LIGHTS OUT OPPORTUNITIES EMERGE FROM THE DARKNESS.

• Author: MASON, LAURIE

"We've sort of been asleep at the switch in California," says Tom Lieser, a senior economist with UCLA's California Forecast, in the unflappable tone of someone who's seen the Golden State clip and rise up again many times in his long career.

Donald Morrison, CPA, a Sacramento business consultant has stronger words: "The rank stupidity of both the people in business who blessed [deregulation] and the people who cooperated is breathtaking."

California's energy crisis has been daily headline fodder for months: Stage 3 Alerts! Rolling Blackouts! Ten-Billion Dollar Bailout! Never have utilities been so interesting. If the citizens of the Golden State have been asleep, they've fast woken up, quickly picking up terms like "ISO," "power grid," "partial deregulation" and "buying on the spot market."

"It's amazing how fast we've all become experts on this," says Lieser. "We did the same thing with oil a couple of decades ago. When there's a crisis you learn something about it."

In 1996 then-Governor Pete Wilson signed into law a bill deregulating the utility business. At the time, Californians were paying higher rates than most states (10 cents per kilowatt hour compared to Oregonians, who spent five, for instance). Under the provisions of the deregulated market, California utility giants Pacific Gas & Electric Co. and Southern California Edison would sell off their generators to pay off debt and buy electricity from generators around the country on the spot market. The utilities only would be responsible for electricity distribution and collecting money from consumers.

Though PG&E hoped that spot-market electricity prices, subject to free-market competition, would be cheaper than their long-term contracts, they were not entirely comfortable that retail rates were fixed while the rates the utility companies were paying generators would be subject to the whims of a free market. "If this were a guarantee, I'd sleep better at night," said PG&E CEO Gordon Smith at the time. "We take the risk if our costs go up."

Costs did go up. When the "new economy" sent California's economy skyrocketing, demand for electricity increased beyond anyone's wildest expectations, and the cost of buying electricity went stratospheric.

Then on Feb. 1, Gov. Gray Davis signed legislation allotting $10 billion in bond money to buy power for the utilities. "This is not the end of the story," Assembly Speaker Robert Herzberg, D-Van Nuys said at the time. "It's just one of the chapters in a very long 'Moby Dick'-style book."

Even with what some are calling a state bailout in place, energy experts worry that the crisis will only get worse come summer when people begin turning on air conditioners. Most industry watchers say that Californians might be in for a bumpy ride for another few years, and since the state's long-term power contracts lock in a relatively high price for electricity over the next 10 years, the trouble might last even longer. "Even if it doesn't become a recession, it's not going to feel very good to go through this," says Lieser.

BLACKOUTS ARE MOST DAMAGING

Analysts agree that many businesses can readily absorb higher utility costs. "Silicon Valley is probably already the world's most expensive place to locate new business, yet it has continued to grow at a fairly fast pace," notes Lieser. "It has the lowest unemployment rate the in the U.S. at this point. It also has the highest home prices and the lowest commercial vacancy rates...