When state Sen. Debra Bowen, D-Redondo Beach, took over as chair of the Senate Energy, Utilities and Communications Committee two years ago from San Diego Democrat Steve Peace, the chief architect of the state's electricity deregulation law, she had little inkling of the coming crisis. At the time, power was plentiful, rates were cheap and the only open question was how much ahead of schedule the state's three electric utilities would pay off their bad debts.
Now, Bowen is one of the players at the center of the power meltdown. Any state legislation to clean up the mess must pass through her committee. And what a mess it is. A power shortage across the Western U.S. has been exacerbated by what nearly everyone now acknowledges is a flawed deregulation law. San Diego Gas & Electric customers, the first to face a truly open market, were slammed last summer with bills three to four times higher than the summer before.
Last month, the crisis spread to the state's two other electric utilities, Southern California Edison and Pacific Gas & Electric. While wholesale electricity prices shot up 50 times over 1999 prices, SCE and PG & E; had their electricity rates capped and were unable to pass on the higher costs to customers. As a result, they have racked up almost $9 billion in additional debts, prompting Wall Street rating firms to put them on credit watch and making it more difficult for them to borrow the money they need to buy power.
SCE and PG & E; have petitioned the state's Public Utilities Commission to allow them to raise rates 30 percent and 26 percent, respectively. The PUC meets this Thursday to decide how much of a rate increase to grant the utilities.
Just prior to testifying at PUC hearings on the issue last week, Bowen took time out to give her perspective on the power crisis to the Business Journal.
Question: Do you think the electric utilities should be granted the level of rate hikes they are seeking?
Answer: I haven't seen all the numbers. But any rate hike that is decided upon should not be retroactive. You shouldn't punish businesses and residents for power they used in the past, since it's now too late for them to respond by using less.
Also, I believe the utilities should bear some of the costs themselves. Wall Street needs to remember that the shareholders of the utility companies benefited enormously when rates were low and they were paying down their debts during the first two years of deregulation. The utilities made the bet that they would recover some of their costs because wholesale prices were lower than the capped customer rates. They should not escape all of the consequences of that bet when it goes bad.
Q: Do you think the power wholesalers are gaming or otherwise manipulating the system? If so, is there anything the Legislature can do about it?
A: I believe that there has been some taking advantage of rules to maximize profits in a way that hurts utilities and ratepayers. But I can't say at this point whether they have broken the rules or unfairly manipulated the system. So much of the data that would answer that question are proprietary; even the Federal Energy Regulatory Commission, which has been looking into this since August, has yet to finish its investigation. And that's part of the problem. I don't think the surveillance of the wholesale market has been adequate or effective. It's very difficult to figure out what's happening.
I'm not just talking about what the utilities pay on the open market. For a market to truly work, the end users, people like you and me, need to know what the prices are and how they fluctuate so they can make decisions on power use accordingly. Right now, people don't truly know what the impact is of using a clothes dryer at 2 p.m. vs. using the dryer at midnight.
Q: Is that why there's so much confusion out there about the severity of the crisis?
A: Exactly. In fact, I've had a large number of people call up my office and say to me that this whole crisis is made up. Because they haven't seen it in their bills, it's not real to them. They are also not seeing any change in behavior of those perceived to be large energy users. Car dealerships are an obvious example. People call my office and say: "Those car dealership lights are on 24 hours a day. How can there be a power shortage?"
Q: So what are you, as chair of the energy and utilities committee, going to propose in the way of legislation to address this crisis?
A: I've already proposed some legislation to change the make-up of the governing board of the Independent System Operator (the entity set up under deregulation to ensure that everyone has access to electricity purchased on the open market). The board needs to be more accountable to California ratepayers instead of beholden to the out-of-state wholesalers, which is why I'm proposing that the board consist of three gubernatorial appointees. We're still working on this, but I'm looking at having the board consist of the president of the Public Utilities Commission, the chairman of the California Energy Commission and the head of the Electricity Oversight Board.
I will also introduce some legislation to incentivize further conservation and demand management measures. I've always been a fan of conservation. But this is an instance where conservation not only is good for the environment, it also helps us keep our own money in our own pockets. The utilities really aren't focusing on this.
Q: But Edison Chairman John Bryson is already asking the public to conserve electricity by turning off holiday lights and the like. Isn't that enough?
A: No, it's not. It takes more than John Bryson asking people to conserve. We need to use our (state budget) surplus to give loans or outright grants to residents and business owners so that they can purchase more energy-efficient appliances and systems. And government agencies should be out in front, setting the example, so there should be funding for things like more energy-efficient traffic lights.
But it's not just installing more energy-efficient equipment. There's the whole area of demand-side management, of planning when to use your power. Everyone knows that if you wait until the last day before Thanksgiving to purchase plane tickets, you're going to pay a very high price. So you purchase tickets weeks in advance to get a lower price. Likewise, if you know that running your dishwasher at 4 o'clock in the afternoon on a hot summer day is going to cost you twice as much as running it at midnight, you'll plan accordingly. The same goes for a business: If you can stagger work hours and turn off some systems during that afternoon crunch, you'll save money.
Q: Are there other measures you're considering?
A: We need to change the way the rate structures are set up, to make people more sensitive to the marketplace. I'm very concerned that if the PUC simply adopts a rate increase across the board without changing the rate structure, it won't do much to solve the problem. As it stands now, there's a certain threshold for a low "lifeline" rate that covers the barest essential power usage in a home. Then, for everything else above that, there's only one rate. That doesn't reflect the marketplace, where it costs more to buy that last kilowatt-hour than that first one. There need to be more tiers for energy use. That way, people know that if they cut back on their energy use, even a little bit, it will make a bigger difference in their bills.
Q: There's been a lot of talk about re-regulating the electricity market. Edison Chairman Bryson has advocated it on the airwaves and consumer advocate Harvey Rosenfield has an initiative that would essentially re-regulate the market. Where do you stand on this issue?
A: This is an area that needs a lot of discussion and one in which we need to tread very carefully. Obviously, we can't go back to the exact situation we had before. We need to have discussion of whether we ought to have public control over the transmission system. There are upsides and downsides to that, and it may not solve the immediate problem we have of pricing. There's also been talk about having the state buy generating plants, but that might make the utilities' financial situation worse because those power plants are their only remaining in-state assets.
As for the Rosenfield initiative, that will be too late to solve the problem. It couldn't go on a ballot before March of 2002, and it couldn't possibly take effect until January of 2003. If we don't have this situation under control by then, we'll have far more serious problems then dealing with an initiative.
Q: You've been tracking this issue for two years now. Everybody knew no new power plants were going up and everyone knew the economy has been expanding rapidly. So how come no one saw this crisis coming?
A: We didn't start seeing any signs of trouble until the California Energy Commission came out with a report in mid-1999 warning of possible power shortages on the horizon. But even they didn't see the full extent of the explosion in demand, especially the increasing demand per capita now that everyone has computers and is wired for the Internet. And at that time, everyone just ignored the report, which was really frustrating.
It seems to me that when deregulation started, people just placed their faith in the market. The assumption was that the markets would take care of everything, the market would provide sufficient supply. Cost was the issue, not supply and reliability. In fact, when the deregulation law was being discussed four years ago, there was little focus on the whole supply issue.
Q: Did you have any doubts four years ago when both houses of the Legislature unanimously passed AB 1890, the deregulation law?
A: I was very uneasy and had a lot of questions and doubts. We were entering truly uncharted waters and there didn't seem to be enough time to air all the concerns. We had no idea how the electricity market would actually work. But Jim Brulte, R-Rancho Cucamonga, Steve Peace and Dianne Martinez (former Assembly Democrat from Alhambra), who didn't agree on much of anything, all agreed that this was the best that could be done. They also put it to us that this was better than what the PUC was proposing at the time, which was a much speedier direct transition to an open market.
For reprint and licensing requests for this article, CLICK HERE.