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Electric-industry deregulation has been a costly failure in the United States, a consumer group charged in a report yesterday that cites soaring power prices in Massachusetts and other states.

Consumers in states such as Massachusetts, where the industry has been restructured, are generally paying much higher prices and getting less reliable service than states that kept utilities as regulated monopolies that own their own power plants, the Consumer Federation of America said in a 29-page study. The group urged states to drop or slow down deregulation plans until federal officials overhaul electric-industry oversight.

Mark N. Cooper, the group's research director, said the 27 percent jump in average electric bills in Eastern Massachusetts over the past 20 months is one of the leading examples of how electric deregulation has failed to deliver the promised savings.

"As states like Massachusetts that moved early to deregulate come out from price caps and start going to market [prices], consumers are getting clobbered," Cooper said. The state's 1998 restructuring law promised an inflation-adjusted 15 percent rate cut for customers, but last year's soaring energy prices have more than wiped out the initial savings.

Citing everything from soaring Bay State electric rates to 300 percent increases in California wholesale prices, and big rate jumps in deregulated states including New York, Montana, and Pennsylvania, the report said: "Any state that has not restructured should not. States that can slow down or stop should do so." Twenty-two of the 50 states are currently at some stage of restructuring their electric industries…

When Ed Riley, operations director for California's electric grid, headed to work before dawn on Jan. 17, he knew it was going to be another bad day for the state's experiment with deregulation.

A cold snap in the Pacific Northwest had increased demand for power, reducing what could be imported into California. Low water levels flowing into hydroelectric dams had reduced the state's own power supply. Then, that morning, Riley got word that a malfunction had forced the closing of Duke Energy Corp.'s 1,000-megawattgenerating station at Morro Bay, halfway between San Francisco and Los Angeles. Within hours, Riley knew, much of California would be out of electricity. From a windowless control room in an office park outside Sacramento, Riley and a dozen colleagues in the operations control center began telephoning as far away as Mexico and British Columbia in a desperate search for power to import. Among the calls was one to Duke, which had an idle, inefficient, gas-fired unit at its Chula Vista station near San Diego.

Under California's environmental regulations, the Chula Vista unit could operate only a limited number of hours each year, which Duke preferred to save until summer, when wholesale prices are at their highest. But with blackouts beginning to roll across the state and Riley threatening to use extraordinary powers to force its hand, Duke officials offered to fire up the unit -- for $3,880 per megawatt-hour, the highest price ever charged in the state.

Duke officials later acknowledged that the price was many times what they thought it would cost to generate the power. They also calculated that, with several of the state's biggest utilities on the verge of bankruptcy, there was a 1-in-5 chance that they would ever get paid. Most of the proposed fee, executives said later, represented a "credit premium."

Grid officials were in no position to say no. As exorbitant as it might be, the $3,880 megawatts would still be less than the cost to the state's economy of an afternoon of idle aluminum smelters, oil refineries and computer-chip plants. Reluctantly, they agreed to pay the price. The blackouts were over by mid-afternoon, but the political sparks had just begun to fly.

In Washington, the dispute over California's electricity deregulation came down to a single question: Should the federal government step in and cap the wholesale price of power?

To Californians, caps seemed like the quickest and easiest way to bring down prices and prevent generators from profiting from the energy shortage.

But to the power industry and its supporters in the Bush administration, price controls would represent an unacceptable return to the bad old days of government regulation. By keeping prices artificially low, they warned, price caps would only make the situation worse over the long run by discouraging consumers from conserving and investors from building new plants.

That's what every student is taught in Economics 101. But if they stick around for "Economics 101.25," according to Alfred Kahn, the Cornell University economist who deregulated the airline industry as chairman of the Civil Aeronautics Board, students learn that there are some markets in which companies are able to raise prices above competitive levels by withholding supply or engaging in other strategic behavior. When firms have such "market power," Kahn's textbook calls for some form of government price controls.

Whether the six independent generating companies operating in California exercised market power remains a topic of hot debate and extensive litigation. Unquestionably some of the price increase reflected the rising cost of natural gas and environmental emission credits. And even in truly competitive markets, prices are expected to increase when demand outstrips supply. In California, however, independent researchers found other factors at work.

In a study commissioned by Southern California Edison, researchers Paul Joskow of the Massachusetts Institute of Technology and Edward Kahn, a private economist, asserted that by closing plants for repair at crucial times, generators created an artificial scarcity that forced up the price of power on the short-term market. Subsequent data confirmed that there were at least four times as many scheduled and unscheduled plant shutdowns in the fall and winter of 2000-2001 as in the previous winter.

In March, the California wholesale market and grid operator, known as the Independent System Operator, or ISO, submitted two other studies contending that the generators not only routinely withheld supply but also had collectively gamed the bidding system, which taken together accounted for one-third to one-half of the increase in wholesale prices. The ISO estimated this exercise of market power cost California consumers $6 billion last year.

The study revealed that the rules of the hourly auctions made it possible for a small number of generators to manipulate prices to their advantage. Under those rules, generators were allowed to submit up to 10 bids to each hourly auction, each bid for a different batch of electricity. The power exchange would rank the bids from least to most expensive, then go down the list until it had enough bids to satisfy the expected demand for power during the period. The highest bid accepted became the price paid to all bidders. Through that process, the market for electricity was supposed to mirror the workings of most other commodity markets, in which all producers receive roughly the same price on a given day.

According to the ISO report, however, the generators, anticipating tight supplies, submitted such lopsided bids that the only explanation was market manipulation. Typically, the generators would bid in most of their power at prices that reflected the actual cost of producing power, as would be expected in a competitive market. But for the final one or two increments of power, the companies submitted bids that jumped to levels three, five, even 10 times the competitive bids, knowing that in past rounds that their rivals were doing the same. Such strategies would guarantee a lucrative outcome for all the companies whether their last bid was accepted or not.

No one has suggested that the generators illegally got together and agreed to collude in this strategy. But in markets with open bidding and a limited number of participants, economists say, it is possible to accomplish the same thing simply by signaling intentions in the structure of bids at each hourly auction. The strategy works as long as supplies are tight and no competitor tries to gain advantage over the others by offering all its power at competitive prices.

The generators and their consulting economists, in their analyses, attempt to cast doubt on the this "market power" theory. But with generator profits soaring, even longtime advocates of deregulation found it hard to believe that what was happening in California reflected the workings of a healthy, competitive marketplace.

"Clearly when you have power sold at $3,880, it goes beyond any conventional definition of scarcity," said James Hoecker, a former Federal Energy Regulatory Commission chairman who for months resisted calls for price control. "What you've got there is market power . . . that was produced and facilitated by bad market design."

In June, FERC finally acknowledged that the California market had become dysfunctional and voted unanimously to impose bid caps on the generators in California and throughout the western grid.

As for the infamous $3,880 megawatt-hours, the commission found that the "just and reasonable" price should have been $273 and ordered Duke to return any money collected over that amount. As it turns out, however, there is nothing to return. As Duke officials had feared, they have been paid much less -- only $70.22 -- for each of those megawatt-hours.

Previous Morro Bay article:

Duke Energy to Sell California Plants?

It was only a little more than a year ago, before the blackouts and bankruptcies and skyrocketing prices, that just about everyone thought it a fine idea to deregulate the nation's electricity industry.

Deregulation of air travel, trucking, natural gas exploration and telephone service had delivered more choice and lower prices for most consumers. So it stood to reason that the same benefits could be had by bringing free-market competition to electricity, which was still produced and distributed almost everywhere by a single company under tight government regulation.

"We were so convinced that the old system of regulated monopolies was so inefficient that we couldn't go wrong -- that even a flawed market would be better than the old system," said William Massey, a member of the Federal Energy Regulatory Commission.

Now people aren't so sure.

In California, the earliest and boldest experiment, deregulation has become synonymous with corporate greed, government incompetence and the failure of free-market economics. During the past year, California has suffered through power blackouts and rationing while its annual electric bill jumped at least fivefold, prompting federal regulators to impose price controls. With the state's largest utilities in or near bankruptcy, the state government had to step in and buy $9.5 billion worth of power on their behalf.

Nationally, the California experience has slowed the rush toward deregulation to a cautious crawl. Of the two dozen states that had begun deregulating electricity, six -- Oregon, Nevada, Oklahoma, Arkansas, West Virginia and New Mexico -- have put the process on hold, while others that were considering it have backed away. A recent poll of utility regulators by RKS Research and Consulting of New Salem, N.Y., found that three-quarters "expect the California situation will either stop or decelerate restructuring in their states."

This series will explore several of the problems that have plagued electric deregulation in California and across the country -- the economic flaws in the design of the newly competitive markets, the physical bottlenecks that prevent power from getting to where it is needed, and the behind-the-scenes political battle between the old-line electric utilities and a new breed of merchant energy generators and brokers. Although few experts consider it advisable or even possible to return to the old regulated monopoly, many acknowledge that deregulation has fallen short of its promise.

"The California debacle has distracted people from noticing that some of these other markets aren't working so well for many of the same reasons as California," said Kenneth Rose, senior economist at the National Regulatory Research Institute at Ohio State University. "We are not getting the intended benefits. . . . It's just very hard to get these markets to operate competitively. And it's going to require a lot more refinement than simply slapping on temporary price caps."

In New York, regulators have imposed price caps similar to those in California after concluding that generators manipulated the wholesale market last year to raise prices above competitive levels.

In Montana, the decision by the state's utility to sell all its generating facilities to a single Pennsylvania firm has resulted in industrial wholesale power prices 10 times what they were before. More than 1,000 people have lost their jobs as sky-high electric rates caused plants and mines to close.

In New England, officials from several states began an investigation after private studies found that generating companies had artificially driven up the wholesale price of power by shutting down plants and withholding supply, particularly during last summer's heat wave.

Perhaps the most successful deregulatory regime is in Pennsylvania, which participates in a wholesale market with New Jersey, Delaware, Maryland and the District of Columbia. Even there, however, there has been backsliding. In the Philadelphia area last year, nearly two dozen companies competed to provide households and small businesses with retail power, most offering prices below those charged by the old monopoly. As the price of wholesale power has risen to the level of the retail price cap still in effect, however, the number of competitors has shrunk to two.

For those trying to figure out where to go next, California has become the case study in how not to proceed. Opinions differ on what combination of bad luck, bad design and bad execution doomed the California experiment. There is, however, general agreement now that most of the missteps flowed from the faulty assumption that consumers could get all the benefits of free markets without assuming their risks.

More broadly, there is a newfound recognition even among the most market-oriented economists that the qualities that once made the electric market a "natural monopoly" still persist. Creating a market is the easy part. Creating a genuinely competitive one is likely to be more of a challenge.

"I sometimes think people involved during the last four years haven't gotten the message that this isn't a piece of cake," said Paul Joskow of the Massachusetts Institute of Technology, whose early work provided the foundation for electric deregulation. "There were good economic reasons why you had regulation in the first place. You have to respect those realities. It's not something that you can snap your fingers and say you have a competitive market."

A number of experts, in fact, recommend dropping the term "deregulation" altogether because it conveys the false impression that electricity, like copper or cabbage or most other commodities, can be left to the market, with little or no government involvement.

"The magic of the market is no sure thing," said William Hogan, a utility economist at Harvard University. "Electricity is an example of an industry where introducing competition leads not to less regulation, only different regulation. [These] markets are made, they don't just happen."

Most consumers take for granted that when they flip on the switch, the juice will always be there. That was true only because regulators gave electric companies the mandate and the incentives to ensure it. By setting rates high enough to allow the companies to recover all their reasonable costs plus a fair profit, the system effectively invited the utilities to build too many generating plants and build them as expensively as possible.

For consumers, the cost of that reliability was tucked quietly into the price of each kilowatt. But as the cost of building nuclear power plants sent rates soaring in California and many other states, big energy-consuming businesses complained that the cost of power would soon drive them out of the state. A competitive market, they argued, would generate more prudent investments and lower prices.

A competitive market, however, isn't as good at providing reliability. Any firm that does the "responsible" thing by maintaining a reserve capacity in case of a sudden rise in demand runs the risk of losing out to competitors that had lower prices because they maintained no reserve.

Most experts say that totally unregulated electric markets will naturally swing between periods of too much capacity and too little. Companies would tend to wait until there was a shortage looming before adding new plants, and then all rush in with too many plants, creating a glut.

"The energy market is not capable, by itself, of keeping supply and demand in balance," said Lawrence Makovich of Cambridge Energy Research Corp., a firm that consults widely in the electric industry. "There's a natural tendency toward boom and bust cycles."

In that respect, electricity is a lot like gasoline, steel and other commodities that require big, expensive plants to produce them. In such industries, economists say that supply is "inelastic," meaning it does not quickly or easily adjust to changing demand. In the case of electricity, this inelastic quality is magnified by the fact that it can't be stored or stockpiled. While big users of steel and gas routinely try to moderate price swings by filling tanks and warehouses when prices are low and supply is plentiful, electricity users cannot.

If the supply of electricity is inelastic, demand for it is even more so.

In some respects, that's just a fancy way of saying that because electricity is among the most vital commodities of modern life, people are willing to pay high prices to avoid going without it.

Over time, of course, consumers and businesses can figure out ways to use less power if the price gets too high. In the short run, such conservation efforts are hampered by the fact that consumers don't find out what the price is until a month or two after they've consumed it. And even then, because electricity is billed at a single, average rate for all the kilowatts they use, there is no incentive for them to reduce consumption during periods of peak demand, when supply is scarce and the cost of producing power is the highest.

In such a market, "even small changes in supply or demand lead to big swings in prices," said Severin Borenstein, director of the University of California Energy Institute.

"Consumers can't stand the kind of volatility that a completely free market provides for a commodity as vital as electricity," said S. David Freeman, chief energy adviser to California Gov. Gray Davis. "These prices got to the point where they threatened to trigger a recession. They also violate any sense of fairness. That's why [the state and federal governments] have to step in. The idea of a completely free market is not compatible with the needs of society."

If the underlying economics make it difficult to design a workable plan for electric deregulation, the politics make it almost impossible. No political issue was more contentious in California than the question of what to do about billions of dollars that the old regulated utilities had invested in plants that were so expensive to build, or so inefficient to run, that they could never produce power at competitive prices.

Environmentalists and consumer activists argued that utilities and their shareholders should suffer the consequences of those unwise investments by writing off the billions of dollars in "stranded costs" as losses. The utilities argued that it would be unfair to make them pay the full penalty for investments that were incurred with the approval -- in some cases, at the insistence -- of state regulators.

In California and a number of other states, the regulators and politicians hit upon a compromise: Consumers would reimburse the utilities for their "stranded costs," but only out of savings that would flow from deregulation. Deregulation, after all, was projected to cut the average cost of generating electricity from roughly $60 per megawatt-hour to $30. The utilities were allowed to keep the retail price about $60 (equal to 6 cents per kilowatt) and collect the difference between wholesale and retail until they had recouped all their stranded costs. After that, retail prices would fluctuate with the wholesale price.

In California, however, deep distrust of the utilities led officials to make several other changes to the design of the new system that proved to be its undoing.

The first was to encourage the existing utilities to sell most of their power plants to independent merchant generators such as Duke Energy and Mirant. The sales would allow the utilities and regulators to calculate the total value of the "stranded costs" to be recovered without years of contentious hearings and court battles to determine what the plants were now worth.

A second requirement was that all generators had to sell all their electricity to a single state-run power exchange, which would run what amounted to a continuous computerized auction for wholesale power. With a single power pool, state officials figured they could establish a level playing field, with upstart competitors able to buy all the power they needed at the same price, and under the same conditions, as the old monopolies such as Southern California Edison and Pacific Gas & Electric. By preventing utilities from signing long-term contracts, state officials hoped to ensure that consumers would get the full benefit of falling prices that they were confident deregulation would produce.

In the two years after California began deregulation, the wholesale price of power fell even more than had been predicted, allowing the old utility companies to recover their stranded costs ahead of schedule. Dozens of competitors sprang up to enter the newly deregulated market. Other states began to consider adopting the California model.

By the spring of 2000, however, just about everything that could go wrong in California did.

With the California economy growing faster than expected, demand for power quickly caught up with the supply. Although generators eventually responded by proposing new plants, few would be ready much before 2002. Suddenly, what had been a buyer's market with too much supply turned into a seller's market with too little.

Later in 2000, the price of the natural gas used to produce most of the state's peak load power increased by five times. Because plants were running longer to keep up with the increasing demand, the cost of emissions permits under California's stringent clean-air regulations soared.

The decision to require that all power be bought on the spot market put the utilities that delivered it at the mercy of the generators that produced it. With retail rates capped, PG&E and SoCal Edison were forced to sell power for less than it cost them to buy and produce it. After piling up $9 billion in debt, PG&E filed for protection from its creditors in federal bankruptcy court. SoCal Edison is on the brink awaiting a bailout from the state legislature.

For the moment, the sense of crisis has abated in California. Because of lower-than-normal temperatures and conservation, blackouts predicted for the summer have yet to happen. Natural gas prices have fallen back to normal levels, while federal rules effectively cap the wholesale price of electricity on the spot market at just under $100 per megawatt-hour.

With California knee-deep in the electricity business and billions of dollars in lawsuits hanging over the industry, it could be years before a genuine retail market can develop.

Since the California energy crisis, a consensus has emerged among regulators and economists on five "fixes" that could give deregulation a second chance, not only in that state but also across the nation:

• Long-term contracts. Instead of preventing them, experts say utilities should be required to arrange in advance for at least 75 percent of their power. While studies show that long-term contracts will probably raise the average price of electricity over the long run, they will also prevent much of the price volatility that consumers find so difficult to accept. California is already wrestling with such trade-offs. At Gov. Davis's direction, the state has contracted for more than half of its power needs several years into the future. And while the average prices on those contracts are half of what the spot prices were last winter, they are now two and three times what power is selling for on the wholesale market. As a result, the state has been in the politically embarrassing position of having to sell some of the unneeded power it bought under long-term contracts, at an estimated loss so far of $30 million.

• Capacity reserves. For a competitive market to deliver reliability, every utility should provide a fair share of the system's reserve power. The simplest way would be to require each electric company to buy 10 percent or 15 percent more power than it expects its customers to demand, and include the cost of the power it doesn't sell into the price of the power it does.

• Real-time pricing. Everyone agrees on the need for electricity pricing schemes that would encourage households and businesses to use less power when supply is scarce and the cost of producing it is high. The obstacle is the standard electric meter, which keeps track of how much power is used but not when. New meters, though costly, are available that would allow the utility to charge different rates at different hours, depending on prevailing wholesale prices, while letting customers know what those rates are in real time.

• Independent grid operators. In California and other regions, one reason for shortages and price spikes is that there are not enough long-distance transmission lines to get power from places with too much power to places with too little. The old regulated utilities that own the lines are not eager to expand capacity, or even make existing lines available to competitors, knowing that it will lower prices and profits. But federal regulators, with White House support, are proceeding with a plan to wrest control of the lines from old-line utilities and state regulators and invest them in a few independent regional grid operators regulated by the federal government.

• Vigorous antitrust enforcement. Even the most ardent market-oriented economists warn that the peculiar economics of electricity also require the government to make aggressive, and even novel, use of the antitrust laws. In other deregulated industries such as airlines and railroads, the initial burst of competition and price cutting often gave way to consolidation in which a few companies dominate the market. Those firms, in turn, found ways to manipulate supply and keep out competitors while studiously avoiding getting into price wars with one another. Economists call those oligopoly markets, and there are already signs of one developing in electricity, with fewer than a dozen companies consolidating their hold on most of the nation's privately owned generating capacity. "Historically, there have always been troubles in the transition from regulation to deregulation, and electricity is no exception," said Robert Pitofsky, who stepped down this spring as chairman of the Federal Trade Commission. "It usually takes a decade to work things out," Pitofsky said. "But in that period, the government has to be especially careful about concentration. Trading a regulated monopoly for a unregulated oligopoly is not a good deal for consumers."

Although California power prices fell during the second quarter, Duke Energy's average charge rose.

The Charlotte company charged its dozens of wholesale California customers - the state, utilities and other power traders and generators - an average of $145 per megawatt hour. That's up nearly 7 percent from $136 during the first three months and nearly double last year's average of $76.

A typical Carolinas home uses one megawatt hour in a month - at a retail cost of $73.

California power pricing - which started gyrating wildly last year as the state lurched into an energy crisis - began moderating in May as unexpectedly cool weather and conservation reduced demand. New power plants also helped push down wholesale pricing as suppliers faced more competition.

The rise in Duke's average price, even as market rates came down, is the latest twist in California's evolving power disaster. Duke - one of California's largest generators - sells about 90 percent of its power on long-term contracts. Such contracts are typically priced well below market rates when they're signed, but because the contracts prices are set, they don't quickly reflect changes in market rates.

"We made our commitments a long time before the prices went down," said Nancy DeSchane, a senior vice president at Duke's western power-trading offices in Salt Lake City. "Our long-term, fixed price contracts provide stability to customers. If prices rise, Duke holds its prices. If prices fall, Duke holds its prices."

Duke's average quarterly price includes all power delivered during that time on contracts that were signed weeks, months or even years earlier. The price also includes power sold to the state and others in the volatile, last-minute market.

California - buying power since January on behalf of its insolvent utilities - has been criticized for long-term contracts signed with power suppliers months ago when prices were higher.

Critics say the state should have waited until prices came down before committing to long-term contracts. The agency buying for the state is the California Department of Water Resources, which now supplies about one-third of the state's power.

During the first quarter, Duke was the lowest-priced of the agency's large providers. At $146 per megawatt hour, Duke's price was almost the lowest of all providers. The agency will release second-quarter pricing in September. During the second quarter, Duke also sold a very small amount of power to another state agency for $2,100 per megawatt hour, according to federal documents. That's the highest price listed for Duke and three other large California suppliers.

Earlier this year, Duke sold power to California for $3,880, more than double the highest previously reported price. The charge, first reported by The Observer, became a rallying cry for California legislators demanding federal action to curb power prices.

Several state and federal investigations and some lawsuits accuse Duke and other generators and power traders of price gouging and market manipulation. Generators deny the charges.

Duke entered the California market in 1998, buying three power plants, which utilities sold as part of the state's electric deregulation plan. With a fourth leased plant, Duke generates 5 percent of the state's power.

Duke and other generators say inadequate supply drove up California's wholesale power prices.

In June, the largest rate increase in the state's history took effect as state regulators passed rising wholesale costs on to ratepayers. Californians now pay as much as three times the rate Duke Power charges in the Carolinas.

All of Duke's top-priced sales this year - including the $3,880 and $2,100 charges - have been to the California Independent System Operator. The agency runs the transmission system serving about three-fourths of the state.

Running the system means balancing power demand with supply. So sometimes, the agency has to buy power to make up shortages. Those purchases are made on the volatile last-minute market.

When California power prices shot out of control last year, the state's utilities quickly ran out of cash. As they quit paying, the system operator couldn't pay its bills.

Because of that, Duke levied a poor-credit surcharge of 80 percent on sales to the agency. The company considered the worst-case scenario of bankruptcy in calculating the surcharge. In bankruptcy proceedings, creditors usually have to settle for a small fraction of the original bill.

Duke continued imposing the surcharge in the second quarter because the agency still wasn't paying its bills, DeSchane said.

Last month, at the order of federal regulators, Duke issued new invoices to the agency, reducing the amount due by $20 million. The reduction applies to the power sold at $3,880 as well as some priced at $1,170.

The $20 million write-down comes from a $110 million reserve Duke set aside last year to cover money it doesn't expect to collect from California sales.

California is pressing for refunds of nearly $9 billion from generators, including Duke, and others selling power in the state from May 2000 through May 2001. A federal mediator said last month that the amount due the state is closer to $1 billion. The mediator also said generators might end up owing nothing because California utilities owe them more than $1 billion.

As prices moderated and the predicted summer of blackouts hasn't materialized, the frenzied assault on Duke and other generators has quieted.

Duke says it has had no requests to review 120 boxes of documents it produced in response to demands from a state Senate committee investigating claims of power market manipulation and price gouging.

The boxes sit in an office the company rented in the state capital of Sacramento.

Duke also hasn't had any requests from the grand jury seated last month in Sacramento County. In June, the state's attorney general said he wanted a grand jury investigation, the first indication that the state Department of Justice was considering criminal as well as civil charges against generators.

Grand jury proceedings are confidential, so Sandra Michioku, a spokeswoman in the attorney general's office, said she can't even say if it is considering a case against generators.

"If they were considering it, it's not something that would be done in a week," she said, adding, "Our investigation within the attorney general's office is proceeding."

In case you missed it, here’s the first paragraph of staff writer Stella M. Hopkins’ front-page story in Wednesday’s Observer: “Duke Power and other Carolinas electric utilities are among those meeting behind closed doors in Washington, crafting sweeping changes in who delivers electricity across the Southeast – changes critics say could jeopardize service and increase costs”

What’s going on? The companies are talking with each other and a federal mediator about creating a grid of high-voltage lines to serve 14 southern states form North Carolina to New Mexico.

Why is the public shut out? Because the mediator, administrative law judge Bobbie McCartney, said so. Despite her arbitrary decision, these discussions are not simply the business of the power companies. The agreements made in the secret secessions may affect the supply and cost of energy throughout (the) region. The discussions should be held in full view of the consumers who’ll pay for it.

Many factors contribute to a crisis in public confidence in our national energy system. Among them: the California deregulation debacle, the secret meetings that produced President Bush’s pro-producer energy plan, and the lingering public suspicion about manipulation of energy supplies.

You’d think that federal regulators would want to demonstrate that nobody is conspiring in secret against the public’s welfare. Instead, the hearing ordered by the Federal Energy Regulatory Commission have added to the suspicions.

A FERC spokesman explained, “We think the most expeditious way to work I out is for the parties to get together in a closed room and kind of hash I out.” Translated: This way is easier for us. The trouble is, this way bars an important party from the talks: the customers and citizens whom the power companies and the government serve.

Leon Jacobs, head of the Florida Public Service Commission, has it right: “How these decisions are reached is as important as what decisions are reached,” he said. He and other state regulators share “a very serious concern that much of what’s occurring is a forgone conclusion.”

So do we. FERC should wake up and serve the public.

Duke Power and other Carolinas electric utilities are among those meeting behind closed doors in Washington, crafting sweeping changes in who delivers electricity across the Southeast - changes critics say could jeopardize service and increase costs.

The 45-day negotiation, ordered by the Federal Energy Regulatory Commission, is part of a milestone in the country's move toward electric deregulation. Nearly 10 years after Congress passed the Energy Policy Act paving the way for deregulation, the commission is grappling with ending utilities' control of the power grid. That's the giant towers and high-voltage power lines.

At the July 17 start of the meetings, which include utilities serving about a dozen states, the energy commission mediator ordered reporters out. The mediator, administrative law judge Bobbie McCartney, also imposed a gag order on participants. Dow Jones news service quoted the judge as saying the process is a "critical one for the people of the Southeast region." She also said, "My policy is not to engage with the media."

The commission closed the meetings under its "dispute resolution" rules.

State regulators and public interest advocates find the secrecy disturbing.

"This stuff seems so arcane, dry and dusty, but the decisions these people make are critical to deciding whether or not consumers will be protected," said Anna Aurilio, legislative director for North Carolina and other states at the U.S. Public Interest Research Group. "Meetings behind closed doors with large powerful utilities don't bode very well for consumer protection."

California's blackouts and double-digit power rate hikes brought harsh national attention to deregulation's downside. The energy commission was accused of doing too little too late.

"This is not an agency that gives me a lot of confidence in their ability to protect consumers," said Aurilio, adding that California should be a warning against complacency.

Late Tuesday, McCartney hadn't responded to requests for comment. Commission spokeswoman Barbara Connors said: "We think the most expeditious way to work toward a proposal is for the parties to get together in a closed room and kind of hash it out." That way, she said, "they're not standing up, knowing they have an audience.''

She added: "I don't want people to think some decisions are going to be made here that will be ironclad and no one will have an opportunity to comment."

Federal commissioners would review any proposal, with "opportunity for public comment," Connors said.

That's not enough for Phil Bradley, the S.C. utility commissioner for transmission issues. "I say, let the sunshine shine in at the beginning, not at the end…"

Cheney Energy Task Force Under Investigation

Although mired in the state's power crisis, energy companies spent more than $6 million to influence state government in the first half of the year, with the bulk going to sway voters to help bail out Southern California Edison.

Campaign finance and lobbying reports from the major utilities and electricity-generating companies show their contributions to politicians down from previous years, as many legislators have declined energy-related money. Citing tough times, Edison has said it has stopped donating money to political candidates.

But that hasn't carried over to other government-related spending.

Edison International alone spent more than $5.5 million on an advertising campaign aimed at stimulating voters to pressure lawmakers to bail out Southern California Edison and fend off bankruptcy, lobbying reports show…

Duke Energy spent $99,735.44 in what a company spokesman called a response to the "onerous" legislation relating to energy companies.

"We need to step up the activity," said spokesman Tom Williams. "We have a lot at stake in this state. We're a major player in terms of bringing new generators and as a result we're investing more in our lobbying effort."

In particular, the company has lobbied against proposals that would impose extra taxes on energy companies if they make "windfall profits" or exclude them from a law that keeps property taxes down, Williams said.

Duke Energy approached Davis in March with a secret deal that offered monetary concessions if the state dropped lawsuits and investigations into its alleged price-gouging. The offer, made in a 17-page letter to Davis, was Duke's "wish list," Maviglio said.

Heller said the money energy companies have spent is a small slice of the "billions they've gained as a result of the energy crisis," adding that the power companies want to continue energy policy that has failed everyone but them.