California Captolweek January 5, 2001

Energy Crisis update and Gray Davis performance

((Melissa)) This week . . . brace yourselves for sky-rocketing utility bills. Consumers in Southern California have some advice.

((Jack)) And Gray Davis . . . will California’s energy crisis short circuit any hopes he may have for higher political office?

((Jack)) Hello I’m Jack Kavanagh.

((Melissa)) And I’m Melissa Crowley . . . how we got into this electricity mess is next.

((Melissa)) Thank you for joining us. All eyes are on how our state gets through it’s energy crisis.

Political experts say how the Governor handles it could make or break his political future.

Jack Kavanagh will have more on that later. But first . . . we’re all feeling it in our pocketbooks, and it’s getting worse

The Public Utilities Commission has approved rates hikes ranging from 9 percent for residential owners to 15 percent for small businesses.

Pacific Gas and Electric and Southern California Edison say it’s needed to deal with 9 billion in losses stemming from deregulation.

Consumer advocates say the public shouldn’t have to pay the price. The Governor says federal help is still what’s ultimately needed.

(( Melissa )) There are a lot of proposed solutions, but consumers are just going to have to wait it out.

Jennifer Fischer went to San Diego . . . the first city in the state to pay market prices.

Their experience gives us a glimpse of what the future may hold for the rest of California.

San Diego Utilities Package

What if you couldn’t afford to clean your house? Cook? Or wash your clothes?

((Michael Shames, Utility Consumers’ Action Network))

It’s truly a summer of trauma.

Hard to imagine, but it’s happened to many in San Diego, the first city in California to pay market prices for power…

…With other California cities set to follow in the next two years, will triple-digit bills become the norm?

((Gloria Galindo, San Diego Resident))

I said, “My God, they are killing us. This bill is so high.”

San Diegan Gloria Galindo is on a fixed income. Both her and her husband do not work. They are on disability. They cannot afford to pay the inflated prices.

((Gloria Galindo, San Diego Resident))

From fifty-five, it went up to one [hundred] thirty-seven, because, you know, I was just paying whatever I was paying before.

Small businesses are also feeling the effects of the price spike…

((Sharon McAnally, San Diego Small Business Owner))

I called in June when my bill went up three hundred dollars, and I said, “My gosh, I didn’t use any more energy.”

For ten years, Sharon McAnally and her husband have run this small restaurant in Carlsbad. Sharon says she’s afraid to raise her prices, but she has to make up for the high utility bills…

((Sharon McAnally, San Diego Small Business Owner))

We started by paying about seven [hundred] fifty in May for our utilities. Then, we paid a thousand fifty in June, and then came my July utility bill, and it was almost twenty-five hundred dollars. We don’t have really high prices, but there’s no way someone is going to pay fifteen dollars for an egg breakfast.

In September 2000, the legislature voted on a six and a half cent price cap. It’s helping, but many say it’s a short term fix.

((Michael Shames, Utility Consumers’ Action Network))

People don’t understand. This was not a San Diego problem. This was a California wide problem. In fact, it was a Western region of the United States problem.

Michael Shames heads up the Utility Consumers’ Action Network, a San Diego advocacy group…

((Michael Shames, Utility Consumers’ Action Network))

In San Diego specifically, we’re subjected to a market that was not yet competitive.

For their part, Utilities say that California is paying the price for not building enough power plants, but everyone agrees that if the legislature does not figure out a long-term fix, the same thing could happen statewide.

((Michael Shames, Utility Consumers’ Action Network))

The Legislature is going to take this up again in 2001, the next legislative session. There’s going to be a lot of talk, there’s going to be a lot of negotiation. Something may come out of that process. If it doesn’t, then 2002 will be a very tough year, not just for San Diego, but for the entire state.

San Diego Gas and Electric took a heavy piece of the blame during the summer months, but Shames says many are at fault.

((Michael Shames, Utility Consumers’ Action Network))

There is literally a cast of hundreds of people who made bad decisions on bad information and allowed their judgement to be clouded by ideology.

Officials here at SDG&E say they’re hoping that Federal Energy Commission will implement measures now to restrict the price of electricity while the wholesale market is reformed…

In the interim, residents and advocates warn others that this could happen to you…

((Sharon McAnally, San Diego Small Business Owner))

I warn you up in central and northern California, you better start speaking up now, and don’t wait till it happens.

((Michael Shames, Utility Consumers’ Action Network))

I think San Diego should charge tuition for the lessons that California has learned, and the tuition would be for a class in why you don’t want your region to be decimated economically by a bad energy policy.

END SAN DIEGO UTILITIES PKG.

(( Melissa )) All right, here’s the very latest as it stands: Governor Davis will unveil his plans in his State of the State address on Monday.

Lawmakers will convene an emergency session on electricity. Legislation would take effect within 90 days. Some democrats are talking about buying and building hydro-electric plants.

Republicans favor increased supply, but are pushing tax incentives and reduced restrictions on building new plants.

((Melissa)) Joining us for more on how we got to this point and what lies ahead:

Jan Smutny-Jones , with independent energy producers, also a board member from the California Independent System Operator which controls the electrical grid for the state . .

John Rozsa, chief consultant from Senator Steve Peace's office. He helped draft the deregulation legislation.

And Jon Tremayne from Pacific Gas and Electric.

Thanks for joining us.

DISCUSSION PT. 1

((Melissa))

John, we’re going to put you on the hot seat first. Obviously, this is not what was intended with deregulation. Our bills are supposed to go down. What’s going on? What happened?

((John Rozsa, Chief Consultant for Senator Steve Peace))

Tight supplies throughout the West have give marketers the leverage to extort unconscionable prices, and the Federal Energy Commission, instead of helping California and helping Governor Davis, voted on an ideological basis to not impose price caps on the price of power throughout the West, which is what they should have done, so California is going to have to go at it alone.

((Melissa))

All right. As a consumer, everyone wants to know is the worst yet to come? From the utilities perspective, John, is the worst over, or can consumers expect that things are going to get a lot worse?

((Jon Tremayne, Pacific Gas & Electric Company))

It’s really hard to say. As John mentioned, if the federal government can step in and control prices, it helps us in what we’re passing on to customers. We’re in a position of spending thirty or forty cents on a kilowatt, and it’s a product that we turn around and sell to our customers for five cents. Certainly, it’s a situation that can’t go on forever. We need some sort of controls put into place or some sort of responsible activity taken on behalf of the generators to help keep the prices down so that our customers don’t feel the huge increases.

((Melissa))

All right, Jan, you’re here representing the wholesalers, many of whom have made 600% profits. Is that fair? A lot of people are pointing now at the wholesalers as one of the bad guys.

((Jan Smutny-Jones, CA Independent Energy Producers))

I think if you listen to Dave Freeman, the General Manager of the Los Angeles Department of Water and Power, which has made a lot of money in this market, he was quoted as saying, “Even a blind pig can make money in this market,” and he may have something there. I think Mr. Rozsa hit on part of the problem correctly which is that we do have a serious supply problem, not only in California, but throughout the American West, but the real problem in California, and this does not require federal action, is the total lack of forward purchasing on the part of the utilities, and that is largely due to the fact that our regulators here in California have limited the ability of the utilities to buy longer term products at much lower rates that even come under price caps, so that really is at the heart of the problem.

(Jon Tremayne, Pacific Gas & Electric Company))

And to the tune, we’ve been asking the Public Utilities Commission for over a year for permission to do exactly that. We were given that permission in August. Shortly thereafter, we began entering into some of the bilateral contracts that will help keep prices low, but ultimately what I think we need to do is to get control of the market because the market is just producing horrible prices.

((Melissa))

All right, Jon, we want to talk about the effects because there are some long term implications, not just with our state but also worldwide with what happens. Let’s talk about the rate hikes that the utilities are asking for. You’ve asked for as much as 30%. Many people are skeptical. Are there some other ways we could accomplish solvency without raising rates? What about, maybe, the dividends paid to shareholders or maybe the parent company to chip in of Edison?

(Jon Tremayne, Pacific Gas & Electric Company))

And Pacific Gas & Electric I assume?

((Melissa))

Right.

(Jon Tremayne, Pacific Gas & Electric Company))

We’ve been saying for months that we’re all part of the solution, that we all need to work together to come up with some solution that is beneficial to all so that nobody has to bear an unfair burden. What we really need to do is focus on getting the conditions in the market resolved so that the prices don’t continue. As far as part of the solution, we definitely want to be part of the solution. We’ve proposed using our own generation at cost of service, which is significantly lower than the thirty or forty cents we have to pay on the open market, and using that to help mitigate some of the market prices.

((Melissa))

All right, John. Let’s look at—there are a lot of different options on the table now. Is it time to retool deregulation? Are there some loopholes that are being exploited?

((John Rozsa, Chief Consultant for Senator Steve Peace))

I think that deregulation is dead. I think that the people of California are interested in a larger public interest in the power industry. I think the independent power industry is dead. They don’t know it yet. I think that people throughout the United States are watching what has happened in California. They’ve seen this industry rape and pillage, and they don’t want any part of this, and so I think it’s going to take a while, but I think you’re going to see in California considerably less reliance upon private capital in meeting the needs of the state.

((Melissa))

And, John, how come we couldn’t anticipate some of these problems when you drafted the deregulation? I know it was a different order than the PUC drafted originally.

((John Rozsa, Chief Consultant for Senator Steve Peace))

Well, actually, it was the Public Utilities Commission that deregulated the industry in California. When the Legislature came to this problem, they had to assume that deregulation would go into effect because the Legislature was divided politically between Republicans and Democrats and a Republican governor who threatened to veto any legislation that changed the PUC plan. Therefore, the Legislature had to assume that deregulation was going to go into effect, and what they did in AB-1890 was to try to make it better, but they couldn’t change it, and they couldn’t roll it back, and the problem was that there were many people in the Legislature that were opposed to deregulation, but AB-1890 was passed unanimously. If it was about deregulation, you can be certain that there would have many votes against it.

((Melissa))

Okay. Jan, we want to let you get in here.

((Jan Smutny-Jones, CA Independent Energy Producers))

Yeah, I think the concept of trying to socialize the electric system in the sixth largest economy on the planet is, frankly, very, very troubling. The fact of the matter is deregulation has attracted ten to fourteen billions dollars of private investment capital to California to build and modernize power plants here. The state has no business getting into building power plants or owning the transmission system or anything else. The surplus in this state ought to be better spent on fixing the highways and schools in this state. Things they actually can do. If you’re really looking for solutions, we need to look at longer term contracts so that people can actually build power plants in order to sell that power. We also need to really push retail competition. It is not true that deregulation doesn’t work. It has worked. Even in San Diego with certain people buying fixed price products. It certainly works in Pennsylvania, so the idea that somehow we’re going to magically solve this problem by creating a large, bureaucratic, public entity to solve this issue is just going down the wrong path. There is no question that we need to readjust some of the things that we’re restructuring, but to try to go a hundred and eighty degrees backward, or, worse, to try to socialize the system just is not the direction to go.

((Melissa))

Jon, is bankruptcy on the horizon for PG&E? What do you think it’s going to take?

(Jon Tremayne, Pacific Gas & Electric Company))

It’s really a question that I think the financial community will answer, and I think we’re probably see some results of that this week based on what actions are taken at the Public Utilities Commission. Really, it’s up to them. They said they wanted to see three clear things. They wanted to see a rate hike, they want assurances that the utilities would be allowed to recover the under-collections of the past six months, and they wanted a rate in place that’s high enough to continue the cost of power going forward, and so it’s really going to be their decision, and it’s going to be up to them to make those decisions.

((Melissa))

The ninety days, is that enough? PG&E and other companies are looking for a more extended rate hike?

(Jon Tremayne, Pacific Gas & Electric Company))

Yeah, we’re certainly looking for a more extended rate hike. Twenty-six percent was our proposal. That would get us through until market reforms or some sort of market controls could be put in place or voluntarily put in place because I don’t think anybody believes the five hundred percent profits are justifiable. They’re not just; they’re not reasonable, and FERC really should step up to the plate, step in, and insure just and reasonable rates for Californians.

((Melissa))

John, where do the consumers factor into this equation? We’ve heard from utilities, we’ve heard from wholesalers. How are consumers being considered?

((John Rozsa, Chief Consultant for Senator Steve Peace))

Consumers were always the most important thing in this enterprise and the greatest concern from the beginning, that there wouldn’t be any benefits [to deregulation], not that there would be the damage that has been, but that there wouldn’t be any benefits for consumers because deregulation was really about the electricity bills of large customers who are the employers of the state and who needed to compete in an international market and who needed lower electricity costs, and so it was always in the mind of the Legislature to protect the consumers in this. Now, unfortunately, consumers are going to bear a large set of costs for the next five years I would say. At least until this thing is ironed out, unless we are successful with our suits suing FERC and suing the generators and getting the money back and getting some rates established. That’s something that people haven’t talked about. There are some active suits going on.

((Melissa))

Jan?

((Jan Smutny-Jones, CA Independent Energy Producers))

Yeah, the fact of the matter is it’s easy to blame this all on deregulation. We have not built power plants in this state in over a decade. That’s a similar experience throughout the American West. The fact of the matter is rates would be going up now anyway even if we had left it under the old system simply to add new generation. That is a fact.

((Melissa))

But as we look at supply though, supply has definitely gone down and demand has increased, but not to correspond to the amount that we’ve seen rates hiked. How can we explain that that? When there’s a demand but certainly not enough to justify the expense?

((Jan Smutny-Jones, CA Independent Energy Producers))

I can tell you that on certain days this year, we’ve been within fifty to a hundred megawatts of having rolling blackouts in this state. It is a very serious problem, and it will be fixed if we allow private power producers to actually build power plants in the state. There are nine plants licensed right now for construction. They will come here so long as there’s a stable political and regulatory environment, and, again, I think the talk about nationalizing the electrical system is the surest way to result in long term reliability problems and, in fact, higher rates.

((Melissa))

Jon?

(Jon Tremayne, Pacific Gas & Electric Company))

But for a stable political system, you need to insure that the people generating the power aren’t gouging the people of California, and you’re seeing prices that last year were three or four cents per kilowatt hour are thirty or forty cents this year.

((Jan Smutny-Jones, CA Independent Energy Producers))

And Jon, that same power was offered to PG&E in April of this year for forty-two dollars.

(Jon Tremayne, Pacific Gas & Electric Company))

When we didn’t have the opportunity or the—

((Jan Smutny-Jones, CA Independent Energy Producers))

Well, that is not the problem—that is not the fault of the independent power industry that was offering the power at that price. That is a California specific regulatory problem—

(Jon Tremayne, Pacific Gas & Electric Company))

And the Federal government has come in and has made it very clear that the producers are charging unjust and unreasonable rates for California.

((Jan Smutny-Jones, CA Independent Energy Producers))

And I should point out that when we say “producers” that this includes a number of public power entities like the Los Angeles Department of Water and Power, Bonneville-Pacific, British Columbia. Actually, the socialists are doing pretty well in this market.

((Melissa))

And on that note gentlemen, we are just about out of time. John do you have a final quick word in our last few seconds?

((John Rozsa, Chief Consultant for Senator Steve Peace))

I think it’s important to watch the suits that have been embarked upon by the state of California against the Federal Energy Regulatory Commission for not acting in accordance with its charter, and I expect that there will be some preliminary decisions as early as tomorrow, and these will be pursued to the Supreme Court because FERC has not carried out its role in protecting the citizens of California.

((Melissa))

And on that note gentlemen, we’re out of time. Thank you all for joining us.

END DISCUSSION 1

((Melissa))

Next week we’ll examine proposed fixes in detail.

In a moment, Dan Schnur and Susan Rasky on the potential impact of the energy crisis on Governor Davis’s future

But first . . as lawmakers begin work in 2001, nearly 1,000 new laws they passed last year are now in effect.

Marcy Brightwell explains.

NEW LAWS PKG.

About a million California workers will get a pay raise January 1^st…

…The minimum wage will increase fifty cents to $6.25 an hour.

State workers will get a new paid holiday…

…Caesar Chavez Day will be March 31^st.

A landmark abandoned baby bill takes effect. Desperate parents can drop off their newborns at a hospital with no questions asked…

((Jim Brulte, Senate GOP Leader))

If we can save one or two or three children a year, we think that’s a worthwhile goal for the state.

More college students will have access to Cal grant loans, and public school teachers will have more financial incentives, including some pay raises…

There is some tax relief. The state sales tax will go down by a quarter cent…

Annual car registration fees will be cut by about half…

Two new laws deal with DNA evidence, and death row inmates will be given access to DNA testing…

((Jon Burton, Senate President Pro Tempore))

We don’t want innocent people in jail and if you have an innocent person in jail, that means the guilty person is out doing the same type of crime. That’s why several of the crime victims groups are supporting it as well.

Toy guns will be changing. A new law requires that toy guns have neon colors to help distinguish them from the real thing…

Racial profiling will be outlawed. Cops will have to undergo training to help prevent race-based traffic stops…

((Gil Cedillo, Assemblyman [D], Los Angeles))

We must have a society in which men and women can drive, and they won’t be stopped based upon their race.

The state legislature passed nearly 1,500 bills this year. The Governor signed about 1,100. Next year, the pace should be about the same, but one issue is expected to dominate the agenda, California’s energy crisis. At the state Capitol, I’m Marcy Brightwell.

END NEW LAWS PKG.

((Jack))

Time now for a new regular segment . . . a chance for you to hear from political experts and insiders on some of the behind the scenes talk at the capitol.

At issue this week: could California’s energy crisis potentially spoil Gray Davis’s ambitions for higher office?

Many political experts see Davis as a contender for the 2004 Democratic Presidential nomination.

He now heads the Democratic Governors Association, a job once held by Bill Clinton.

The Governor has not ruled out or commented on any future political ambitions, though he has built a sizable campaign war chest.

@ ISSUE

((Jack))

Which brings us to our first question: Is Gray Davis toast if he doesn’t get us out of this energy crisis politically?

((Susan Rasky, Professor at UC Berkeley School of Journalism))

(Laughs)

((Dan Schnur, Republican Political Consultant))

I don’t think we’ve got the power left to really toast him.

((Susan Rasky, Professor at UC Berkeley School of Journalism))

Come on now, seriously. It certainly hurts him. It certainly hurts him for Governor. God knows what it does in 2004 for President, but I think it’s important to say that if he handles it right—and the man does have a swell PR operation—he could make much of this. He could be a hero for having solved it, for having brought all the sides together.

((Jack))

You don’t agree with that?

((Dan Schnur, Republican Political Consultant))

I personally agree. Two points: One, you know we’re on public television because you can say something like “swell,” Susan, and get away with it. Second, I think that Susan’s point is right in that regardless of how this power crisis turns out, Gray Davis will be remembered as the “Energy Governor” for better or worse, and when he gets off the plan in Iowa or New Hampshire or any other early primary state, They’re not going to ask him about healthcare; they’re not going to ask him about education reform; they’re going to ask him how he solved the energy crisis.

((Susan Rasky, Professor at UC Berkeley School of Journalism))

Unless, of course, the economy tanks.

((Jack))

Well, let’s connect those two dots because this issue is not going to get better. It’s going to get worse before it gets better. Much worse. There is some speculation that one of the reasons that the Governor met with Alan Greenspan and one of the reasons the Fed lowered interests rates, coincidentally, a week later was because of the economic catastrophe that could be facing the country and the state.

((Susan Rasky, Professor at UC Berkeley School of Journalism))

Yeah. While I realize we’re not talking about George Bush today, but I would argue that George Bush has as much to be concerned with if California’s economy tanks. In other words, he’s got a stake in this energy crisis too. The question is, can Gray Davis play that to his advantage? Can he count on a Bush administration the same way he might have counted on a Clinton administration to bail him out?

((Jack))

I don’t want to get too far ahead of viewers who are participating in this, but should we make it clear to ratepayers that it’s going to get worse?

((Dan Schnur, Republican Political Consultant))

I think that’s very important because right now there is so much finger-pointing going on on so many different sides. All the average ratepayer knows is that they’re paying more than they used to, and I think for someone to step up and put this whole crisis in perspective and to offer a comprehensive solution, frankly, that is the job of the Governor. His staff has already said that he’s not going to offer that comprehensive solution in his state of the state address. He’s going to talk about education, but it is incumbent upon Davis, not just for future political reasons, but for very real world reasons for people in California, to step forward and put this entire crisis in the kind of context that you’re talking about.

((Jack))

Just a few minutes ago there was a discussion about coming this close (gestures) to rolling blackouts in California. Stories have been in The Wall Street Journal about the Embarcadero Building in San Francisco leaving the Christmas lights on twenty-four hours a day so they don’t have to worry about the bulbs burning out. The holiday day lights on the five and a half mile Bay Bridge are on. Is the message not getting through? Is that what’s happening? Is it Davis’ fault?

((Susan Rasky, Professor at UC Berkeley School of Journalism))

First of all, there’s a huge swath of ratepayers in this state who are likely to have their rates go down rather than up—

((Jack))

Los Angeles is one of them.

((Susan Rasky, Professor at UC Berkeley School of Journalism))

That’s right. That’s where two-thirds of vote are in this state.

((Dan Schnur, Republican Political Consultant))

I would argue—I would make the point that most voters in the 1970’s never met a Medfly. That didn’t keep the crisis from hurting Jerry Brown. If the public perception along with the reality continues to grow worse, that’s a serious political and policy problem for Davis, so even if you have islands of stability, I don’t think that protects him to the degree that you’re talking about.

((Susan Rasky, Professor at UC Berkeley School of Journalism))

I think Davis is smart. I would argue that Davis’ caution here may, in the end, serve him well. As long as he can control how the parties finally come together, appear to be the man who crafted the solution, I think—I disagree with you about the public being unaware that further rate increases are coming. I think the public is more than aware of that.

((Jack))

Okay, I’m a ratepayer, and I own a small business, and I’m about to go out of business because I can’t afford to keep the refrigeration going to keep the food safe. What do I do? Do I trust the legislature that created the problem in the first place? Do I trust Gray Davis? Do I trust the utility companies?

((Susan Rasky, Professor at UC Berkeley School of Journalism))

Or worse yet, the folks who are going to have an energy measure on the ballot, Harvey Rosenfield. I think Dan is right. I think, ultimately, the Governor gets blamed or praised. Whatever the solution turns out to be, the Governor is a singular person. He’s not a hundred and twenty people like the legislature.

((Jack))

He’s the biggest target out there then?

((Dan Schnur, Republican Political Consultant))

He is a target, but it is also a window of opportunity if he solves this, and I think here’s where Susan and I disagree a little bit. Davis has been a very effective Governor in many ways up to this point because he has been cautious during this time of economic prosperity. Now he's facing his first real crisis, and that same caution that served him so well when dramatic action was not called for or necessary may not serve him as well now. At this point, it’s time for Davis and the people around his to start thinking outside the box, to start governing in a bolder fashion than the last two years have required him to do.

((Jack))

Two years from now, another race for Governor appears on the horizon. If I’m say, Arnold Scwarzenegger in Los Angeles and I say, “I can lower your electric rates. Vote for me,” wouldn’t that be a compelling political argument?

((Susan Rasky, Professor at UC Berkeley School of Journalism))

I would love the chance to argue how that can be done from a party that prides itself on letting market forces operate. It's a tricky little maneuver.

((Dan Schnur, Republican Political Consultant))

I’ll tell you exactly how you do it, and whether it is Arnold Scwarzenegger or Bill Jones or Chuck Poochigian or Jim Rogan or anyone else, you start running on Gray Davis’ energy tax, and you promise to repeal it by taking the budget surpluses and rebating those surpluses to the ratepayers. You promise to speed up the regulatory process. You promise to streamline or—

((Jack))

Make it easier to permit a plant?

((Dan Schnur, Republican Political Consultant))

Make it easier to permit a plant. Remove the competitive bid process like they did after the Northridge earthquake. That’s the Republican free market solution—

((Jack))

Sounds like a plan, sounds like a plan. We’ll look for it in two years. Dan Schnur and Susan Rasky, thank you very much

END @ ISSUE

(( Melissa ))

Jack . . . we’ll continue following California’s electricity crisis.

If you’re confused about what potential fixes may be the best, you’re probably not alone.

Next week we’ll break down the proposed plans for you . . from the Governor’s . . . to the legislature’s . . . to

A possible ballot initiative.

((Jack))

What ideas do you have about fixing this problem? What questions do you have about this complex issue?

Please send us your comments and questions so we can use them in next week’s discussion.

Our email address is capitolweek dot o-r-g.

((Melissa))

That’s our program for this week, I’m Melissa Crowley.

(( Jack ))

And I’m Jack Kavanagh, thanks for joining us.