Wall Street Journal

SACRAMENTO, Calif. — Gov. Gray Davis was briefly diverted from worries about the state’s energy crisis when an unexpected guest, former Carmel mayor and sometime golf partner Clint Eastwood, stopped by for a statehouse visit one recent night.

The Democratic governor cracks that the movie star came by “to check out my putting stroke.” With Arnold Schwarzenegger threatening to run against him over his handling of California’s electricity shortages, Mr. Davis adds, “I’ve got to make sure I’ve got enough stars on my side.”

But getting the stars in alignment isn’t all Mr. Davis needs, and it’s not “The Terminator” who poses the greatest threat to his political ambitions in 2002 and beyond. It’s California’s ballot initiative — the state’s 90-year-old experiment with direct democracy — that has the governor and his advisers most spooked.

The specific threat: a potential initiative that would reinstate rate regulation, impose a windfall-profits tax on energy producers, and eliminate any private market for energy, or at least maintain a stringently controlled one.

One of the governor’s concerns is a political one. “Gray Davis‘s worst fear is that he finds himself sharing the ballot [in 2002] with an initiative that calls into question his actions during the electricity crisis and forces him to take a stand that may ultimately not be popular with the public,” says Mark Baldassare, senior fellow at the nonpartisan Public Policy Institute of California. “All year long,” he says, “the governor’s been looking over his shoulder — not at the possibility of running against Arnold Schwarzenegger, or a wealthy independent, or necessarily a threat from within his own party — but at Proposition X, Y or Z.”

Threat to Investment in Plants

But the other concern is practical. Gov. Davis told Wall Street analysts last week in New York that any consumer initiative aimed at eliminating deregulation “would pass in a heartbeat.” And from the day such an initiative qualified for the ballot, he said, “not a penny would be invested in new plant equipment.” Yet getting more generators on line, he said, is pivotal to digging California out of its crisis.

It is the looming threat of such an initiative that has Gov. Davis so determined to hatch an energy deal without rate increases, even though many financial analysts are skeptical that it’s possible.

“People who don’t know much about California politics — including some on Wall Street — think that raising rates is the magic solution to the energy crisis,” says Phil Trounstine, the governor’s communications director. “What they don’t understand is that a massive rate hike, imposed by the state or as a result of bankruptcies, would give certain radical consumer groups the one thing they need to win an initiative battle: mass anger. This is a direct democracy state. Maybe you remember Proposition 13.”

The antitax Proposition 13 is a prime example of how California’s gubernatorial contests often have gotten intertwined with ballot initiatives. In 1978, then-Gov. Edmund G. “Jerry” Brown Jr., a Democrat running for re-election, was a vociferous opponent to the initiative on the primary ballot. But voters overwhelmingly approved the measure, which among other things limited the growth of the property-tax rate. Gov. Brown — whose chief of staff at the time was Mr. Davis — then switched positions in the general election to become a born-again supporter of the measure. He won re-election with 56% of the vote.

More recently, then-Gov. Pete Wilson faced polls in the spring of 1994 showing him behind by double digits in his re-election bid against then-Treasurer Kathleen Brown, Mr. Brown’s sister. As the state struggled through a tenacious recession, the Republican governor aggressively embraced Proposition 187, which sought to cut public benefits to illegal immigrants, while Ms. Brown opposed it. Indeed, one of the most searing memories of the race was a pro-Wilson television spot that showed grainy black-and-white surveillance footage of about a dozen people dodging cars as they dashed through the San Ysidro, Calif., border crossing. “They keep coming,” intoned a solemn narrator.

Mr. Baldassare argues that Gov. Wilson “used [Proposition 187] as the vehicle to get re-elected;” he won by 14 percentage points.

Even when initiatives fail, they can have political and economic ramifications. Mr. Trounstine and others point to 1998, when consumer activists sponsored an energy-related initiative that opponents today say was damaging to California’s economy. The measure, Proposition 9, which would have cut utility rates, eventually failed at the polls. Even so, just its appearance on the ballot “created a spontaneous moratorium” on energy generation plants, recalls state Senate Republican Leader Jim Brulte of Rancho Cucamonga. “It delayed construction of generation for two full years.”

The current energy crisis is prompting one of the state’s most successful ballot-box consumer activists, Harvey Rosenfield, and his team of lieutenants at the Foundation for Taxpayer and Consumer Rights to begin work on the re-regulation proposition. Getting enough signatures to qualify it for the ballot is expected to be easy.

Jamie Court, executive director of Mr. Rosenfield’s Santa Monica-based group, which sponsored Proposition 9 in 1998, says what has been “glaringly missing” from the governor’s proposals and from legislative discussions of re-regulation is “some type of legal obligation to provide a fair process [for rates] and guarantee against profiteering.” If those details don’t find their way into the ultimate solution, says Mr. Court, “then ratepayers will be able to go to the ballot in 2002, and have more choices and lower prices.”

Governor’s Big-Tent Approach

The threat of such a consumer initiative has contributed to the governor taking steps to collaborate with Republicans and Democrats alike to help shape energy policy. That’s a departure from Mr. Davis’s frequent practice of announcing his proposals and then calling on lawmakers “to implement my vision.”

“I do that for a reason,” the governor says of his new big-tent approach. “If both parties buy into the solution, you can be assured the solution will last.”

The potential ballot initiative has been a concern of the governor’s “all along” as he seeks a workable compromise, says Mr. Trounstine. And make no mistake about it: Californians love their initiative process. When asked in polls, they also admire their own prowess at using it to shape public policy. “It’s a process which is used more and more frequently to make the most important public-policy decisions in the state,” says Mr. Baldassare.

Gov. Davis isn’t arguing, even as he works to avoid letting the state’s energy policy be shaped by a ballot initiative. “I strongly oppose the notion that all wisdom resides in Sacramento,” he says. “I think very little wisdom resides here. Good policy springs from the people.” As do election victories.