A new way out of the power crisis

Just regulate the PUC through Governor's request, then legislation, so that they stop over-regulating the utilities

There is a simple, obvious solution to the immediate financial crisis faced by our utilities. We can just change a few key rules that caused most of the problems in the first place. The Governor can immediately implement this himself and it can be formalized later. Yet no one is talking about it. Why?

Essentially, the crisis happened because California did not do its homework on deregulation. Pennsylvania did. They deregulated around the same time we did and are viewed as a model of how to do it right. We made many mistakes that Pennsylvania did not. Unlike other states, we over-regulated our deregulation. Here's how:

  • We did not allow the market price to cover actual costs
  • We did not allow any major new power plants to be built (and we didn't make it easier)
  • We did not allow utilities to enter into long-term power purchase agreements and forced them into an inefficient spot-market bidding process
  • We did not allow utilities to keep their power plants
  • We did not take it seriously when the utilities complained more than 6 months ago

Since a major reason the utilities are in default is over-regulation by the PUC, the solution is straightforward. Just do what other states have done, and what we should have done four years ago: regulate the PUC so that it does not continue to over-regulate the utilities.

Today, utilities are not allowed to buy power with long-term contracts and they can be forced to sell for less than cost. Governor Davis could fix these two items instantly by asking the PUC, and then asking the legislature to subsequently make that change permanent. This change, along with acknowledgement by the state of the validity of the federal lawsuit brought by the utilities to recover their losses (which it appears they will win anyway), would instantly restore their credit-worthiness.

To keep rates down, Governor Davis can simply ask the utilities to institute, and later have the PUC mandate, a special “rate freeze” for those low- and fixed-income people unable to pay an increase. Because the utilities can probably do a better job buying power than the state (because that’s what they specialize in), consumers may get an even better deal than if the government was involved. The PUC can even give them an “incentive” by letting them make a small profit if they can negotiate better power prices than the state. This would guarantee consumer pricing that is equal to or better than the current Assembly solution which tries to solve the problem by involving government in the purchase of power (AB18). More importantly, this would  align the interests of the utilities with those of the consumer, something AB18 does not do at all.

With this approach, Davis would solve the problem by fixing what was fundamentally wrong in the first place. He would reduce government over-regulation and increase consumer options. In addition, there is a huge incentive for utilities to reduce the consumer price still further. Other advantages of this approach relative to AB18 are detailed on  my website at www.skirsch.com. They include:

  • It can be implemented immediately by Governor request and formalized later
  • It is simple to understand
  • It is faster and easier to implement than AB18 because government does not have to get involved
  • It requires minimal legislation
  • It doesn't require a delicate negotiation with the utilities
  • It provides an instant "pathway to creditworthiness" for the utilities
  • It increases competition
  • It acknowledges market realities
  • It provides the best possible rate for the consumer
  • There are minimal rule changes so it is less risky
  • It doesn't require government to ever enter into the power business
  • It allows utilities to borrow to smooth out supply cost fluctuations
  • It provides for a rate freeze for those unable to afford a rate increase

Most importantly, Davis could institute this himself  immediately, without waiting for legislation, saving perhaps hundreds of millions of dollars in the meantime.

Steve Kirsch is CEO of Propel, a supplier of e-commerce software based in San Jose.  He was a member of a 10 member panel invited by the Assembly leadership to comment on AB18. He can be reached at [email protected].

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