Sacramento Scramble

SACRAMENTO -- The state Capitol is a fairly surreal place today. Outside, its Renaissance-revival exterior remains scarred by the explosive impact of a 40-ton rig driven by a maddened truck driver. Inside, the venerable building plays host to a frantic scramble to keep the juice on. Schemes to fix the electric-power debacle come and go almost daily, as do gubernatorial assurances. Information is fleeting and incomplete.

But it’s not nearly as surreal as the simple experience of reading the California Energy Plan signed in 1998 by then-Governor Pete Wilson. In it, he boasts of his legacy of electric-power deregulation, forecasting lower prices and a declining rate of growth in electricity demand. Foolish though this last projection may seem today, California‘s electric-power demand did grow by a mere 2 percent per year for the two decades preceding the 1996 deregulation. That was in stark contrast to the state’s average 7 percent annual growth rate in electricity demand during the 1950s, ‘60s and early ’70s, before the energy-conservation approach championed by then-Governor Jerry Brown took hold in the late ‘70s. Energy conservation helped make California the fourth lowest per capita user of energy of the 50 states. But since the 1996 deregulation, electric-power usage has accelerated. What could Wilson possibly have been thinking?

Before deregulation, California utilities owned 46,000 megawatts of electrical-generation capacity, more than half again as much as needed to meet winter peak demand and avoid blackouts. Though it’s often reported that the private utilities were required by the deregulation legislation to sell their power plants, the bill in fact didn‘t require that. As Center for Energy Efficiency and Renewable Technologies executive director V. John White notes, it was the Wilson Public Utilities Commission that strongly encouraged utilities to sell off half their plants and that de-emphasized conservation. After deregulation, California’s private utilities rushed to do just that, selling to the very out-of-state firms now ramming it to ratepayers.

California‘s private utilities then used much of the proceeds to buy and build power plants in other parts of the country. Pacific Gas & Electric (PG&E), for example, whose threats of bankruptcy are near-constant, quickly became one of the biggest electric-power generators in the Northeast. Incredibly, PG&E, was planning to sell its precious California hydroelectric facilities as recently as this month.

Sacramento mostly fiddled when the deregulation deal went down. Though a few players, such as then-state Senator Tom Hayden, were critical, most everyone -- politicians, citizen groups and media alike -- went along with the multi-million-dollar lobbying blitz waged by the private utilities, power companies, and big power users. The big sleep extended outside the Capitol as well. Consumer advocate Harvey Rosenfield, who led an unsuccessful anti-deregulation initiative and threatens an omnibus power initiative in 2002, is one of the few who looks prescient in retrospect.

Governor Gray Davis made several pronouncements recently, dutifully reported in the daily press, indicating that he had a deal in the works for the state to purchase power at very affordable rates. Today, there is no such deal. Instead, the state -- operating on an ad hoc basis through the mechanism of the Department of Water Resources, which has experience in the hydroelectric business -- has gone into the incredibly exorbitant spot market with $400 million. That money is buying power that is then distributed to the near-bankrupt big private utilities for their customers’ use. The state will probably never see that money again. It will run out in a matter of days.

There is widespread skepticism about Davis‘ oft-announced but still vague plan to get long-term power contracts at 5.5 cents per kilowatt hour. ”It’s a mystical figure,“ says Assembly Speaker Pro Tem Fred Keeley, a Santa Cruz Democrat who is quarterbacking the power issue in the lower house on behalf of Speaker Bob Hertzberg, his San Fernando Valley colleague. And don‘t look to the new administration in Washington for any help in locking in low prices: With deregulation fan George W. Bush in the White House, there is even less prospect of federal price caps than there was under Bill Clinton’s surprisingly pro-free market Federal Energy Regulatory Commission.

This week, the state is conducting an auction to see at what price it can buy power. It may well be that the only credible leverage to get Davis‘ preferred price is the threat of the state exercising its right of eminent domain. That is also a resort touted by the governor and other Democrats as a way of keeping the lights on if power companies refuse to sell. In that scenario, the California Public Utilities Commission -- which finally has a majority of Davis appointees, following the governor’s belated appointment of San Francisco Public Defender Jeff Brown, cousin to Jerry and Kathleen -- would determine a fair market value. But the seizure of assets under eminent domain can take time. When Sacramento declared eminent domain back in the 1920s to set up its public power authority, the Sacramento Municipal Utility District (SMUD), it took some 20 years to get the assets from PG&E. ”Perhaps things could move more quickly under the governor‘s declared state of emergency,“ suggests former SMUD president Ed Smeloff, now head of a New York energy project and co-author of Reinventing Electric Utilities. Perhaps.

The truth is that the mostly out-of-state power generators and the California-based private utilities, which lobbied the partial-deregulation legislation through in 1996, have California over a barrel (well, at least those parts of California not served by municipal utilities, such as SMUD and L.A.’s DWP, which are suffering no crisis). That assessment of the utilities‘ power position may surprise you. The big private utilities’ -- Pacific Gas & Electric, Southern California Edison -- have been reduced to junk-bond status, are already in default and on the brink of bankruptcy. Yet their parent corporations are using their structures to protect billions in profits and assets.

Much of the utilities‘ debt is essentially to themselves. Though Southern California Edison keeps proclaiming that its books are open, the exact figures remain unclear. The utilities claim $12 billion. Consumer advocates and some state officials say it is much less. But it is entirely possible that the utilities want a bankruptcy reorganization, which would allow them to further pressure the state for a bailout, and to escape billions in debt resulting from their mistaken claims that selling off power plants and deregulating wholesale prices would lead to real competition and lower electric prices.

The whip hand held by the power generators is more obvious. Incoming President Bush is very close to the power industry, much of which is based in his home state of Texas. Not surprisingly, Bush says he is opposed to controlling wholesale power pricing, and that California should relax environmental regulations that limit the running of some older, more polluting plants. As it happens, these plants are regulated by federal law, specifically by the Clean Air Act, the most recent version of which was signed into law by Bush’s father. (Yes, it is going to be that kind of presidency.)

The success of such municipally owned and operated power companies as SMUD and the DWP, whose customers pay considerably lower rates than those of PG&E and Southern California Edison, was clearly a factor in state Treasurer Phil Angelides‘ proposal to establish a state power authority (a proposal partly drafted by DWP chief David Freeman). Though there is some frostiness in Gray Davis circles about Angelides’ cheekiness, the trend in Sacramento is clearly in the direction of public power.

Senate President Pro Tem John Burton, the powerful San Francisco liberal who in the term-limits era is easily, along with Davis, the most experienced figure in the Capitol, is the author of the state power-authority bill. With the state facing a power crunch that he projects might last as long as five years, Burton concludes, ”We have to put this power authority in place now.“ Speaking for the leadership of the lower house, Assembly Majority Leader Kevin Shelley concurs: ”This measure is the cornerstone of the long-term solution, and we are fully committed to it.“

Burton describes the state‘s abrupt, ad hoc intervention in the power business --buying power on the spot market -- as ”the tail wagging the dog.“ With a state power authority, he says, ”We will be the dog, and we will be wagging the tail.“ The bill would use the state’s ability to sell revenue bonds to finance new power plants and a conservation program. Modeled after the New York Power Authority established by Governor Franklin Roosevelt in the early ‘30s, it is intended chiefly to stabilize the market. ”Instead of selling [power] back to Californians at cost plus and an arm and a leg,“ says Angelides, ”we’ll sell it at just enough to pay off our bonds . . . The idea here is to control our destiny. If we controlled 10 or 15 percent of capacity, we wouldn‘t be victims of the market right now.“

In the meantime, the struggle to keep the lights on continues, with consumer advocates insisting that there be no utility bailout for a plan gone horribly wrong. ”As far as getting security“ to back up a bailout, says Burton, ”Most of the utilities’ assets are bonded and mortgaged to the hilt, or so we‘ve been informed. And if they go into bankruptcy, [the state] will just be sitting there with everybody else.“

Senate energy committee chairwoman Debra Bowen, a Democrat from L.A.’s South Bay area, adds that ”We run the risk of losing even more control [if the utilities go into] bankruptcy. A bankruptcy court could order immediate rate increases. We could lose control over the generating assets the utilities still own, and the bidders would be the companies charging us the high wholesale prices now. The situation wouldn‘t be improved if hydroelectric and nuclear generation goes into the hands of the companies refusing to sell more to California.“

One idea very much in the air is a state takeover of utility assets, perhaps in exchange for helping the utilities out of the fix they’ve gotten themselves into. Burton, for one, would like to use a state power authority to take over hydroelectric facilities and utility transmission lines. Hertzberg, who is playing a mostly behind-the-scenes role, and Keeley have floated a plan to take over the utilities‘ hydro assets, mostly owned by PG&E, inasmuch as most of the state’s water is in Northern California. In exchange, they would let the utilities use ratepayer money to pay off their debts.

Burton and utility groups don‘t like the plan, decrying it as a utility bailout. Republicans and utility executives don’t want a hydro takeover by the state. The governor is noncommittal. And hydropower is no long-term panacea in any event: A recent U.S. Geological Survey report indicates that climate change may have a negative impact on California‘s hydroelectric capacity.

The scramble continues.