February 16 - 22, 2001

Master of Disaster

How Pete Wilson’s energy chief short-circuited the California grid

by Bill Bradley

Market power: Freeman wrested grid from state grip. Photo by Debra DiPaolo Enlarge image

SAN FRANCISCO — It’s quiet at the roosting place of the architect of California’s failed experiment in electric-power deregulation. Here in San Francisco’s spiffy Embarcadero Center are the elegant, hushed offices of the globe-spanning, carnivorous-sounding mega–law firm LeBoeuf Lamb Greene & MacRae. Daniel W.L. Fessler, 59 years old, Western-born and Eastern-educated, is a top-dollar partner here.

Mr. Fessler, as it happens, is not available. Nor is he replying to phone calls or e-mail. If you haven’t seen or heard his name in the welter of news reports on the power crisis, not to worry. He’s barely been mentioned by our out-of-sight, out-of-mind news media. But it was Daniel W.L. Fessler who started it all, not far from here, at the offices of the California Public Utilities Commission (PUC), which, as the appointee of then-Governor Pete Wilson, Fessler ran from 1991 to 1996. Those were the years in which California’s electric-power deregulation was hatched, and the liberal City by the Bay was the seemingly unlikely place where it happened. Here and London, that is.

In 1994, Pete Wilson was embroiled in what ultimately turned out to be an easy re-election campaign, thanks in large part to his championing of the anti-immigrant Proposition 187. In the long run that would ä boomerang on him, turning his legacy to ashes, but he wasn’t thinking about that then. Nor was he thinking too much about electric-power deregulation, which would also boomerang on him, even though top aide Otto Bos spoke of it back in 1991 as part and parcel of their reinventing of a “modern Republican Party,” and Wilson himself strongly endorsed it. “I have concluded,” he declared, fatefully, in 1993, “that the market can be trusted to engage in the planning, development and deployment of electric-generation capacity in California.”

Wilson, though, was consumed by politics. Thinking about power deregulation was delegated to Daniel Fessler. This U.C. Davis contracts-law professor had no particular background in energy issues, but he was a friend of First Lady Gail Wilson and scored big with the Wilson governorship. A free marketeer from Wyoming, where his father was in the minerals-extraction business, Fessler landed the powerful presidency of the PUC and seats on the state’s Transportation Commission and High Speed Rail Commission.

Like Wilson, Fessler was an Anglophile; his manner was described by one associate as being akin to John Houseman’s in The Paper Chase. “He enjoyed affecting a mock English accent,” notes former PUC administrative-law judge Sara Myers. Like Wilson, Fessler was a great admirer of former British Prime Minister Margaret Thatcher. Perhaps even as much as Ronald Reagan himself, Lady Thatcher was venerated by conservative free marketeers around the world. After all, she broke the backs of the labor unions in Britain. She also privatized and deregulated Britain’s electric-power market.

So Dan Fessler was off to London. It was to be an exciting and momentous trip.

A junket, actually, sponsored and paid for by the tax-exempt foundation of an outfit called the California Council for Environmental and Economic Balance (CCEEB). CCEEB, which, despite its name, has historically promoted a conventional pro-business agenda, was then headed by former Southern California Edison president Michael Peevey. (Peevey was recently tapped by Governor Gray Davis to negotiate a state bailout of his former employer, a bailout necessitated by the very scheme he helped set in motion. Like they say in Disneyland, it’s a small world after all.)

Before quaffing the radical capitalist waters in London, Fessler, Peevey and company jetted to Paris for some R&R. Also along were Fessler’s fellow commissioner, Greg Conlon, several legislators led by then Senate Republican Caucus chairman Bill Leonard, a number of top executives from Edison, Pacific Gas & Electric and San Diego Gas & Electric, as well as senior PUC and CCEEB staffers — a cozy little group fit to chill the cockles of any political reformer’s or consumer advocate’s heart. And, one might think, stir the interest of the California news media. But no one noticed.

“There were good things for us to learn in England,” says one of the junketeers today, somewhat defensively. Once there, ensconced in a luxury hotel in London’s posh Mayfair district, within walking distance of the global shopping mecca known as Harrod’s, the group embarked on a worshipful round of meetings and dinners, including one memorable fête at the Grosvenor Hotel, with ranking Thatcherites, free-market economists and Conservative members of Parliament.

The usually aloof Fessler was especially taken with his meeting with Stephen Littlechild, then head of the U.K.’s Office of Electric Deregulation, and popularly known as “The Regulator.” Littlechild was the czar of Thatcher’s deregulation program, a man who set historic changes into motion by having the ear of a powerful politician. It was a role Fessler could play back home in California.

“Fessler was plainly thrilled to be in the U.K. amongst these people, some of whom were heroes to him,” says one participant in the trip.

The stage was now set for a larger drama than any West End theater could provide. Fessler and company returned to California with a sense of purpose. Electric-power deregulation was shifted onto the fast track. Trouble was, there was no clamor for deregulation.

Unlike Britain, which had had a wheezy public-power system, California had a system that worked. Power cost more here, on average, than elsewhere in the U.S., but far less was used per capita than elsewhere, too, because of energy-efficiency improvements begun during Jerry Brown’s governorship.

Initially, the only real constituencies for deregulation in the early ’90s were such old-economy industries as steel and cement, eager to reduce their production costs. In addition to his ideological motivation, say a number of his associates from that time, Fessler thought his mandate was to deal with California’s “competitiveness crisis.” A decade ago, there was much rhetoric about the Golden State’s losing substantial portions of critical new-economy industries such as entertainment and high-tech to low-cost, non-union states such as Nevada — a notion that proved to be a lot of talk. When it comes to energy, these industries are more concerned with reliability than marginal price issues.

In time, though, Fessler’s view of a reconfigured utility industry would strike a powerful chord with utility leaders such as Edison chief John Bryson. The utilities themselves ultimately emerged as the crucial backers of deregulation — a deregulation, that is, which suited their purposes.

The tight relationship between Fessler and the utilities that was clear from their English pilgrimage was reflected in the daily dealings between the PUC and the utilities. According to one study of the agency’s logs, eight in 10 visitors to the PUC during the crucial October 1993–to–October 1994 period, in which deregulation was brewing, were utility representatives. Consumer groups were out of the loop and viewed with hostility. “I find it shocking that TURN [the Utility Reform Network, one of the state’s leading consumer groups] uses members only for money,” Fessler once declared.

Fessler’s first version of deregulation, which he attempted to issue as a sort of PUC decree, wasn’t entirely to the utilities’ liking. He was still reacting in part to the initial complaints from the steel and cement industries, which wanted a lot of direct access to power generators other than the utilities. But the ball was rolling now, and Fessler and the utilities were destined to achieve a mind-meld.

Fessler opposed government efforts to promote conservation, and regarded renewable energy skeptically. To him, the price signal was all that was needed to spur greater energy efficiency. Fatefully, he strongly favored turning over regulation of the power grid to the federal government, which has barely regulated it at all, thus placing California in its present thicket. Through a variety of means, he moved the PUC away from the regulation of power generators. And he claimed that great benefits would accrue through the elimination of utility reserve margins, emphasizing savings at the expense of reliability.

“Rather than focus on public governance and planning, Fessler preferred instead to turn things over to the market,” notes Center for Energy Efficiency and Renewable Technologies director V. John White. But not, despite his market ideology, a truly open market.

Instead, Fessler and the utilities worked together to craft a market in which there were considerable barriers to entry for firms other than the utilities themselves and other big power generators, which already had big built-in advantages. The pot was sweetened in other ways as well. The utilities were granted a multibillion-dollar bailout for their investment in nuclear power. And in exchange for selling off their in-state generating facilities, the utilities would be set free to roam the country, indeed the planet, buying and building power plants where they could seek the highest return, exempt from California’s regulatory reach while still able to count on California ratepayers for their crucial cash flow.

This is precisely what the utilities have done.

“Deregulation and the Fessler-led PUC’s insistence that California utilities sell off their power plants left the Southern cartel [such out-of-state power generators as Enron and Reliant Power] with the swing capacity,” says Ed Smeloff, former president of the Sacramento Municipal Utility District. Over the past year, these companies have used this edge to jack up wholesale electric prices and enjoy record profits.

Fessler’s biggest blunder was to place the consumer in the easily manipulated wholesale spot market — just as in the British model he so admired. In the Thatcherized U.K., electric prices have been 70 percent higher than in the U.S. over the past decade, service has decayed, and blackouts have become more frequent. Sound familiar?

Once Fessler had put his package together, it was time for the Legislature to get into the act — but the template was already laid down. With Wilson re-elected in a landslide, the Assembly in Republican hands and the utilities lobbyists roaming the Capitol, California’s electric-power industry was deregulated in 1996.

His work in government done, Fessler moved on to an energy practice at his big international law firm (which, it turns out, had worked on power deregulation in Britain), a poor law professor no more. His patron, Governor Wilson, unceremoniously left office two years ago, to become a Hoover Institute fellow and to work for a Beverly Hills investment firm.

Like Fessler, Wilson has not returned repeated phone calls to his offices requesting comments on his central role in the failed deregulation scheme which, he declared in 1998, would provide a “lasting energy legacy” for California. Which it most certainly has.

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-- Martin Thompson (mthom1927@aol.com), February 18, 2001