS are getting all the press. But energy mavens are talking about another recent far-reaching -- but little noted -- U.S. Supreme Court decision on the California energy crisis: It took them seven years but they finally figured it out.

The revisionist part of the story is well known: Big bad oil traders like Enron gamed the market and drove up energy costs fifteen-fold. The blackouts, insolvent utilities and economic chaos are remembered as the worst energy crisis in American history.

But the Supreme Court turned this conventional wisdom on its ear and said there may have been misconduct by energy sellers, but no one ever showed that caused the crisis.

To paraphrase Bart Simpson, the court, in part, said: They didn't do it.

This left the real villains hiding in plain sight: The regulators who enforced the worst law in the history of the Golden State: the California energy deregulation of 1996. The same regulators who now say that despite the Supreme Court ruling they intend to continue their expensive vendetta on energy producers.

The stakes are high and it is worth remembering how we got here. So let's go back. Way back to 1996. I was a member of the California legislature then.

I voted for what I thought was deregulation. Soon after the "deregulation" became law, one thing became apparent: This was not deregulation, but re-regulation -- complete with price controls and trading restrictions that did not produce one extra watt of power.

Once in the hands of the befuddled regulators, this bill went from a bad idea to a nightmarish reality.

Anticipating the Supreme Court and Bart Simpson, the energy economist Geoffrey Styles figured it out six years ago:

"California's energy crisis grew out of years of neglect, over-regulation and a fatally flawed 'deregulation' scheme that, upon scrutiny, failed to meet any common-sense definition of that term." As the architects of an electric-power deregulation process that grossly distorted the market, California's elected officials and regulators deserve their own share of the blame.

The regulators established the price caps and scheduling system that Enron's traders so effectively exploited with their bizarrely named strategies, and the legislature and governor froze retail electricity prices, while letting wholesale prices float (far above retail), deliberately opening up a gap that soon brought the state's two largest utilities to their knees.

When prices returned to earth, utilities -- locked into long-term deals they signed at the peak of the market -- suffered what the Supreme Court is calling "buyer's remorse."

They demanded refunds from the energy companies. Some agreed. Others did not, saying the sales were fairly negotiated between sophisticated buyers and sellers. And a deal was a deal. So off they went to court.

After a lower court and the Federal Energy Commission found no evidence that dirty dealing caused the crisis, the most overturned court in America got into the act -- the Ninth Circuit Court of Appeals. These judges said the federal government had a duty to rip up these contracts because of the high prices.

But the U.S. Supreme Court was having none of that.

In giving short shrift to claims that the reviled energy companies were behind the crisis, the court said legally what California voters knew intuitively when they voted the first time for Arnold Schwarzenegger. Absent massive mismanagement, there would have been no crisis.

The Supreme Court has sent a message. California citizens have the right to expect even better: Stop the war on energy producers. Declare victory and go home. Redeploy California's private army of $700-an-hour lawyers who have frittered away tens of millions of dollars in pursuit of this now hopeless legal endeavor.

Roads and parks and even taxpayers could use the money for utility bills.

A real energy policy recognizes that markets and contracts produce power.

Regulators and rhetoric do not. The governor and his regulators should be able to figure this out. The Supreme Court sure did.

Howard Kaloogian is a lawyer and a former member of the California State Assembly. He can be reached at