FTCR Warns Governor Davis Against Bailout II

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Letter from FTCR to Governor Davis

December 18, 2000

Governor Davis

State Capitol

Sacramento, CA 95814

Fax: 916-445-4633

Dear Governor Davis:

Newspapers over the weekend reported that you are presently negotiating with Edison and PG&E to force ratepayers to once again bail these companies out.

We are warning you in the strongest possible terms: don’t do it.

It’s not necessary. The utilities’ recent threats of bankruptcy/financial ruin are designed to pressure you into accepting a bailout. There is no justification for a bailout. The utilities’ characterization of their financial condition is incorrect, and their statements reckless and irresponsible. In fact, the talk itself appears to have caused the credit crisis last week.

Here are some facts that reveal Edison‘s true financial condition, for example:

  • Southern California Edison issued a $1.8075 quarterly dividend on its preferred stock last Thursday.

  • Last Thursday, Edison began a multi-million dollar television advertising campaign — the company has refused our requests to state the exact cost — informing the public of its financial woes. Claiming the Legislature forced deregulation upon them. More pressure/cover for a bailout. The company is running the ads in Sacramento, where it has no customers.

  • Edison, too, is profiting from the current crisis as much as hurting from it: 70% of its power comes from the company’s own plants, for which it receives the market price. But Edison isn’t counting its profits when pleading its financial woes,

  • The company has received $9.3 billion from ratepayers since 1998 under the “competition tax” imposed on ratepayers by the deregulation law — way more than it has paid out so far in higher energy prices.

  • Until the recent electricity hikes, Edison and its shareholders prospered from deregulation.

  • The company has been spending prodigiously in Sacramento on lobbying and campaign contributions.

  • Bryson himself earned $2.2 million in salary and other compensation in 1999, a 58% increase over the year before.

It’s not fair. The utilities have lots of lobbyists in Sacramento, so its easy to get their message of financial hardship. But think of the poor and people on fixed incomes, who don’t have their own lobbyists in Sacramento. They’re already facing doubled and quadrupled gas bills. They have no one to pass a 10% electricity rate increase through to.

Moreover, this would be the second bailout in four years for the utilities. In 1996, the state’s three utilities — Edison, Pacific Gas & Electric and SDG&E — wanted deregulation. But they were worried that their bloated bureaucracies would not be able to compete. So they demanded that ratepayers be forced to subsidize billions of dollars in uneconomic deals (like nuclear plants) on the utilities’ books. The Legislature agreed, freezing residential and small business electricity rates for four years at 50% above the national average. In exchange, the law stated that once the debts were paid off, the rate freeze would end and consumers would receive a “guaranteed” 20% rate reduction. Ratepayers have paid Edison and PG&E $17 billion so far under the “competition tax.”

Now, however, that deregulation has become a disaster, and market prices have soared, the utilities want out — and, once again, make the ratepayers pay. This is just not fair. The utilities pushed for deregulation, and have profited handsomely from it. In demanding to be in the “free market” — with a $17 billion subsidy in the form of the first bailout — the utilities took the risk that the market wouldn’t always operate to the company’s advantage. It’s time for the shareholders to foot the bill. A bailout in effect forces the ratepayers to become investors in the companies, with none of the reward that a bailout will provide its shareholders.

It’ll lead to more rate increases. A bailout guarantees that rates will continue to skyrocket, because it tells the wholesale energy producers: charge whatever you want; we’ll just pass it through to the ratepayers.

It’s not legal. We do not see where AB 1890 left the PUC with the authority to regulate rates after the rate freeze is lifted — if it did, then what exactly did AB 1890 deregulate? (By the way, contrary to the utilities’ claims, the freeze is not over). Any changes in that law can only be made by the Legislature; even then, there is some question whether it can constitutionally force ratepayers to subsidize the utilities. You do not have the authority to act as the Legislature or in place of it.

Another legal issue: Under state law, the process of setting rates must be conducted by the PUC, under public scrutiny. It is unlawful for the PUC to become a rubber-stamp for your privately-negotiated deals.

It’s not democratic. Ignoring the Legislature and the PUC‘s constitutional role by deal-making in secret is not only illegal, its anti-democratic. Once again, the public is excluded from the process, as it was four years ago when deregulation was foisted upon us.

It’s bad politics. If you capitulate to the utilities and order a bailout, it will cost every ratepayer a minimum of $150, and potentially much more. Responsibility for the higher prices will fall squarely on you. There will be a ratepayer rebellion at the ballot box in 2002.

Californians require and deserve a comprehensive strategy for solving the energy crisis from its elected leaders. We have developed such a plan and urge you to consider it closely. Its combination of short and long term actions, both executive and legislative, will force the energy cartel to cease its unlawful manipulation of the marketplace and will restore a reliable and affordable energy system to California.

You may not have caused this problem, but you did oppose Proposition 9 in 1998, which would have limited the financial damage to the ratepayer from deregulation. Moreover, your statements in recent weeks suggest you still believe that deregulation might work in the future — ignoring the bitter reality that some commodities, such as electricity, are too crucial to California’s economy, infrastructure and public health and safety to be subject to the vicissitudes of an oligopolistic marketplace dominated by a cartel.

Governor Davis, your leadership and judgement are on trial now. To surrender hastily to an industry that has repeatedly broken its promises to the public about deregulation, and to shift another multi-billion dollar financial burden from giant corporations to individual ratepayers, would be a great dereliction of your duty.

In times like these, we count on our leaders to represent the public interest. The energy industry may be interested in a quick conclusion to a confusing crisis that passes on the costs of its grievous and foolish mistakes to the public before all the facts are even known. The public’s interest is in a deliberative process that protects individuals from responsibility for financial harms they did not create. With the entire apparatus of the state of California at your disposal, surely you can find a better solution to this crisis than sending ratepayers a multi-billion dollar bill for the price gouging of giant corporations. Obeisance to the public or to big business are the stakes now, Governor. It may be the biggest decision you will ever be required to make, but there’s no way to avoid it.


Harvey Rosenfield Douglas Heller

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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