Before there was a budget deficit, a car tax increase or drivers' licenses for illegal immigrants, the issue that first cracked former Gov. Gray Davis' political armor was the electricity crisis of 2001. Voters understood that Davis did not create the problem, but they held him responsible for what they believed was a slow and confused response that only made things worse.

Once the lights went out in California, darkness also descended on Davis' career. He never recovered from that debacle, and his slumping approval ratings left him vulnerable to the recall election that eventually cost him his job.

Now the man who replaced him, Gov. Arnold Schwarzenegger, is confronting the same issue, and while the stakes at the moment do not appear to be as high, they could be soon. Electricity reserves are minimal, and with demand growing again in a recovering economy while supplies remain stagnant or perhaps even shrink, California faces the prospect of renewed shortages in the near future.

In response, Schwarzenegger last week outlined his vision for the state's role in electricity regulation. Interestingly, he waved off the Legislature, saying that the most important work that needs to be done can be accomplished by regulators at the Public Utilities Commission, without further lawmaking. That effectively makes Schwarzenegger responsible for what happens from this point forward, a position he appears to relish.

The governor says he wants to create a vibrant two-tiered electricity system, in which the largest users - hotels, big box retail stores, factories - shop around for their own power and enter into contracts with private generators to provide it.

Smaller businesses and residential customers would remain with the regulated utilities, and the utilities would be required to go through a competitive process before buying or building new generation.

Schwarzenegger's position puts him at odds with consumer groups and Democrats in the Legislature, who have been pushing for a return to a fully regulated, monopoly utility model in which consumer choice is eliminated and everybody pays whatever it costs the utilities to produce electricity, plus their profit.

But the old-style utility model won't do in a modern world, where manufacturers increasingly look to other states or other countries for ways to cut costs. Ten years ago, Californians under that system were paying 50 percent more than the national average for electricity, and the disparity is what led to the electricity industry restructuring adopted in 1996.

That bill was a failure. But rather than simply trying to turn back the clock, Schwarzenegger is proposing that California learn from its mistakes and move forward.

At the heart of the crisis was the state's over-reliance on the volatile spot market for electricity, where utilities, and ultimately their customers, were at the mercy of daily fluctuations in the price of power. That happened because the utilities at first could not, and later would not, enter into long-term contracts with private generators for electricity. One reason they would not go there was a system that made the utilities subject to second-guessing by regulators, who wanted to approve the contracts up front and then come back later and assess penalties if, in hindsight, the deals didn't turn out to look so great.

Schwarzenegger, in contrast, is urging the PUC to fully implement a 2002 bill that would give the utilities more freedom to sign long-term contracts without the fear of retroactive review. Once that process is in place, the governor wants the utilities to move quickly to lock in supplies at today's prices, which are relatively low.

Schwarzenegger is not averse to the utilities building more power plants themselves. But he wants them to do so only after competitive bidding establishes that their proposals are better for consumers than any deals the utilities could get from private generators. This is also wise.

Finally, the governor wants the Legislature to restore the right of big consumers to buy their own electricity, as long as those who leave the utility system pay a fee to compensate the rest of us for the fixed costs of the grid and the debts we all are still obligated to pay from the 2001 disaster.

Those who oppose letting big customers negotiate their own power contracts say that doing so would let them get the best deals while sticking the little guy with higher prices from the regulated utilities. But that sounds like an argument for allowing more private contracting, not less. If the potential deals are so good, why not give everyone a shot at them?

Schwarzenegger is off to a good start here. If he follows through, he might just prevent a re-run of the crisis that began his predecessor's demise.