California Left In The Dark

by Elizabeth McCarthy

Last week, a handful of newspapers and a Republican legislator filed Public Record Act requests seeking to wedge open the secrets about the deals being made for long-term contracts.]

Much to the dismay of consumer activists, California's Governor Gray Davis has held exclusive meetings with the heads of Pacific Gas and Electric and Southern California Edison. The two companies, which helped craft the much-maligned 1996 deregulation law, have wracked up billions in unpaid wholesale energy bills they claim they can't pay. Few outside Davis' inner sanctum, from reporters to citizens, know exactly what goes on during Davis' closed-door meetings. The matter is aggravated by the fact that two of Davis' energy advisors have ties to Edison.

Most of the non-insiders are unsure how many meetings and conference calls have been held since the state's two-year old deregulated energy market went haywire and who besides PG&E and Edison have been included. What is known is that a deal on how and who will pay off the two investor-owned utilities humongous debts is in the works.

The multibillion dollar question is this: What will the state get in return for paying off their debt, if anything? The size of their financial hole -- be it $13+ billion that PG&E and Edison claim, or a fraction of that 11-digit figure as ratepayer advocates insist -- is a matter of hot debate.

Up until the third week of February, Maviglio said the governor held three exclusive talks with the heads of PG&E and Edison, John Bryson and Robert Glynn respectively, since the beginning of the year.

"All information will be released at the appropriate time," Maviglio said, acknowledging the frustration of those outside the inner circle trying to be informed.

Since late February, Davis began meeting almost daily with the utility executives.

In the meantime, consumer and ratepayer advocates fear Davis will cut a deal that ultimately knocks up consumers utility rates, but only after the November 2002 elections when the governor is up for reelection.

"It is very troubling," said Mike Florio, senior attorney for TURN, a 25-year-old organization that works to protect ratepayers. Florio explains that his organization's role has been limited to letting the governor know what they like and dislike about the proposals he releases. Other activists, including those from the Foundation for Taxpayer and Consumer Rights, Global Exchange and California Public Interest Research Group, have had no access to the governor and/or limited contacts with key legislators.

"Everyone, except for a select few, is running into walls," said Doug Heller, consumer activist with the Foundation for Taxpayer and Consumer Rights. The foundation launched the successful insurance initiative in 1988 that led to more than $1 billion in customer rebates and rate rollbacks. The group may put an initiative on the ballot next year that would create a state power authority to run the electricity business if Davis and the legislators fail to protect the state's consumers.

For Heller, Davis' inner circle, which includes Hertzberg, is a "den of thieves."

Hertzberg's advisors included two investment bankers from Wall Street's Credit Suisse First Boston Bank, whose client list includes many of the generators selling power into the California market at astronomical rates. Hefner acknowledged that Credit Suisse bankers were part of Hertzberg's team of experts, but said they worked on a temporary basis and for free. In addition, two of Davis' energy advisors were formerly employed by Edison, Michael Peevey and Larry Hamlin. Peevey, who was appointed as Davis' special advisor, is a former president of Edison. Hamlin, an Edison vice president who is on leave, is the new power plant construction chief for the state.

Benjamin and others in the Public Power Campaign have attempted without success to meet with the governor to counter the lobbying efforts of the utilities, generators and Wall Street.

Meanwhile, momentous changes moved ahead with minimal public input. In January and early February, emergency legislation was passed and signed into law at breakneck speed. Committee hearings were called last minute and public participation was scant, although billions of dollars of taxpayer money was on the table.

• In mid-January, the state stepped in to buy electricity for the two private utilities and spent $45 million a day of taxpayer money, for a total of $540 million. In spite of the sky-high price tag, how much electricity the state bought is a well-guarded secret.

• Later that month, emergency legislation was passed that dissolved the Cal-ISO board and replaced it with a much smaller board that Davis hand-picked.

• Also signed into law was a bill that allowed the state to enter into long-term power contracts, which was backed by $10 billion of the state's General Fund money. The terms of the contracts have been kept secret, for "competitive purposes."

• On February 8, the governor issued a series of emergency orders to speed up the construction and retrofitting of power plants. Several hours after the press conference, when his orders were finally available, it appeared the new batch of electricity supplies from the plants would be at the expense of the environment, contrary to Davis' claim.

• The governor is in the midst of exclusive negotiations with PG&E, Edison and San Diego Gas and Electric to work out a possible purchase of their 25,000 miles of electrical wires strung across the state. Ratepayers fear he will buy them at an inflated value.

"The administration and legislature seem hell-bent on crafting a solution behind closed doors while the public remains -- literally at times -- in the dark," said Kent Pollock, executive director of Sacramento-based California First Amendment Coalition. "They apparently are confident that we will trust the self-serving nuggets of information they release following closed-door meetings."

Crisis management, however, often comes with a price. "Haste is what got us into this mess in the first place and we're not going to make that same mistake again, "acknowledged Roger Salazar, Davis' spokesperson.

Many consumer advocates and legislators worry about the speed at which things are coming down the Capitol pike. They point to the grave consequences arising from the 1996 deregulation law by Senators Steve Peace (D-Chula Vista) and Jim Brulte (R-Cucamonga), which was rammed through the legislature and devoid of adequate public debate. It passed on a unanimous vote and Governor Pete Wilson eagerly signed it into law.

Sacramento's Assemblyman Darrel Steinberg defended the governor's and legislators recent actions saying. "Given the crisis at hand, the consequences of inaction are great in and of itself."

A looming question though, in light of the emergency powers, is how much of this energy crisis is manufactured?

A letter from Credit Suisse First Boston Corporation, which was posted on their web site, indicated the state's energy shortage is a means to an end. "[T]he rolling blackouts in California are more likely intended to soften up the Legislators and the voters to the need for a rate increase than they are indicative of a permanent 'when the lights went out in California scenario,'" states the January 18 letter.

The memo was brought to Hertzberg's attention but he didn't see it as a cause for concern, Hefner said. "It is not from the folks on the ground," he added.

Heller reacted very differently, contending that Hertzberg should have taken the letter to state Attorney General and initiated a racketeering investigation into the generators' practices.

Since the beginning of the year, the Public Power Campaign has been trying to cast some light on the fast moving, high stakes energy game and Davis' maneuverings. Group leaders have made numerous phone calls, sent faxes and letters to the Governor to set up a meeting in his office, but to no avail.

They strive to not only prevent legislation saddling consumers with the investor-owned utilities debts but also stop measures that weaken environmental safeguards to boost energy supplies. The coalition wants profit driven private utilities replaced by public power agencies -- like the Sacramento Municipal Utility District and Los Angeles Department of Water and Power.

On February 7, and coincidentally the day after Davis had dinner with the head of Edison, Benjamin and Rodriguez demanded to see the governor once again. They waited for half an hour in the Capitol to schedule a meeting.

Then they got mad.

The two women attempted to march into Davis' office but were grabbed by CHP officers at the door. Benjamin and Rodriguez were arrested and taken to Sacramento County Jail.

Rodriguez was released but Benjamin was thrown into jail for 15 hours. She said she was given neither food nor a blanket. At 5:00 a.m. the next day, she was released from jail after friends posted $1,000 in bail and learned she was charged with resisting arrest and battery against the arresting CHP officer. Benjamin is under 5 feet tall and weighs less than 100 pounds.

"I was the one who was battered," she said, then quipped she would have been better off spending the $1,000 on campaign contributions to Davis.

At the March 1 court hearing, Benjamin demanded a trial on grounds the charges against her are baseless.

As early March, Davis' office had not scheduled a meeting with Benjamin or Rodriguez.

But that move has yet to happen. Instead, on January 19 Davis signed a bill passed by the legislature, authorizing the state to spend $400 million to buy power for the utilities' customers on a temporary basis.

"They just threw $400 million down the toilet without providing any protection to the taxpayers," Heller lamented, noting the state could have bought a utility power plant for that price.

A few days later, during a Senate energy committee hearing it was revealed the state was spending about $45 million a day to buy megawatts for the private utilities. (One megawatt powers about 1,000 homes). How much power California received for the hefty sum was very hush hush.

Spokesperson Maviglio said the price had to be kept under raps because the state is buying energy every day. Revealing the sum would only increase the generators leverage, he said. The price tag circulating in the capitol hallways was said to be $.30 a kilowatt hour, more than five times higher than what Davis said he would pay. (To put the price in perspective, PG&E ratepayers now pay a capped rate of $0.065 kilowatt-hour. One kilowatt/hour is the equivalent of 10 100-watt light bulbs burning for 60 minutes.)

Until a few months ago, PG&E and Edison were sitting pretty. According to recent Public Utilities Commission audits, they reaped $16 billion from the deregulation law, which required ratepayers to pay off the companies' bum investments, such as cost overruns at nuclear plants. They also have benefited from the unprecedented wholesale energy costs because they sell electricity from their fossil fuel, nuclear and hydro power plants into that market.

The audits also revealed the utilities sold off large chunks of their aging power plants and much of the money they raked in under the deregulation scheme went to their parent corporations. But the parents, PG&E Corp and Edison International, which are worth billions of dollars, have refused to throw their subsidiaries a lifeline.

After agreeing to buy power PG&E and Edison said they couldn't afford, Davis floated the idea of having the state take stock options in exchange for the companies debt. After it was released, consumer groups attacked the plan as seriously flawed. The utilities would be bailed out with shares of questionable value.

"The revenue they might one day generate is a drop in the bucket under the most optimistic scenarios," said Nettie Hoge, the executive director of TURN. Another problem was that the ratepayers' shareholder profits would be tied to utility rates. If their utility bills rose so too would their shareholder returns. There was also inherent risk of owning stock in companies owning and operating nuclear power plants, notably possible leaks and decommissioning costs, which can run into the billions of dollars.

In spite of Davis' moves, the energy crisis continued to spiral downward. Then the day before Groundhogs Day, Davis signed emergency legislation by Assemblyman Fred Keeley (D-Santa Cruz), which allowed the California Department of Water Resources (DWR) to enter into long-term power contracts and sell the electricity to PG&E and Edison customers. DWR's purchases are backed by $10 billion in taxpayer money. Just how that money will be paid back is still a mystery and so is the impact on ratepayers. In addition, the price tag of the watts has been kept in the dark.

DWR requested sealed bids from generators and after its first round of bidding received a fraction of the power it needed to cover the shortfall. Many consumer advocates didn't take issue with the secret bidding process because the state's power costs would go even higher if generators knew what their competitors were charging. But the activists insist that after the long-term bids are in the terms should be assessed by more than the administration and DWR, who are venturing in new territory. Especially given the huge amount of taxpayer money at stake.

"It's a little risky to have the state enter into deals that few people understand," warned Dan Jacobson, Cal-PIRG legislative advocate. Maviglio countered that Davis' experts are well-versed in power purchases.

State Treasurer Kathleen Connell, however, thought it would be a good idea to inform the public about how their money was being spent. She announced February 8 that she was launching a web site that listed the amount of power the state bought daily, its purchase price and how the taxpayers would be repaid. But her efforts were intercepted by the administration.

The next day, the controller reversed course saying, "After discussions today with senior Davis officials, it is clear that final negotiations regarding long and short-term energy contracts would be impacted by disclosure of payment information."

The Department of Finance revealed the state as of mid-March has spent $2.7 billion on power.

For example, Davis appointed a new board of directors to the California Independent System Operator in January. An emergency bill by Assemblyman Keeley and signed into law allowed Davis to appoint his own Cal-ISO board.

Four of the five new Cal-ISO board members have worked with the governor, with TURN's Mike Florio being the odd man out. During the new board's first meeting, statements were made indicating the organization's independence would take a hit.

When the Cal-ISO board of directors was a 26-stakeholder board, made up of utility, generators, industry and consumer representatives, the agency's public relations office did little to filter its news. In fact, it made impressive efforts during the weeks of initial chaos to keep the media up to date. Recent calls to the Cal-ISO office, however, have been directed to the governor's office.

Davis spokesman Roger Salazar denied trying to control the information coming from official sources but admitted the administration has sought to curb the information coming out of Cal-ISO. "One thing we have asked them is that they speak with one voice so the messages aren't mixed," he said.

Over at the Public Utilities Commission, Davis has imposed a short leash. Almost immediately after he appointed former Office of Planning & Research director Loretta Lynch to the head of the commission in March 2000, the formerly-open members of the commission staff quit returning phone calls to reporters, citing directives from Lynch's office. The commission had shut down public access little-by-little in the last decade while under Republican rule, but the change in information access was quite abrupt with Lynch's appointment. Her office responds, but all information must get filtered through the PUC president's office, her staffers said.

At the time the bill that would create the new Cal-ISO was being debated, a number of legislators expressed concerns about having Davis call the shots on selecting new board members. Senator Deborah Bowen (D-Marina del Rey) later introduced legislation that would require new Cal-ISO board members to be confirmed by the Senate. "This will balance the power of the executive and legislative branches," she said at a February 22 Senate Energy Committee hearing.

In early February, Davis executed a series of Emergency Executive Orders to speed up the building and expanding of power plants. He touted his plan as accelerating requisite plant permitting to add 5,000 megawatts of new juice every year for the next four years.

"My proposal and executive orders will build our energy supply and maintain our environment commitment," Davis announced, while standing beneath huge circuit breakers at a power plant under construction in Yuba City. At the February 8 press conference, press releases were handed out that supposedly summarized his orders, but copies of the directives were not included. Several hours passed before the governor's office released the orders and the language indicated that air and water quality protections would be sacrificed in the name on new power supplies.

Two days after the February 14 launch of the citizen power campaign, Davis unveiled his framework for grabbing the out-of-control energy market by the horns. Prior to the start of the three-day Presidents' Day weekend, he said a key ingredient of his rescue package was a state buy-out of PG&E, Edison and San Diego Gas and Electric's 25,000 miles of high voltage wires. Earlier, Senator Burton introduced a bill to have the state take over the system but the legislation was watered down to authorize Davis to cut a deal with the utilities.

At a packed press conference, the governor refused to say how much we would pay for the three private utilities' electrical wires. After being pressed by reporters, he would only concede that the sales price "would be some multiple of book value," which is $3.2 billion. A final purchase price will help the utilities pay off their debt -- by how much is a matter of great dispute.

TURN and other ratepayer advocates have been kept out of Davis' exclusive meetings to cut a transmission highway-for-debt swap. The advocates were, however, somewhat pleased to learn the governor's idea of exchanging stock options for the utilities debts was no longer on the table and that a valuable asset was part of a deal. But their immediate concern became the cost of the transmission system.

The following week, Davis said the sales price under consideration was 2.3 times above book value: $7.36 billion. Ratepayer groups said the wires were not worth that amount and that it was a backdoor utility bailout. Sections of the private utilities transmission systems date back to the 1920s. Upgrades of the aging system that suffers notorious electron bottlenecks are estimated at $1 billion and expansion is needed.

In one of the odder alliances, Republicans agreed with the consumer groups this time. After the proposal to buy the lines was released not one backed Davis' grid-for-utility-debt exchange, in no small part because they too were left out in the cold. "They view it as a complete capitulation to the utilities," said Assemblyman Bill Campbell's (R-Villa Park) spokesperson Jaime Fisfis.

The foundation head, Harvey Rosenfield, said his group wanted to work with Davis and legislators but added his group would not participate in any non-public legislative negotiations or discussions. "We have nothing against private discussion on public policy, but we believe the process of developing legislative proposals to fix this disaster should occur before the full scrutiny of those who are most affected -- the public."

Recently, the group got wind that momentum was building to knock out the potential initiative -- either via legislation or a prohibition woven into a court settlement of PG&E and Edison' lawsuits against the state over their ability to raise rates.

"The prospect of the Legislature and Governor attempting to muzzle the voters would fuel an extraordinary and appropriate public backlash," Rosenfield warned.

"It is all the things we know and dislike about politics but to the extreme," Benjamin said. Much of the blame is attributed to the utilities and/or generators political contributions that have gone to Davis and all but a handful of the 119 state legislators.

Another important critic is Barbara George, an activist since the 1960s and founder of Women Energy Matters (WEM), a group that promotes environmentally sound energy practices in the home. Domestic consumption soaks up slightly less than a third of the state's energy.

The evening after Davis announced his deregulation fix-it proposal, Benjamin and George met with a group of about 50 people at a cafe in downtown Sacramento to discuss the energy dilemma.

"This is an unbelievable giveaway, an unbelievable scam, for which we will be paying for many, many years unless we stop it," Benjamin said. She warned that failure of Davis and the Legislature to get to the root of the problem would drain the once-sizable budget surplus, depriving California of needed funds for myriad programs -- from education to health care.

But, she and George did not deliver all bad news. They noted that citizen and ratepayer advocates helped shoot down Davis' plan to use public funds to buy the utilities debts in exchange for stock options, which wouldn't come close to reimbursing the state.

George added that the energy chaos also presents a golden opportunity to rebuild the energy system to address the needs of the 21st century and reduce global warming. Deregulation squelched conservation, non-polluting energy and the expansion of the network of public power agencies, but they are being given new life.

Opportunity to further promote that agenda will arise when bills to carry out Davis' plan as well as other legislative proposals for curing the very sick energy market are debated at public hearings.

If the people don't like what they get, they can back the initiative that may call for the state to run the electricity market. Citizens and ratepayer may also have an opportunity to finally have their voice heard at the state Capitol and express their dissatisfaction during the next election.