You didn't address the main point here. The reason why the rates were frozen was because PG&E and Edison had huge investments in generating, namely their nuclear plants. The terms of the deregulation required that the companies divest their generating, but who is going to buy nuclear plants for what they are worth??? They can sell their coal and gas fired plants no problem and get close to their investment out of them, but nuclear plants with their massive costs and even bigger potential liability are things no energy company will take on these days. So to help them recover those investments they set a fixed price which was higher than the cost of generating, but slightly lower than what they had been charging their customers. So the argument goes we fix the cost of power for a period of time during which the companies can recover their investments. During this time other utility companies can come in and offer power as well, but they have to charge this fixed rate. There was plenty of profit to be had, but who is going to change their power provider if there is no price competition? Easier just to keep your current power in. Only companies that bothered competing were those "environment-friendly" providers and they generally charged a surcharge above and beyond what the big companies did to those willing to pay for renewable resource energy. Notice that SDG&E, now Sempra, did not follow this scheme. They didn't have nuclear investments so they were basically not regulated in their pricing. Well CA goes into a huge growth spurt and the prevalence of computers that suck up a lot of energy creates some problems. Remember that CA has so many environmentalists blocking almost any power generator, that the lack of investment caused what were comfortable power supplies to start running short. All the "gougers" as Gray Davis likes to call them came into the market, they were the new energy generators that resulted from the divesture of the business by the 3 utility companies. They are unregulated power providers and they did what a smart businessman would do. They acted in ways to make demand even tighter at times and made serious loot off of it. Well these aren't regulated businesses like power companies, they are profit driven. They didn't have monopoly power because there are quite a few generators in the state, but the supply became so short they could just generate some of their capacity and make a lot more money than generate all their capacity and get more volume at much smaller prices. Anyways I digress...they played a big role in it too.


Back to the big 3. SDG&E/Sempra were jacking their prices up big-time. I was in SD the summer before the "crisis" and at that time people were bitching heavily about how the power company was screwing them. I heard bills had doubled, but all the utility had to do under their deregulated operation was just prove they weren't ripping the customers off, that power really cost this much to provide. At this point I raised the issue with my father, an Edison employee, and asked how can people in San Diego pay twice as much in one year and the people in the rest of Southern California actually get cheaper bills??? He said that it was a mess and that Edison's day of reckoning could be coming soon. Sure enough, the next spring and the blackouts began. Edison and PG&E, exposed purely to spot markets were in trouble. A double whammy of lack of resources and lack of money were just killing the business. The CA economy was at its peak at this time, just as the NASDAQ bubble was burst. The strong economy drew ever bigger numbers of migrating residents and the technology required to operate ever more ubiquitous computers, servers, infrastructure...it all added up to a big spike in demand. In SD people had big incentive to cut back on their energy, but in the rest of CA there was none until the blackouts began. Up to that point people were paying low bills and not bearing the consequences of short supply. Had they faced higher bills right away, most of the power disaster would have been avoided.


I remember the idiotic reaction of a lot of Californians not long after the crisis began. The power companies were getting killed, paying over 250% more for power on average than they were a year earlier. They begged for a rate increase, all of 9%! Like that would do much. Anyways they figured it was the best they could get, should be a slam dunk when you are facing huge cost differentials. Well the people affected were just outraged. The companies were lying, the companies were stealing, the companies couldn't expect us to pay such a HUGE increase. Stupidity I tell you, Californians are the absolute greatest at this, the whole we want our cake and eat it too theory. Like cutting a few thousand employees was going to make up all the difference in their costs. Meanwhile Gray Davis at first is agreeing with the public saying he doesn't think they should raise the rates. Fortunately he doesn't decide that, the PUC does and they finally agreed to raise the rates far too late and clearly too little. If they had acted quickly and doubled the rates, people would have concrete reason to cut down on their usage, the utilites would have been much more solvent and everything would have died down quickly. I know Davis loves playing both sides as you say Leroy, but herein is his biggest case of mismanagement where he lied to the public telling them there were ways to avoid paying the piper and in doing so and in having the agencies and people under his control fight rate hikes, he bungled his state into a much much much bigger mess than it had to be. In the end people in CA are paying much higher rates that they argued against because the bills that were run up had to be paid. This mistake he seems to be forgiven for by many of his voters, but it might be one of the biggest mistakes a governor of any state has ever made from a financial perspective. He put politics before economic reality, trying to be the guy "fighting" for the voters. All he had to do very early on was go have a meeting with the leaders of the 2 utilities and say we will make a deal. You can raise your rates very quickly and enough to pay for the differential, but you have to lower them if and when the crisis passes. Further he could have negotiated other concessions out of them for doing this. Not the easiest sell to his people, but most people would grudgingly have to accept it when they see the numbers. Further at this point they could have gotten out of exclusive spot market in the same negotiations. The long term supply contracts they would have bought at this point would have been far cheaper than the ones they ended up with.


Its hard to imagine Davis would have ever thought it would end up as it did, but his ignoring economic reality caused much of the problem. Spot markets and the companies that supplied them were part of the problem too. A smarter plan would have been to have the rates float for all three and then have a surcharge on bills to help recover the nuclear plant disposal issue. Over ten years that charge would have been a very small amount on each bill in a state with around 15 million households and countless businesses.