Has Bush Seen The Light?

By Karen Tumulty and Michael Weisskopf

Conservatives hate to meddle in the markets. So it would be hard to find a more unlikely advocate for federal price controls than California Congressman Duncan Hunter, whose voting record nearly every year gets a 100% rating from the American Conservative Union. But when the owner of a small metal shop in El Cajon showed Hunter his December electric bill--$115,000 for the month, four times what the man had been paying before the state's electricity crisis began--Hunter changed his mind. "I came to the conclusion that this wasn't free enterprise," the San Diego County Republican says. On the day George W. Bush was inaugurated, Hunter introduced a bill authorizing the new Administration to impose caps on "unjust and unreasonable prices in the electric-energy market."

The Administration wasn't interested. For the past six months, Bush and Vice President Dick Cheney have rarely missed a chance to say what a huge mistake government controls of California energy costs would be. But the argument has been slapping up against an obvious political problem: Bush's free-market principles mirror the financial interests of his backers in the energy industry--top executives who are cashing in stock options for tens and hundreds of millions of dollars while their corporate profits are tripling. "The consequence of the inaction has been a massive transfer of wealth from the ordinary citizens of California to rich energy barons in Houston, Charlotte and Atlanta," California's Democratic Governor, Gray Davis, told TIME. The state's wholesale energy bill grew from $7 billion in 1999 to $27 billion last year, and could reach $55 billion this year.

With 54 electoral votes, California isn't used to getting the cold shoulder from Washington. But if the plight of the state's ratepayers hasn't forced Bush to rethink the wisdom of price caps, the plight of its Republicans may have. Control of the House in next year's midterm elections could depend on half a dozen endangered G.O.P. seats in California. That's why House majority whip Tom DeLay told Bush two weeks ago that he shouldn't count on Republicans to beat back price caps. There may be collateral damage at the other end of the Capitol as well. Sources say Senate minority leader Trent Lott has warned Bush aides that California's problems could infect 10 Western states, endangering Colorado's Wayne Allard, Idaho's Larry Craig and Oregon's Gordon Smith. And while Bush may be writing off California's votes, plenty of Democrats covet them, including putative presidential contender Joe Lieberman, whose first act as a new committee chairman last week was to launch hearings into the state's energy crisis.

So Bush is in a bind--caught between his principles and moneymen on one side and the prospect of summertime blackouts, spiraling prices and mutinous legislators on the other. He needs a way out, and may have found one. This week a little-known agency called the Federal Energy Regulatory Commission meets in a special session, its first with two new Bush appointees in place. For the past year, FERC has ignored pleas for sweeping electricity price controls in California and other Western states. Last fall, at a congressional subcommittee hearing in San Diego, chairman Curtis Hebert suggested that consumers should learn to live with higher electricity prices. "If the truth kills Granny," he declared, "let her die." When things got really bad last spring, FERC limited prices only during the worst power emergencies. But this week FERC is expected to approve full-time price controls.

Why is FERC relenting? The argument against price caps is that they do infinitely more harm than good, as Jimmy Carter and Richard Nixon discovered when they allowed government bureaucrats to clog the gears of a free market. Price caps, says Energy Secretary Spence Abraham, are merely a formula for "an increase in the scope, duration and frequency of blackouts."

But Davis, along with virtually the entire California congressional delegation, Democratic and Republican, says the market now is anything but free. It is being manipulated, in their view, by energy companies that have wrung billions out of California consumers by squeezing supply to create artificial shortages. Why else, they say, would California power suppliers like Enron Corp.--a Houston-based trading giant headed by one of Bush's top donors and informal energy advisers--be seeing their revenues jump 281% in the first quarter? Even a respected free-marketeer like Alfred Kahn, the father of airline deregulation, has had enough. "The notion that caps automatically interfere with the increase of supply in the electric industry is absurd," he says.

Word of FERC's expected action comes as Californians are getting a break from towering prices. Last Wednesday, Davis says, the state paid only $29 million for its power--a sharp drop from the $100 million a day it spent in mid-May. While FERC credits its own emergency measures for the lower costs, Davis political adviser Garry South says it is more likely the result of unseasonably cool weather and power companies "trying to lay low until the posse passes by."

For Bush, the beauty of having the nominally independent FERC send an EMS team to Granny's house is that it allows him to keep his distance and take credit at the same time--to escape the bind without seeming to try. At a frosty meeting with California lawmakers last week, Cheney repeated his opposition to price controls even as he suggested help from FERC could be on the way. The White House believes in the free market, but it will crow this week that FERC acted because Bush had called on it to be vigilant. "He has not been looking for the short-term political fix but addressing long-term problems," says Gerry Parsky, who chaired Bush's California campaign. "But what he has done is tell FERC to do its job."

Having it both ways requires some semantic gymnastics. FERC draws a distinction between "price caps," which impose a maximum allowable price, and the more flexible "price mitigation," which sets prices based on a formula that factors in producers' costs.

Fair enough. But the White House is taking pains to get its story straight. At a meeting in economic adviser Larry Lindsey's office, aides were told to use the poll-approved "price caps" in place of the harsher "price controls." Republicans on Capitol Hill are thumbing through their thesauruses for other ways to describe the abrupt change of course. To some, the idea of telling their allies in the energy industry to give back their "unearned enrichment" seems more palatable than slapping them for "price gouging." And for those who find "caps" too strong to take, there's always "market mitigation."

But how they spell relief won't matter if FERC's action doesn't work. "It's better than nothing but not nearly as attractive as it sounds," says Davis, who will tell Lieberman's committee the same thing this week. "The way around it is quite obvious. Generators simply sell the product to a middle person--which they do anyway--and that marketer has no obligations under the order." Also, the order will not get back the $7 billion California estimates it has been overcharged by electricity suppliers since last May.

Even if FERC's order proves effective, Republicans will have salvage work to do. Polls show Californians disapprove of how Bush has handled their biggest problem; some even think he's out to get them. Bush and Davis talked past each other during a meeting in Los Angeles last month, when Bush was on his first presidential trip to the state. But real negotiations were under way elsewhere. Sources tell TIME that political adviser Karl Rove met privately with outgoing Republican mayor Richard Riordan to press him to enter next year's race for Governor against Davis. Rove and top Republicans have kept the pressure on, letting Riordan know that Bush moneymen are waiting with checks if he gets in, and sharing G.O.P. polls with him that show Davis may have been fatally wounded by his handling of the crisis. While the Governor claims he inherited the state's deregulation mess, even Democrats accuse him of ignoring it until it was too late. A strong challenge by Riordan could not only unseat the Democratic Governor but also create coattails big enough to keep Republican House members in office.

Californians will be getting a preview of that war this week as a group called the American Taxpayers Alliance begins airing TV ads featuring fuzzy closeups of a robotic-looking Davis, claiming he is to blame for the state's energy problems. Although the A.T.A. styles itself an "issue advocacy group," funding for the ads comes from, among hundreds of other corporations, a major power generator called Reliant Energy, one of the companies California officials accuse of price gouging. (James Baker, who headed the Bush recount effort in Florida, is a director, and chairman Steve Letbetter was a top Bush fund raiser.) Republican sources tell TIME that Scott Reed, the longtime G.O.P. activist who heads A.T.A., hopes to raise $25 million to keep the ads running. Bush outside adviser Ed Gillespie, an Enron lobbyist, is raising a separate $500,000 war chest for ads attacking price caps.

Not that Davis is without resources. He is paying former Al Gore strategists Mark Fabiani and Chris Lehane $30,000 a month of taxpayer money to handle the p.r. crisis inside the energy crisis. That's despite the fact that Fabiani and Lehane--known as "masters of disaster" for their work at the White House during the Clinton scandals--are consultants to Southern California Edison, a utility at the eye of the storm.

California is only part of the G.O.P.'s energy problem. Bush's plan to boost production nationally is in trouble. In mid-April, internal House polls showed the Republicans 3 points behind the Democrats on the question of which party could be trusted more on energy issues. Two weeks ago, they'd fallen to 15 points behind. Republicans fear that will only get worse as Lieberman and two other committee chairmen convene hearings on Bush's energy policies--and his friends in the industry. Both state and federal authorities are probing allegations of market manipulation by a variety of power generators and pipeline operators.

Even if federal regulators take some of the sting out of California's energy prices, tight supplies and high temperatures will ensure that sporadic blackouts continue. It's hard to tell who will have the hotter summer--Californians, their Governor, energy executives or George W. Bush.

--With reporting by John F. Dickerson, Michael Duffy and Adam Zagorin/Washington

With reporting by John F. Dickerson, Michael Duffy and Adam Zagorin/Washington