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SACRAMENTO — California’s energy crisis may claim a substantial victim: deregulation itself. 

“Never again will we embrace a free market – it’s too expensive,” Gov. Gray Davis’ chief energy adviser, S. David Freeman, predicted Wednesday. 

“The marketplace is blind to the need for cleaner air, it is blind to the needs of consumers in a shortage, and it produces a shortage with its volatility,” the former head of the Los Angeles and Sacramento municipal power agencies told a Senate committee plotting California’s energy future. 

The state’s flawed 1996 law freed wholesale electricity rates while capping retail power prices, leaving the state’s three investor-owned utilities trapped in between. 

Now the state has signed $43 billion worth of long-term energy contracts, and created a power authority that could build its own power plants. 

Its Public Utilities Commission stands ready to bar businesses from freely swapping power providers – the incentive that prompted deregulation in the first place. 

Davis wants lawmakers to approve buying the electricity transmission lines from two of the three cash-strapped utilities, and wants to buy the lines of the state’s largest utility, Pacific Gas and Electric, out of bankruptcy court. 

Consumer groups say the state should buy the utilities’ hydroelectric generation and other assets as well, as part of a return to regulation and a shift to publicly owned power supplies. 

“Look what deregulation and handing our electricity supply over to a bunch of private companies has done for us – 50 percent (rate) increases and $20 billion in surcharges. Thank you very much, but no thank you,” Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights said last week. 

He argued the state should buy all three utilities at their current “fire-sale prices” – “We’re talking about picking them up for a dime-for-a-dollar when they’re totally out of cash.” 

Enron Corp. President and CEO Jeffrey Skilling is among those urging the state to do the opposite and create a truly open market. Public power only drives up costs and lowers accountability, he said. 

“If you had an open competitive marketplace and not put restrictions on that marketplace, I guarantee you the price of power in California will be significantly lower,” he said in a San Francisco speech last week entitled, “The arrogance of regulation.” 

“California needs to get deregulation right and the rest of the country needs to get deregulation right,” Skilling said, shortly after he was hit by a pie thrown by an irate electricity consumer. 

That means giving consumers more immediate price incentives, other free marketers told the Senate Energy Committee Wednesday. 

Tiered electricity rates would reward consumers who confine their electricity use to lower, cheaper “tiers” of energy consumption. 

Real-time electricity meters would let consumers see the price they are paying at any given time of day or night, encouraging them to, say, run their clothes dryer at 3 a.m. when power would be cheaper. 

Business’ demand for choice drove the deregulation movement, when industries sought the ability to choose among energy wholesalers or generators rather than being locked into buying their money through a local utility. 

But PUC President Loretta Lynch predicted the commission will block that choice Tuesday, for fear departing customers will leave residential and other small consumers to pay a larger share of the $8.2 billion the state has authorized for power buys. 

The move was panned by generators and business groups as a step backward. 

Southern California Edison Vice President Bob Foster predicted the state will end up regulating all three legs of its power grid: generation, transmission and distribution. Regulation is needed to smooth out the boom-and-bust business cycle that California has seen so graphically in the last year, he said. 

Freeman predicted the state will likely wind up with some sort of “hybrid” of government regulation that will rein in the excesses of a free market. 

“It’s impossible to say at the moment whether the (investor-owned) utilities will revive,” he warned. If they do, he said their corporate boards may opt to chase the higher profits of the open market while shedding their transmission and distribution systems to state control. 

Yet Freeman and California Energy Commission Chairman Bill Keese predicted residential and business consumers may soon see the sort of freedom of choice they now could only dream about, once fuel cells, photovoltaic generation and micro-turbines become commonplace. 

“The future perhaps belongs to a whole new set of competitors,” Freeman said. “These central station power generators are not going to have it all to themselves.”