UC Berkeley Web Feature
"The chickens will come home to roost": Former PUC president Loretta Lynch on the forgotten lessons of California's 2000 energy crisis
BERKELEY – California's a slow learner. Remember the energy crisis of 2000? Checking the newspapers to see if your neighborhood was scheduled for an emergency rolling blackout?
Fast forward to the present: the southern part of the state is bracing for a hot summer, and residents may want to track down those paper fans. The California Independent System Operator (Cal-ISO), which manages the transmission system, and the Public Utilities Commission (PUC), the state's regulatory agency, are reporting that a heat wave this summer will once again leave Southern California with a shortfall of as much as 1,700 megawatts, enough to turn the lights and air-conditioning off for 1.3 million homes.
Loretta Lynch, who was president of the PUC from 2000 to 2002, says there's a simple reason for this dejŠ vu: the state won't acknowledge that its partial deregulation of the power industry failed. (For a succinct explanation of what deregulation entailed, read this entry in the open-source Wiki encyclopedia.) Lynch was one of the most polarizing figures of the power crisis, unafraid to antagonize everyone from utility companies and federal officials to Governor Gray Davis, who had appointed her. Davis replaced Lynch as president on Dec. 31, 2002, with Michael Peevey, a business-friendly former Southern California Edison executive. She served as commissioner until her term ended in January 2005. Consumer advocates and many other groups were sorry to see her go: as the San Francisco Chronicle stated in its farewell, Lynch was "one of the few commissioners who questioned measures pushed by pro-business interests." She was among the first to call Enron's questionable business practices price manipulation and to argue for renewed regulation to keep prices affordable for consumers.
In addition to serving on several telecommunications boards and co-chairing the Alliance to Protect Electricity Consumers, a coalition of state officials who oppose further deregulation, Lynch has joined UC Berkeley's Center on Politics as an Executive in Residence. She will spend the next year at Berkeley writing a book about the public policy and political origins of the last energy crisis. Following are excerpts from an interview about her time with the PUC.
Describe briefly for us how the last California power crisis came about?
What happened was, in a systematic way, Enron and the friends of Enron started dismantling the regulatory protection that government had put into place. The power crisis was never about a lack of supply. California had plenty of power, through 2000 and 2001, that could have been generated in-state. But that power was not brought on-line. This was about manipulation: the power generators and sellers not making the amount of power they could, or trading power out of state - "parking" it - to create artificial shortages and run up the price. When I was head of the PUC I went after a lot of the sellers, 72 of them, and we proved manipulation six ways to Sunday. The Enron tapes certainly confirmed how they manipulated the California energy market.Was the idea of deregulating California's power industry misguided, or just the way in which it was handled?
Both. Deregulation is not appropriate for a fundamental economic necessity like power, which we need every second of every day. Not only do families need it, but businesses need it as well. It's like deregulating water or air, although at least water can be stored. Electricity can't: you have to use it when you make it. It also costs a lot to build a power plant to bring more supply on line. As the Enron tapes showed, by turning off one little plant in Nevada, you can bring the lights down all over Southern California. It really was that easy. And Enron and the others who copied Enron knew exactly what they were doing. So I do believe that energy deregulation is just inappropriate unless what you want is only the rich to have electricity, and even then you're going to start bleeding them dry.
The way California deregulated energy was also particularly stupid. The system the Wilson Administration put in place, a nongovernmental regulator and private corporation called the California Independent System Operator, was compromised from the start. A majority of the ISO board members were senior executives in the very companies that were manipulating the California market. So basically we had no effective oversight and a government unable to understand what was going on in time to do anything about it. California trusted that the Federal Energy Regulatory Commission would step in and regulate if necessary, which was a huge mistake - the FERC has never shown any ability to regulate on a state-by-state basis, much less the political will to do so.
Do you have any idea why you inspired so much vitriol? You even received death threats.
During the crisis, people were pretty irate, with good reason. There was never a good reason to raise rates except that these manipulators were charging exorbitant prices, and to continue to buy from them, we had to pay their price.
'Regulation worked well for 90 years. We didn't have power crises or shortages, and we didn't have power companies going bankrupt. California's acting much more like a third-world country.'
Has anything changed since the 2000 crisis?
Well, the Davis administration signed long-term contracts that were way over market price, for way too much power, for way too long. Some expire in 2009 but most are in effect through 2011. I call them the white elephants that are strangling the economy. And unfortunately, the PUC has been signing more and more long-term contracts and signing up to build more and more power plants. Basically, the route that's been chosen is not to fix the problem, which is the inherent deficiencies of deregulation that allow manipulation of price, but instead flood the market with so much power that if the Sons of Enron try to manipulate again, it will just be harder for them. But that approach comes with a very high price tag.
The idea being that in a free market, if there are more competitors, they can't engage in cartel-like behavior?
There could be 500 power sellers and cartel-like behavior would still be possible. You can achieve regional market control very easily in California - actually throughout the country - and you can shut down an area. Why are we building duplicates of these huge, expensive, polluting power plants? Just so that the manipulators can't exercise regional market control? Or, in more concrete terms, so Enron can't turn off a plant in Nevada and black out Southern California like it did last time?
Look, regulation worked well for 90 years. We didn't have power crises or shortages, and we didn't have power companies going bankrupt like Pacific Gas & Electric. With deregulation, California's been reduced to acting much more like a third-world country.
What are the chances that California will recover any of the billions lost through market manipulation?
There are some cases that have been settled, unfortunately for 6 to 7 cents on the dollar. And now under Governor Schwarzenegger, we're settling cases for 2 cents on the dollar. The evidence is clear, and I believe if we would wait and take it to a neutral court, and not the biased court of the Federal Energy Regulatory Commission, we could get our money back. I believe the state is instead hurrying to settle all the cases in order to keep this deregulated market, which is on life support, alive.
Why do you say the FERC is biased?
All of their actions in the last five years have shown me that they will bend over backwards for the generators and the manipulators, and push back anyone - a municipal utility, a state government, a consumer group, or a utility - who tries to show them evidence of fraud. [The PUC] had to go to the 9th Circuit Court three times just to get the right to discovery, and then FERC only gave us 100 days of discovery, which is a very small amount of time for such a complex case. And even then we proved manipulation against dozens of companies. FERC slapped them on the wrist, often letting them off for less money than they made in profit through their manipulations.
The term of Commissioner Carl Wood, who often voted with you in a minority bloc against the others and Peevey, your replacement as president, also ended in December. Are these lawsuits going to proceed now that you and Wood are no longer on the Commission to pursue them?
I don't know. I hope so. Certainly Attorney General Bill Lockyer has the ability to stop the settlements for 2 cents on the dollar, but the question is, "Will he?"
In January, less than a month after you left, the PUC voted 3-1 to delay indefinitely the implementation of the Telecommunications Bill of Rights, which you had fought for several years to pass last May. What does that delay mean for consumers?
That essentially they will continue to have no recourse for fraudulent activity by cell phone companies. It's a shame. The changes we proposed were not earthshaking. They were about rewriting contracts so they're in plain English that consumers can understand, spelling out hidden fees, but mostly about making sure that the phones worked in areas where the company said they were going to, and if they didn't, you could get out of your contract without a $250 early-termination fee. We wanted the cell phone companies to rewrite their business plans so that they did not, as we discovered time and time again, include huge profits from early termination fees when they knew their product didn't work in certain areas but continued to sell them in those areas anyway. It was very basic consumer protection, and it has all been put on hold by my former colleagues.
Does it bother you to see years of your work on consumers' behalf undone so quickly?
Of course. But the biggest blessing about being at the PUC for me was being able to put my vote where my mouth was on economic regulation. It's all well and good to be for civil rights or for individual rights, which don't cost anything in hard pocketbook terms, but the rubber really hits the road when you are regulating people's pocketbooks, how much they pay in utility service or for the telephone, and what kind of service they can expect.
The PUC was created in 1911 by California Governor Hiram Johnson, who put it on the ballot as a constitutional amendment to oversee the railroads. At that time, the legislature was pretty tied to the railroad, as was the PUC's predecessor. Johnson created a constitutional independent commission that would be answerable to the legislature, but appointed by the governor with set terms, so that if a commissioner didn't do what the governor liked, he couldn't yank that person. The goal was to be an independent consumer advocate: to be the guardians of just and reasonable rates and quality service. I took those words in the constitutional mandates pretty seriously. And I think not everybody does.
Before 2000, no one in California was familiar with the PUC. But then we all went through a collective crisis, and a lot more people now know what the PUC does, or what it's supposed to do. It was a crisis that was not only about policy and economics, it was also about politics. I believe it influenced the recall [of Governor Davis], and I also think that energy will dog Governor Schwarzenegger. He plans to deregulate the energy market again, it won't work, and the chickens will come home to roost. The only questions are when and how expensive it's going to be this time, when we should have known better.