Christmas lights go out in California as deregulation causes power chaos

The Christmas lights are going out all over California. The Golden State may be at the cutting edge of the new digital economy, and the land of unlimited technological plenty, but it is also suffering from an acute electricity shortage that threatens to cast a dark shadow over the holiday season.

The Christmas lights are going out all over California. The Golden State may be at the cutting edge of the new digital economy, and the land of unlimited technological plenty, but it is also suffering from an acute electricity shortage that threatens to cast a dark shadow over the holiday season.

On Thursday, the electricity supply dipped briefly to less than 1.5 per cent of capacity. This triggered an automatic state of emergency in which lights are dimmed in public buildings, photocopiers and other machines are switched off, air-conditioning and heating systems are strictly rationed and officials gear up for rolling blackouts of entire city neighbourhoods.

The so-called Stage 3 emergency lasted just two hours, but the crisis barely abated yesterday. Symbolically, state government officials turned off the lights on the Christmas tree at the Capitol building and, more robustly, continued to orchestrate a statewide "brownout" in which non-essential power consumption was systematically eradicated.

"Over the next two weeks it will be day by day, night by night. It's all hands on deck," said Steve Maviglio, a spokesman for Governor Gray Davis. "We're doing the best we can."

The crisis is a major embarrassment for America's most dynamic state economy and poses major risks to both productivity and inflation control if a solution cannot be found quickly. The root of the problem lies in the deregulation of California's electricity industry four years ago, which effectively removed all incentive for power companies to build extra capacity.

As demand has risen - driven by a growing population and the expansion of the electricity-hungry hi-tech sector - the utility companies have generally bought in extra supply from other states. All it takes, however, is a summer heatwave or a winter cold snap and the system reaches breaking point.

This week, supply from the Pacific Northwest has dried up because of cold temperatures there.

At the same time, almost a quarter of California's usual capacity has been down because of maintenance work. The result: the lavish Christmas lights that Californians like to string across the front of their houses are staying switched off.

Over time, the situation can only get worse. In several major population centres, the utility companies now have the discretion to charge whatever they want without any state-imposed rate caps. In San Diego this summer, electricity bills tripled - affecting the price of everything from apartment rents to slices of pizza - until Governor Davis stepped in with emergency subsidies to prevent hundreds of small businesses from going under. In San Francisco, rates are scheduled to jump more than 10 per cent on 1 January.

"This deregulated market is getting dangerously out of hand," charged Doug Heller, of the Foundation for Taxpayer and Consumer Rights.

California's public utilities commission estimates that consumers have been overcharged by more than $4bn since deregulation, and it has asked the federal government to intervene with the very rate caps that the state has lifted.

Energy policy specialists warn that more Stage 3 emergencies are inevitable. For now, the winter is proving remarkably mild in much of the state, but there is no guarantee that will last. Much of the new population growth is in the Central Valley, a dusty bowl of irrigated desert where temperatures are particularly extreme.

Even in more established population areas, like Los Angeles, much of the new building has been in the desert, where a similarly high demand for power exists.