When Loretta Lynch accepted Gov. Gray Davis' appointment to head the California Public Utilities Commission a year ago, she knew the job would involve facing a certain amount of controversy. After all, the PUC is a huge agency with regulatory authority over telecommunications, energy, trucking and a whole host of other areas directly affecting California residents and businesses.

But nothing prepared the 39-year-old Lynch for finding herself at the center of the state's worsening energy storm. The former civil litigation attorney and Democratic political campaign worker had little grounding in the massive changes wrought by the state's risky plunge into electricity deregulation.

Yet that hasn't stopped Lynch from weighing in on energy issues. Last August, she issued a report warning of the crisis to come. In January, the PUC approved a rate increase averaging 9 percent. And last month, she pushed through the PUC a proposal to raise rates up to 46 percent, supposedly without consulting Gov. Davis, who steadfastly opposed such a rate hike.

But all along, Lynch , who hails from President Harry Truman's hometown of Independence, Mo., has said the buck really stops with the Federal Energy Regulatory Commission, which she says has shirked its responsibility to clamp down on wholesale electricity prices.

Lynch, in a meeting with editors and reporters at the Business Journal offices earlier this month, offered her assessment of the situation.

Question:

A team of congressional "fact-finders" recently visited California. What did you tell them?

Answer: My message was that Congress needs to get the Federal Energy Regulatory Commission to enforce the law. The FERC is not following its mandate to ensure just and reasonable pricing; if it were, we wouldn't have this problem we're facing now.

FERC has said the market is dysfunctional, they've said the prices California is being charged are unjust and unreasonable, but they haven't taken the next step and said the prices are unlawful.

Instead, they have given the generators and the sellers every opportunity to come up with some concoction about why these prices should be justified.

Q: So what needs to happen to get Congress to put pressure on the FERC?

A: The California delegation needs to unite, and businesses need to add their voice, to force FERC to do its job and get these wholesale prices under control. I was heartened the other day to hear Republican business owners and legislators in San Diego saying temporary rate caps are needed. They had the experience of last summer, when their electricity bills shot through the roof. They know what harm can be done to the economy.

Q: Yet you proposed and the PUC approved on March 27 rate hikes of up to 46 percent for ratepayers of Edison and PG & E.; Why did you take that step?

A: As you know, the utilities have been asking us for months for rate hikes. In fact, the utilities were seeking authority to bypass the PUC and raise rates on their own. In December, we put together an expedited review of their requests, including an independent audit to look at the utilities' books and determine whether a rate increase was warranted. We determined that it was.

As for who will pay the higher rates, we haven't done an allocation yet. All the PUC has done is authorize the rate increase, based on the need for more revenue coming into the system. And let me be clear here, this is for the going-forward purchase cost of power, not for the back debt. We are now designing the new rate structure; we are holding evidentiary hearings this month and my goal is to have that rate structure come before the commission for final approval on May 14.

Q: Could you explain your proposal for how those cost increases should be instituted?

A: I have put forward a proposal. That proposal first follows the guidelines of AB 1X, which shields residences that use less than 130 percent of their baseline allocation from rate hikes. My proposal tiers additional residential use: a somewhat higher rate for those who use 200 percent of baseline or less, and quite a bit more for those who use more than that. Similarly, for businesses, the proposal is tiered so that those who use more pay more. But some businesses either are on or plan to switch to "time-of-use" meters that track energy usage on an hourly basis. For those businesses, my proposal charges drastically higher rates for peak-time summer usage (between noon and 6 p.m.).

Q: There has been considerable discussion around the issue of forcing the utilities to tap into profits from their parent companies or operating affiliates. Where does the PUC stand on this issue?

A: We have opened an investigation into the holding-company issue. The PUC in the mid-1990s granted the approval for utilities to form holding companies, but on the condition that the utility arm would receive what's called "first priority" in capitalization. The issue now before us is just what is meant by that phrase. The utilities argue that it only applies to capital projects, not to ongoing operational costs. Others believe that "first priority" means that the utility must be able to function financially.

What we do know is that several billions of dollars went up from the utilities to their parent companies in the first two years of deregulation.

Q: Do you have any sense of how this is going to all turn out?

A: That's very hard to see right now. We could end up with some sort of hybrid system, with both a public power and a private power component, similar to New York, Alaska and Nebraska. I do know we want financially viable utilities to be part of whatever system emerges. But right now, I'm more focused on getting the FERC to do its job.

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