Out of the Frying Pan: The energy crisis that dominated the California Legislature's 2001 session subsided as the year came to a close, but it left behind a debilitating financial hangover that could hamper the state's economy for years to come.

• Author: Weintraub, Daniel

The blackouts that were predicted for the summer never materialized. California's second largest utility did not, as many lawmakers feared, slip into bankruptcy. And prices on the volatile electricity spot market not only leveled off, they declined to near historic lows.

Those developments brought a sense of relief to California's 120 lawmakers, who faced what some termed the most serious, and complicated, crisis the state had ever encountered. But their joy was tempered by the knowledge that the state, with its back against the wall, had locked itself into long-term contracts that will force consumers to pay high electricity prices for the next decade. And $6 billion drained from the state's general fund--to pay for energy purchases on behalf of the nearly insolvent utilities-still hadn't been replenished by year's end.

These lingering problems left some lawmakers and observers questioning whether the Legislature erred last winter when it granted Governor Gray Davis a blank check to buy power from the same private energy providers that had already driven two of the state's investor-owned utilities to the brink of financial disaster. Even some of those who supported that decision say the Legislature, the governor or state regulators, had they acted sooner, could have averted the worst of the crisis.

SEIZING THE PLANTS

Senator Joe Dunn, a Democrat from Orange County, is one legislator who is certain the state was wrong to stand in for the utilities. Dunn, who chairs a special Senate committee examining the conduct of the private energy generators, voted against the measures that permitted Davis to buy electricity. Dunn feared the treasury would end up in the same shape as Pacific Gas & Electric and Southern California Edison.

The same problem that plagued the utilities--having to buy power at high wholesale rates and sell it at lower, regulated rates to retail customers--would also face the state.

What was the alternative? Dunn thinks Davis should have refused to pay the skyrocketing prices of last January and February and dared the generators to darken the state. If they had, the senator argues, the governor could have used his emergency powers to seize the plants, pay the owners a "reasonable" rate of return and keep the power flowing.

"That would have been a bold statement that would have initiated an immediate meeting of all the stakeholders," Dunn says. "The generators, the traders, the governor's office and the utilities would have come together at that point and figured out a different route out of this problem."

Davis did threaten to seize power plants. But he never did so. Instead, his request for $400 million from the general fund became $1 billion and then $6 billion--for daily buys of electricity beginning in January and continuing, although in diminished amounts, to this day. He also approved more than $40 billion in long-term contracts that will give the state most of the power it needs for the next three or four years and much of its juice for a decade. But the average price in those deals is roughly twice what electricity was selling for before the crisis began and again once the panic faded last summer.

Assemblyman Keith Richman, a Los Angeles County Republican, would not have wanted Davis to seize private power plants. But Richman was among many who complained that Davis locked down far too much power at prices that were far too high.

"Many of us were saying at the time that this was a short-term or medium-term problem. It was not the time in March or April or May to be entering into long-term contracts, when the market was at its...