Utility woes put Davis in hot seat

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Governor says power to end crisis is limited

Sacramento Bee

Consumer advocate Harvey Rosenfield makes his living holding corporate and government feet to the fire, but even he is feeling a little sorry for Gov. Gray Davis these days.

“He’s like Bruce Willis, and he’s handcuffed to a nuclear bomb, and it’s counting down to zero,” Rosenfield said. “He’s got to defuse it before it blows him up and us with it.”

The bomb is a deregulated California electricity market that is threatening forced blackouts and out-of-control increases in consumers’ utility bills.

But to date, Davis has shunned a starring role in the drama, arguing that he has little power as governor to stabilize a market that was deliberately restructured in 1996 to encourage competition and limit the state’s control.

“I’m trying to use a combination of reforms, good ideas and guilt to produce the desired result, and we’ll have to see whether it’s successful,” Davis told reporters last week. “The challenging and somewhat frustrating problem is that we don’t have all the power or authority necessary to solve the problem.”

Regardless of whether he has the ability to fix the system single-handedly, Davis faces two scenarios with the potential to blow up any politician’s career.

One is that the current short-term electricity shortages could result in blackouts at the height of the holiday season, raising the specter of economic turmoil and public safety threats. The prospect of one serious accident in a town without traffic lights is enough to give even the most risk-ready official serious pause.

The second is that utilities are incurring once-unimaginable costs, as the California Independent System Operator – an entity created under deregulation to monitor the system and prevent blackouts – buys energy at exorbitant prices to cope with the in-state shortage.

The ISO will pass along its costs to the utilities, which in turn are expected to pass them along to most statewide consumers no later than March 2002, when price regulations are scheduled to end.

San Diego residents faced increases of 200 percent or more this summer when their region became the first in the state to face the full brunt of deregulation.

(Customers of the Sacramento Municipal Utility District, a publicly owned system that produces much of its own power, aren’t as severely affected by the current cost run-ups. They are being asked to join conservation efforts and are subject to power outages if rolling blackouts are required to stabilize the state’s electricity grid.)

Davis has largely focused his efforts on the Federal Energy Regulatory Commission, the panel that oversees the nation’s wholesale electricity market, repeatedly urging FERC to impose wholesale price caps. But last Friday, FERC took a temporary step in the opposite direction, giving power sellers permission to lift a $250 per megawatt-hour cap that the ISO had imposed on its own purchases.

Prices escalated immediately, leading Davis to complain at a news conference Wednesday that the decision was driving Pacific Gas and Electric and Southern California Edison closer to bankruptcy.

“I said to the FERC, ‘You raised the price cap thinking you would keep the lights on. If you don’t act, the lights will not stay on,’ ” he said.

“We must keep these prices under control. It is an incredibly bizarre situation that shows you how the market can be gamed and manipulated by market power,” the governor said.

Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, argues that Davis is indulging in a “rescue fantasy” if he thinks FERC will take the action he seeks in a ruling expected today.

Davis’ difficulties in handling the problem, Rosenfield argues, are compounded by the fact that Davis “is not a Bruce Willis kind of guy.”

Rosenfield is among those who want the Democratic governor to take more aggressive action, moving to impose a windfall profits tax on price-gouging energy producers and seizing power plants if necessary to keep them on line.

Such action, Rosenfield said, would tell the market “we’re calling your bluff. If you don’t price electricity reasonably, we’re going to put you in jail or regulate you.”

He argues that California’s market is too large and lucrative for energy producers to walk away.

“If they don’t sell to California, nobody else can absorb all the supply,” he said. “This is just a giant game of chicken.”

But there were signs this week that Davis is considering one action Rosenfield wouldn’t like at all – supporting immediate rate increases that utilities say they need to avoid bankruptcy.

Pending before the Public Utilities Commission is a rate hike request by PG&E and Southern California Edison that would increase residential electric bills by 17.5 percent in January and raise them twice more in 2001.

Davis noted this week that utilities currently “are not permitted to pass on the costs they’re paying for power to the customers.”

“On one level, that’s a good thing because the customers were promised rates would go down, not up three, four or 500 times,” he said. “But in terms of their financial viability, it’s a very bad thing. We want to work with them to keep them solvent.”

Davis administration officials also are considering options that range from requiring power generated in California to be sold here to using the state’s power of eminent domain to condemn plants and take over their operation.

They also have been working behind the scenes to make deals with air quality districts that would allow polluting plants to remain on line by buying pollution credits next year – a “pollute now, pay later” strategy to provide some short-term relief.

But in one key area – the wholesale price of electricity – they argue Davis has no control.

“What do you do?” asked Davis communication director Phil Trounstine. “In many ways, we’re at the mercy of this dysfunctional wholesale market, where as far as these guys are concerned, the sky’s the limit for the price of energy. … We’ve conceded control to FERC.”

Declaring a state of emergency, as one major California utility has also urged Davis to do, would be a largely symbolic gesture that “wouldn’t solve the problem,” said Davis spokesman Steven Maviglio.

“We’re not going to send the National Guard in to turn a power plant on if the pipes are leaking. It doesn’t work that way,” he said.

Also on the table is creation of a state power authority that would expand the state’s own power-generating capability. But Maviglio said even that couldn’t happen overnight.

Ordering a turbine, the engine required to run a power plant, “takes a year and a half,” he said. “Even if the state wanted to go into the electricity-producing business, it couldn’t do it much faster than the private market.”

Davis may very well call a special session when the Legislature returns in January to allow speedier approval of electricity measures, including his proposal to restructure the ISO, an entity whose board includes energy producers and utilities, in a way that would eliminate what he sees as its inherent conflicts of interest.

But aides said the governor is under no illusions that such action would solve the problems anytime soon.

“Everybody thinks one bill is going to solve this, and it’s not,” Maviglio said. “It’s too complex.”

Rosenfield, with an initiative in the pipeline to crack down on the utility industry, may be sympathetic, but he’s still waiting.

“Our belief is that it’s the job of the elected officials, not a consumer group, to solve this problem,” he said.

“We’re willing to do it if they don’t do it right. But they ought to at least take a crack at it first before handing it over to us.”

Consumer Watchdog
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