California has made it through the summer. Now it faces the consequences of its energy woes.
The TV commercial begins with grainy shots of what seems like a Third World country interspersed with images of the California landscape going dark. California Gov. Gray Davis is pictured on a billboard next to the words “You’re To Blame.” The serious-minded announcer explains that Davis has bungled the state’s energy crisis to the point where state residents now end up paying “First-World taxes” while they suffer “rolling Third-World blackouts.” It’s time to call these events what they really are, the announcer intones: Rolling “Grayouts.” The political message is clear: California is going downhill fast and Davis’ energy program makes matters worse, not better. The California energy deregulation plan was supposed to be a simple effort that would open up the market, increase supplies and lower rates for consumers. Two years after the plan went into effect, however, the impact has been anything but simple. In fact, it has morphed into a dangerous whirlwind for Davis, the legislators who approved it, state and federal regulators who oversee it, and consumers and businesses that are paying the steadily rising state energy bill.
In fact, many of the solutions seemed to have created more problems than they’ve solved. Davis is pushing a plan to stave off utility bankruptcies by using billions of dollars of state monies to purchase their transmission lines, but the state legislature is balking and political opponents say he’s overpaying. He helped stabilize energy prices by spending billions from the state treasury to buy power and committing to long-term power purchasing contracts. But consumer critics claim that solution will burden ratepayers with locked-in high energy prices for decades to come. Paradoxically, the long-term contracts, a milder-than-expected summer and conservation efforts by the state’s citizens have combined to create at least a temporary power glut in the state. Surplus energy bought under the long-term contracts had to be resold in July at one-fifth what the state paid. The financial loss in July alone was an estimated $46 million. A long-term power surplus for California may be in the cards, and that could cost the state up to $500 million annually in excess power. Supporters counter that such a surplus is healthy because it broke the runaway market that caused energy prices to spiral and it is insurance against breakdowns, economic growth and other problems.
Meanwhile, deregulation’s aftermath has caused a host of other complications. Davis has come down hard on the out-of-state power suppliers who Davis and others claim have pillaged the state treasury for billions of dollars in excessive energy charges earlier this year, but the companies threaten to stop investing in the new power plants the state needs. Even the two Clinton political operatives Davis recently hired [for $30,000 a month from taxpayer funds for six months] to help him spin the energy controversy generated their own controversy. The state controller, a fellow Democrat, said she wouldn’t sign their checks, and Secretary of State Bill Jones, a Republican running against Davis, wrote a letter to the state Fair Political Practices Commission asking for an investigation. Gov. Davis eventually backed down.
While many of these heated political disputes over California energy deregulation may seem parochial in scope, their eventual impact will be much more wide-ranging on the industry as a whole. Davis, in June, accused the Federal Energy Regulatory Commission of allowing “unjust and unreasonable rates to prevail for months without taking action.” That may have prompted the commission to act.
The agency slapped electricity price limits on California and nine other Western states in mid-June and convened an unsuccessful two-week long summit to resolve issues between California and its power suppliers. FERC could order a refund from power suppliers, but it’s unlikely to be anything near the amount Davis wants.
Gov. Davis claims FERC’s price caps will help but “it’s only half the job – the other half is to give us back the money [an estimated $9 billion] that was taken from us.” Davis wants the power suppliers to make refunds to the utilities he claims were overcharged through market manipulation. He also asserts the federal government [and President Bush] haven’t been doing enough to help California out of its crisis, while the Bush administration counters the state should build more power plants and stop trying to shift the blame to the Republicans. California’s deregulation measure was pushed by Davis’ Republican predecessor, Pete Wilson, and passed unanimously by the state legislature. Wilson, for his part, says energy deregulation works and, echoing a common Republican theme, claims Davis should have acted much more forcefully in the early days of the power crisis by, among other things, using his executive power to force adoption of long-term power supply contracts.
Paying the Bill
Despite the political posturing, there are many difficult issues left to resolve. For example, the state has stepped in and fronted an estimated $9 billion in energy costs to keep the juice flowing to the utilities. Who will end up paying that multibillion dollar energy deregulation bill – the utilities, their parent companies, the state taxpayers, residential consumers, business consumers or the energy providers? Should the state of California create its own power authority and generate its own electricity? Should the state’s utilities be allowed to go bankrupt? Have the utilities been routinely overcharged for energy during the crisis? What role should the federal government play in state energy issues? What is the future of energy deregulation in California and elsewhere?
Many of these issues may be decided in court or the ballot box. Gov. Davis faces re-election in November 2002. While it sounds like he’s talking tough about energy now, many consumer advocates are incensed because they believe he is proposing a statewide bailout of the utility companies with consumers paying the bill through dramatically higher utility rates. They believe it is the power providers and the financially healthy parent companies of the state utilities freed by deregulation to trade energy and invest in power production outside of the state that should pay the bill. If Davis and the state legislature throw this burden onto the consumer, they are set to launch a statewide voter initiative that would scrap deregulation and likely put the state squarely in the power business.
Harry Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, said last November his organization would mount the drive to re-regulate the power industry, put the state in the power business and slap a windfall profits tax on excessive utility rates. In more recent testimony before a State Senate Committee, Rosenfield noted that energy deregulation is a dismal failure that resulted in 50 percent utility rate increases and $20 billion in power surcharges for consumers.
Douglas Heller, a consumer advocate with Rosenfield’s group, says work is continuing on the initiative while the organization waits to see what the state legislature decides. In Heller’s view, energy deregulation is unwinding in California and other states because unregulated energy markets are easily manipulated by power providers.
He terms Davis’ plan “a taxpayer bailout of the utility companies” because it would see the state pay top dollar for antiquated transmission lines that are worth much less than Davis wants to pay. Heller believes the utilities’ parent companies should bear the burden of any utility bankruptcy. California would do better to buy hydroelectric generation and other assets as part of a return to regulation and a shift to publicly owned power supplies. “Deregulation just doesn’t work,” Heller says. If energy costs rise and are passed on through higher utility bills, ratepayers wind up paying billions for the energy the state purchased on the utilities’ behalf. It’s hard to see how voters, who were promised lower bills, won’t join the revolt.
State Power Authority?
In fact, California has the mechanism in place to operate power plants. It seems farfetched, however, that the state would build, acquire, purchase or outright seize power production facilities unless the prices skyrocket again or the energy shortage reappears. Even so, the issue has moved front and center to the state political debate. The ripple effect such an action would have on the energy deregulation movement nationally also would likely be dramatic. Nevertheless, the state already has created a power authority that could run the plants. Consumer advocates and some state legislators believe such an approach could solve the state’s energy woes. And earlier this year, Gov. Davis tapped S. David Freeman, a respected energy industry veteran, from the Los Angeles Department of Water and Power, to be his chief energy advisor. Freeman headed the Los Angeles Department of Water and Power, successfully steering it away from bankruptcy through cost-cutting and strategic repositioning. He also is a past director of the Sacramento power agency. Republicans have already begun tagging Freeman as an energy socialist hiding in the governor’s inner circle.
Freeman was the top negotiator of the $43 billion worth of long-term power contracts that helped stabilize the state’s energy market. Critics claim the policy imposed a great long-term cost on consumers. The state’s plan is to float a large $13 billion bond issue later this year that would return the $9 billion or so the state treasury already has advanced to buy power on behalf of its beleaguered private utility companies. It would leave some wiggle room for additional power purchases. In return, the state would receive the power lines or other assets.
Davis appointed Freeman and four others in mid-August to the Consumer Power and Financing Authority board of directors. The board, which Freeman chairs, is supposed to ensure an adequate supply of energy to the state. “Their job is to supplement, not supplant, private sector initiatives,” Davis says.
However, Freeman has become a new controversial figure to Republicans. In late June, Freeman testified before a state senate committee in Sacramento about the energy issue, noting that the deregulated market is too expensive and volatile. “Never again will we embrace a free market,” Freeman said, contending such a marketplace is blind to the need for cleaner air, the desires of consumers and, in fact, winds up producing “a shortage with its volatility.”
The issue of a state power agency could easily come to the forefront of next year’s gubernatorial race, either in the March primary or November general election, especially if an initiative is placed on the state ballot. Davis’ leading opponent, Secretary of State Bill Jones, already has launched a statewide campaign. On energy issues, Jones argues that the state should stay out of the power business if at all possible. In a keynote address before the Western Power Trading Forum in late June, Jones slammed Gov. Davis for allowing the energy issue to evolve from a manageable problem to a crisis because the governor “lacked the will to make the tough decisions that needed to be made.”
“There were some technical flaws in how deregulation was set up,” Jones says. “These flaws were magnified by a temporary but extreme shift between supply and demand. The population increase in the rest of the Western energy grid combined with drought in the Northwest shut down much of our normal supplies.”
Jones told the power traders, “You folks are going to have to make a few changes to the way you do business in California. The political climate has changed dramatically and either you get with the program or Californians may take matters into their own hands.” He added that if the traders don’t do something to help the state “then you as energy providers face a dim future here.”
Jones endorses temporary regulation of wholesale prices “until sufficient new generation capacity is online” to meet demand. He also backs FERC’s price caps and asked the power traders to drop their appeals against it so that energy prices could stabilize. Jones also supports easing the permit process for new generation and transmission plants, something Davis already has done, as well as continued investment in conservation efforts, another Davis strong point.
However, Jones made it clear he wants the state “out of the energy business.” Instead, he’d push California to restore the utilities to credit-worthiness through a “fair division of the outstanding utility debts among shareholders, debt holders, ratepayers and taxpayers.” Furthermore, he proposes that the state Public Utilities Commission, energy commission and state energy oversight board be combined into a single agency coordinated by a state secretary of energy. Jones believes such an agency should be coordinated by someone “whose goal is not to socialize the energy business like David Freeman would like to see done today.”
Jones also told the western energy traders that Gov. Davis “has helped create you as the bogeymen. All of you here have been lumped and morphed into a new category of citizens who go by a number of less than flattering names: energy bandits, profiteers, price gougers.” He reminded the audience that they needed to “act now” because the state’s ballot initiative process makes it easy for angry voters to take direct action. Jones pointedly notes, “there are those now on the governor’s staff and in the legislature who would be very happy with the state being in the power business.”
Ultimately, the issue of whether California becomes its own power generator and whether deregulation lives or dies in the state, depends upon Davis’ ability to cobble political deals to stabilize power rates, keep the utilities solvent and share the burden of paying off the huge power debts. FERC may be one solution; it could order power providers to make refunds to the state utilities. State financial relief could also arrive through ongoing state investigations into alleged overcharging by power providers. Just the threat of unleashing California’s unpredictable initiative process on the energy industry may well compel an equitable political compromise as the state’s political deadlines inexorably approach.