SACRAMENTO — Five months after California’s experiment with deregulation sent electricity prices soaring, state policy-makers haven’t come anywhere close to a consensus on how to solve the problem.
So politicians are doing the next best thing: They’re making a lot of noise.
Last week, Gov. Gray Davis told the Federal Energy Regulatory Commission that its Nov. 1 proposal to bring prices down by tweaking the deregulated marketplace just plain won’t work. Senate utilities committee Chairwoman Debra Bowen, D-Marina Del Rey, added to the punch by warning the free-market-minded commissioners that if they don’t take strong action, voters will most likely re-regulate the industry through the initiative process.
And Friday, a consumer advocacy group set about doing just that.
Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, announced that his group was drafting a plan it will put on the ballot if the Legislature doesn’t adopt it first. The consumer advocates haven’t worked out the details, but basically the initiative would put power generation back in state control and prohibit Pacific Gas and Electric Co. and Southern California Edison from billing customers for losses caused by this year’s power cost overages, he said.
“I don’t give much credence to the chest-thumping,” Rosenfield said. “I feel sorry for the governor. This would never have passed on his watch, but he’s going to shoulder all of the blame now.”
The consumer foundation doesn’t plan to put a measure on the ballot until 2002, but in Sacramento, sometimes just the threat of change is enough to bring all parties to the table.
In fact, Bowen said the Legislature passed the original deregulation bill only because the California Public Utilities Commission — appointed by Republican Gov. Pete Wilson — was about to impose its own deregulation plan. Many Democratic lawmakers thought the PUC plan too industry-friendly, so they came up with their own version after a series of whirlwind meetings in the final three weeks of the 1996 session and got nearly unanimous approval in both houses.
Rosenfield’s group sponsored a ballot measure to repeal deregulation in 1998, but voters rejected it, apparently buying the promise of lower rates through a revitalized, competitive market. A full-page advertisement in The Record purchased by Pacific Gas and Electric Co. in November 1997 said deregulation guaranteed that rates would remain frozen until 2002 and would begin dropping after that as utilities entered the new laissez-faire marketplace.
Instead, PG&E has filed suit to collect $2.9 billion in losses it incurred when power costs soared to three, four and even five times the $54 per megawatt-hour rate that the utility is allowed to charge its customers. Electricity bills more than doubled in the San Diego area this past summer before the Legislature adopted a stopgap rate freeze. The Independent System Operator, which runs California’s electric grid, is warning of possible rolling blackouts next summer because of supply shortages.
In the meantime, electricity generators are reaping enormous profits. For example, third-quarter earnings for Virginia-based AES Corp., among the state’s largest energy providers, jumped 131 percent over last year, according to a report filed late last month with the Securities and Exchange Commission. PG&E may eventually lose money because of runaway wholesale power costs. However, the utility’s parent company, PG&E Corp., owns power plants and saw its third-quarter earnings jump 22 percent over last year.
Davis, utilities and consumer advocates had asked the Federal Energy Regulatory Commission to declare the California market noncompetitive and regulate prices so generators could get no more than their cost of doing business plus a fixed profit margin. The commissioners did say electricity prices are “unjust and unreasonable” but, instead of fixing prices, recommended a series of reforms designed to make the deregulated market operate more competitively.
The commission won’t adopt a final order until December, however, and is holding hearings to find out what the public thinks about the plan. On Thursday, the commissioners listened to a videotaped tongue-lashing by Davis and stern warnings about a consumer revolt by Bowen. More of the same is expected Tuesday at a hearing in San Diego.
Bowen said the image of greedy out-of-state generators sucking money out of Californians’ pocketbooks provides just the right backdrop to give momentum to a deregulation-repeal initiative campaign. She said the Federal Energy Regulatory Commission, whose members are strong advocates of deregulation, need to understand that they may lose the experiment in California unless they rein in the generators.
“Most people want to drive to a market-based solution, but I don’t think you can get there by allowing the kind of extreme price disruptions that you saw in San Diego this summer to occur around the state,” she said. “If nothing else, people may take things in their own hands, and I might be standing in front of Target along with everybody else with a petition.
“We could put the whole state in a recession.”
Consumer advocates are doing their best to keep up appearances of a voter uprising.
On Monday, The Utility Reform Network of San Diego will hold a rally at the headquarters of Sempra Energy Corp. and march to a hotel where utility regulators and consumer advocates are holding a national convention.
Rosenfield said his group was busy last week drafting the details of the proposed ballot initiative. In short, the measure will aim to gain state control over electric generation. The state may do that by using eminent domain to buy power plants or entering into long-term contracts with generators.
Rosenfield said consumers can’t count on their elected representatives to solve the problem.
“The politicians, they don’t have a clue about this,” he said. “This is a slightly higher grade level. It’s too complicated for them to develop on their own, and it’s too risky.”
For their part, the generators say California could fix its problem simply by following the federal energy commissioners’ advice and reforming the market. Jan Smutney-Jones, executive director of Independent Power Producers, said the state should remove regulatory obstacles that prevent utilities from signing long-term power-purchase contracts.
“Now that the problems have been defined, it’s time for regulators, policy-makers, generators and the utilities to come together and focus on solutions,” Jones said in a news release.
Assemblyman Anthony Pescetti, R-Rancho Cordova, said Republican lawmakers are working on their own plan to bring down power costs. He said he favors extending a rate freeze on PG&E and Southern California Edison beyond 2002, allowing the utilities to collect for any overages by taking advantage of the reduced costs that will come after more power plants are built.
Stanford University economist Frank Wolak said all the blustering by elected leaders and threats by consumer advocates serve a purpose, whether or not they result in real reforms.
Wolak said one of the main problems with California’s electricity market is that generators know they can get top dollar if they simply withhold power on hot summer days until the grid is under threat of collapsing. Deregulation worked for two years to bring prices down, he said. But when supplies got scarce this past summer because of urban development and other factors, the generators learned how to exercise their market power and drive prices up to record levels.
Wolak said that fortunately, the generators are not immune to public pressure. He said they are likely to exert more self-control if they think the Legislature or voters are about to impose new regulations. Likewise, the Federal Energy Regulatory Commission will take stronger action against the generators if its board members know they’re facing an angry populace.
“I think the political wheels are starting to work,” Wolak said. “To be perfectly honest, I think the politicians are hopefully going to do what they do well; that is, tell them: ‘We’re California. We’re big. You better do something to take care of us.’ ”