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Enron Mail |
Loretta Lynch, President, California Public Utilities Commission
June 10, 2001 Lynch was appointed March 22, 2000. Previously she was director of Gov. Gray Davis' Office of Planning and Research. Question: What is this summer going to be like in terms of blackouts? What is the economic impact going to be? Answer: I don't think anybody can predict. They are wild guesses or at least estimates based on assumptions that we don't know. Three factors influence the level of blackouts. One is how hot it's going to be. The second is conservation and whether folks will really step up to the plate, both business and residences, and conserve their hearts out and load shift to non-peak times. We reduced the load 8 to 9 percent in March and April and slightly more (11 percent) in May. We're going to have to do better than that to avoid blackouts. The third factor is making sure that the generation that can run does run and right now we're doing an abysmal job of that. We have record levels of unplanned outages at generating plants. This week 10,000 megawatts were out of 35,000 megawatts (42,000 megawatts including municipal utilities) in state capacity. Historically, there has only been 3,000 to 4,000 megawatts off at any one time. Does the PUC have no control over when utilities take a plant off line? Utilities yes, private generators no. Since November the unplanned outages have been three, four times what history would show over a 20-year period. Exactly what explains that is the heart of one of our investigations. What can the PUC do about it? We have been in the plants since mid-January. In January we had 25 days of stage 2 alerts, two days of stage 3 in 31 days. We started going in those plants although we've had lots of difficulty getting into plants on time and most importantly getting the operations and maintenance logs. Why don't you get an injunction from a judge to tell the private companies they have to give the PUC everything it wants? Frankly, because in this last 100-day period I was trying to not be that aggressive, I was trying to work it out with these generators. And we have made significant movement with some of those generators. Is it illegal for a privately owned power company to shut down in order to drive up prices? Isn't that the multibillion dollar question? That's where you match you legal theories. Is the PUC joining in any of these legal actions against FERC and the private power generators? You know we actually asked for help from FERC in getting data from generators because FERC has wide access to all sorts of market data. I talked to (former chairman James) Hoecker directly in September. He said, 'No problem. You just send us your data request and we'll make sure they comply.' But we had no informal help from the FERC and so we filed a motion, in November, I believe, for FERC to compel those people under its jurisdiction to give us basic documents. FERC has yet to move on those motions to compel. Is the PUC is joining in any of the civil actions? At this point we haven't joined in the private civil lawsuits. What else can the PUC do? Well there's a ton of stuff that the PUC does in front of FERC. We appear on electricity and natural gas issues and we continue to file formal complaints to that administrative agency. For instance, it was the PUC that brought the complaint at FERC against El Paso Corp., three weeks after I became president of the PUC. We complained about anti-competitive activity. We have brought all the motions at FERC to prevent the generators from re-upping their market price authority. If FERC does nothing and allows this market-based rate authority to continue, what would you do? California is experiencing the real time consequences of justice delayed is justice denied. Eventually the administrative procedure act would allow us to go to court but frankly a variety of utilities and other folks have been trying to kick it up to either the D.C. Circuit or the 9th Circuit. Preliminary responses from the courts have been that they have failed to exhaust administrative remedies. What's in store for San Diego in terms of price hikes? Bottom line, it's unrealistic to think that San Diego can continue to be charged in the 6 to 7 cent range when everybody else now is being charged in the 10 to 11 cent range. But I can't prejudge the level because we're just starting to hear the evidence. How do you think the escrow accounts -- 'our individual charge accounts with SDG&E' -- are going to shake down eventually? Frankly, that's an issue that's also before the commission. What the legislation clearly says is that there's this balancing account that San Diego is billing things into as a regulatory accounting matter but that's not the end of the inquiry. They put the money in and they charge it to a regulatory account and then they come to the PUC. Then the PUC judges the reasonableness of those charges. And the separate watch dog component of the PUC, the Office of Ratepayer Advocates, has done some preliminary analysis on SDG&E's charges up through I believe August of 2000 and has questioned a large percentage of those charges as unreasonable because of SDG&E's failure to hedge when they had hedging opportunities. Utility executives criticize the PUC on two major counts. They say only half the utility plants had to be divested but the PUC set the rate of return and other restrictions in such a fashion that it really encouraged utilities to dispose of the other half. Second, they say that when the PUC eventually allowed them to enter long-term contracts, it did not spell out procedures in case the contracts turned out to be unfortunate moves. How would you respond? The first part wasn't on my watch in terms of the rate of return. That was set by the prior PUC. However on that question of rate of return and 50 percent versus more I think SDG&E is a little separately situated because I do think there were some encouragement of SDG&E selling off in order to be able to merge. The rate of return may have been lower than the utilities wanted . . . And the criticism about long-term contracts? I think the long-term contract issue has been painted in simplistic terms and it's not a simplistic question. When the utilities came to the commission in 2000 seeking permission the commission acted faster than it usually acts. On July 21 of last year PG&E and Edison came to the commission and said they wanted authority to enter into direct bilateral contracts. By Aug. 3 we said yes. But they claim that you did not give them the ground rules. Oh, we certainly did. We applied the historic reasonableness test. But they wanted an up-front guarantee that they would not be second-guessed and my concern on that was heightened because they have all these unregulated subsidiaries. Because they're now energy trading in the market . . . The facts are they did enter contracts and we can show you the contracts they entered into in August, September, October and November of last year. When California's deregulation law was being shaped, why was nobody concerned about abuse of market power by the private generating companies? It is truly astonishing and I believe it's because of an ideological bias from my predecessors who said, 'Well, we will have a flood of competition into this market because it's just a commodity.' But, in fact, this commodity is uniquely situated to not have a flood of competition because you have high capital barriers to entry. You have long lead times to increase supply. It's a fundamental economic necessity which can't be stored and you can't choose not to buy it, there's no effective substitute. Other states such as Texas and Pennsylvania appear to be doing deregulation right. Do you believe it can be done right? I think the jury's out on that question. Texas started from a position of supply and is energy independent and does not report to the FERC in terms of its own intrastate transmission grid. Pennsylvania already had an integrated utility sharing relationship with other states. The utilities had buy-back contracts with the plants that they sold so that they got long-term contracts at the time of sale. The utilities also sold a much smaller percentage of their plants. I say California went the farthest fastest with the least amount of safeguards. In retrospect, what was the central flaw in this deregulation plan? The central flaw was not to realize the market power would be exercised by the sellers of a fundamental economic necessity for which there is no effective substitute. In the current argument over temporary price caps, the Bush administration says this might diminish short-term pain but in the long term would discourage new supply. What's your reaction to that? My reaction is price caps or cost-based pricing is an absolute economic necessity for California. The market is broken. Regardless of who broke it and how it broke, it's broken, maybe irrevocably. Until we can make a market work here we must have some protection for our economy. We really are going back a hundred years and reaching back, these companies are re-creating the kinds of trust that led to trust busting. The economy can't withstand this and in terms of the supply argument, yeah supply is a state issue. Gov. Davis is streamlining and we have all these plants being built and plus we are conserving like never before. We have supply coming on line, it's being built, it's not being abandoned and if it were abandoned in the unlikely event the people that sunk in hundreds of millions of dollars into an investment decided to walk and abandon their investment, which isn't rational economic behavior, then the utilities could take those over and build it at cost-based building or the power authority or whoever. Most of those plants entered the permitting process when the price cap was $250 a megawatt. Talking about rational behavior, it's certainly in the political and economic interest of the Bush administration not to see California's economy go in the tank, not to see the economy of the whole West Coast be hammered and suffer accordingly. If you presume rational behavior on their part, you'd have to presume that they're doing what they think is the right thing. But once again it's a question of are you going to stand on your ideology regardless of all facts to the contrary or are you going to try and fix given the actual facts that are at play in that market? I think even the most committed free market person, if they're principled, recognizes that you need a market cop in any market. This market's being gamed in a myriad of ways. Are you getting anywhere with the FERC in making the arguments that you're stating here? The question right now is who is the FERC? I have not met formally with the two new FERC commissioners since they've been confirmed which just occurred last week. I look forward to a transition period where the FERC gets off its ideology and gets back to practicality and doing its job as a regulator. Will that happen as long as George Bush and Dick Cheney are saying quite the opposite? California needs to do what it needs to do to protect itself, but I do think we may have an opportunity in transition. We can't count on it, but we shouldn't close the door to it. The new electricity plants coming on line for the most part are natural gas-fired. Would we still be in a crunch if natural gas prices remain high? The PUC has been doing everything it possibly can in the last two months and will continue to do it in the next several months to encourage utilities to add natural gas infrastructure. The other thing is they have to inject natural gas into storage right now, even though we know that the price of natural gas is too high. California is being gouged on natural gas. Isn't everybody else being gouged on natural gas prices? No, God no. Prices at the California border are two to three times higher than anyplace else in the country. The problem here is the El Paso line is the market maker for the price of gas coming in to California because of anti-competitive behavior which I believe was intentional to raise prices. That evidence is being heard at the FERC right now. Are you expecting anything from that administrative law judge at FERC? We have to be hopeful. The astonishing thing here is that we, California, cannot count on the federal government to do its job. Lynch was interviewed June 1 by members of The Union-Tribune's editorial board. The information contained in this e-mail message and any accompanying documents is subject to the attorney-client privilege and/or the attorney work product rule and is confidential business information intended only for the use of the individual or entity named above. If the reader of this message is not the intended recipient or representative of the recipient, you are hereby notified that any dissemination of this communication is strictly prohibited. If you have received this communication in error, please notify the Systems Administrator at admin@pkns.com and immediately delete this message from your system.
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