Gov. Gray Davis should follow Pacific Gas & Electric's example and
admit that his electricity program is also bankrupt. The governor's
primary objective was to keep the utilities from bankruptcy. He has
failed. He should admit his failure and reformulate his policy. Whatever
he does must be based on a clear understanding of the problem.
The people of California have a right to buy electricity at fair
prices. Producers of electricity are entitled to a fair return on their
investment. Before 1998, a balance between these two points was struck by
the Public Utilities Commission using cost-of-service pricing. Utilities
presented their production bills, the PUC reviewed them, determined a
reasonable rate of return and set a rate high enough to cover both.
California became the second most efficient user of electricity in the
country under this system, and its utilities prospered.
In 1996, the electric power industry, with promises of lower prices,
induced Gov. Pete Wilson, the PUC and the Legislature to reduce the
commission's power to ensure just and reasonable electricity prices.
Under the power industry's system competition, not regulation, would set
prices, and prices would go down. PG&E head Robert Glynn represented it
to be a "huge opportunity for consumers to lower their energy costs."
PG&E, San Diego Gas & Electric and Southern California Edison, with PUC
approval, then sold California's most significant generation plants, its
gas-fired units, to five multinational corporations.
These five companies led the onslaught on California consumers,
raising electricity prices from $7 billion in 1999 to a projected $70
billion in 2001. California authorities have determined that 98% of the
price bids submitted by these five companies--some 25,000--were based on
monopoly, not competitive, pricing. Gov. Davis is right: "California's
deregulation scheme is a colossal and dangerous failure."
No one--not Wilson, the PUC or the Legislature--provided an exit
strategy if deregulation did not work. Davis has been unable or unwilling
to come up with one. He failed to get on top of the problem when he took
office, despite clear warning signs. He failed to see that he cannot
finance ever higher prices with public funds, and he lacks the resolve to
do what he must to stop them. His one effort to use tax funds to keep the
utilities out of formal bankruptcy has failed, with PG&E's filing for
Chapter 11 last week.
There are no good choices now. However, we cannot continue down the
road Davis has chosen. It leads to financial ruin. We cannot rely on
private companies building new generation plants because the same price
gougers will control how the new electricity gets priced. We cannot rely
on the Federal Energy Regulatory Commission or President Bush. California
can only rely on California to solve this problem.
As a first step, Gov. Davis should do what he threatened to do in his
State of the State address: use the power of eminent domain to recover
the gas-fired generation plants that the price manipulators are using to
set monopoly prices. He can pay "just compensation" to the owners but not
one dime more.
The governor should now recognize California's vital interest in
protecting itself from these prices. Eminent domain is a reasonable tool
to use to achieve that goal. It has been used in less compelling
circumstances. For example, eminent domain was used in the early 1980s
for George W. Bush's investment team to assemble the land on which the
Texas Rangers' stadium is built, from which he and his partners profited
handsomely. If eminent domain can be used for private profit, it can be
used to protect the vital interests of the state of California. The
plants should be divested to private ownership, but only to companies
that are under PUC jurisdiction.
The PUC also should be used to plan how California can move forward to
an improved cost-based system of regulation. What we cannot do is to
continue on with the current plan, which is to have the governor set
electricity prices behind closed doors, working with the very people who
are suspected of unlawful price fixing. PG&E's bankruptcy provides the
governor with a new opportunity to move to a more effective program.
The governor should now stop using public funds to buy electricity. He
should urge Edison to join PG&E in reorganizing under bankruptcy court
protection. This will allow all parties to contest the unpaid billions of
dollars of receivables owed to the power producers and their associates.
This will send a message to Wall Street to stop funding such outrageous
and predatory practices because they don't pay.
The state attorney general should conduct a criminal grand jury
investigation into the alleged wrongdoing by the power generators. He
should also join in the private litigation that asserts that the power
producers violated the state's antitrust laws. He should follow the
investigative trail to Houston, Tulsa, Atlanta and wherever else it
Finally, Californians are going to have to make a short-term sacrifice
to get a long-term gain. The governor's call last week for conservation
does not go far enough. Each city council and mayor and all boards of
supervisors should be required to come up with an emergency conservation
plan. We need to cut consumption to the point where we can meet it with
current supply. We cannot put an unfair burden on business because this
will cost jobs. People with lower incomes and fixed incomes need to be
PG&E's bankruptcy filing removes the foundation of the governor's
plan. He should remember the example of FDR, who likened himself to a
football quarterback who tries one play and, if it did not work, then
tries another. But for heaven's sake, try something. We must show our
fellow citizens that we know how to act effectively in solving this