THE PUC : NEW MAJORITY FACES A BATTLE OVER TURF

There’s some irony for Janice Kerr, a self-described “child of the ‘60s,” in finding herself a champion of states’ rights--the same banner under which segregationists fought the civil rights movement during that tumultuous decade. And yet, as general counsel of the California Public Utilities Commission, Kerr, with her attorneys, jousts daily with federal agencies over what the PUC views as attempts to take over state regulatory turf.

In this case, the states’ rights issue arises from a growing dispute between California and federal regulatory agencies over the supervision of such broad and volatile areas as telecommunications and energy. Federal and state officials have clashed over the handling of the fallout from the U.S.-imposed breakup of the Bell System, deregulation of natural gas, federal decisions affecting distribution of electricity--and even what can and cannot be mailed with utility bills.

The question of regulatory turf assumes special significance for Californians this year now that, for the first time, appointees named by Republican Gov. George Deukmejian--including the new PUC president, Stanley W. Hulett--account for three votes on the five-seat commission. Deukmejian is expected any day to fill the vacant fifth seat, which leaves Donald Vial, the previous president, as the only holdover from the administration of Democrat Edmund G. Brown Jr.

An early test of the new majority is expected this spring: The commission must decide whether to reconsider its decision of last October that Southern California Edison shareholders must absorb $344.6 million of what the PUC deemed excessive costs in building the San Onofre Nuclear Generating Station in northern San Diego County. The only two Deukmejian appointees on the commission at the time, Hulett and Frederick R. Duda, were outvoted, 3-2 by Brown appointees.

In any case, utilities and their customers have been increasingly caught in the middle in the federal-state jurisdictional dispute. For example:

- Three years ago on New Year’s Day, customers of Pacific Telephone & Telegraph awoke to find themselves served instead by Pacific Bell. This resulted from the historic settlement of a federal antitrust lawsuit against Pacific Telephone’s parent, American Telephone & Telegraph, which was forced to spin off its local phone operations.

- Last New Year’s Day, as the result of a Federal Communications Commission decision, Californians were suddenly made responsible for maintaining phone wiring inside their homes, until then repaired without an extra charge by the phone company. State regulators were not consulted.

- Earlier this month, the Justice Department recommended that the former Bell operating companies be freed of federal court restraints--imposed as part of the antitrust settlement--over the kinds of businesses they can enter. The announcement contained no hint that the states or Congress, which sets the nation’s telecommunications policy, might have an interest in the outcome.

Because of the effect on consumers from such federal initiatives, general counsel Kerr keeps seven of the PUC’s 44 attorneys working full time on federal issues. “We’re trying to preserve for California the decisions California can make for itself,” she said.

Whether the newly constituted PUC has the will to safeguard consumers’ interests in the face of all of the economic change is an unsettling question for consumer advocates such as Sylvia Siegel, executive director of Toward Utility Rate Normalization, or TURN.

“The big industrial users are all over the place, just licking their chops,” she said, referring to industry representatives at the PUC’s new headquarters in the curving Edmund G. (Pat) Brown State Building at 505 Van Ness Ave. here in San Francisco.

In recent interviews, commissioners Vial, Hulett, Duda and G. Mitchell Wilk played down the role of partisan politics. “The issues are nonpartisan,” Vial said.

Hulett added that the sheer weight of what he estimates as $40 billion in annual rate decisions tends to blow away partisan or parochial considerations. And Wilk, a former Deukmejian aide who became the governor’s crucial third commissioner when he joined the PUC last December, said the governor’s marching orders to him were: “Go in there with a notion of balance.”

A Lengthy Tradition

That’s a directive that Howard P. Allen, chairman of Southern California Edison, thinks has a lengthy tradition. “Governors of all philosophic bents, whether liberal or conservative or business-oriented or anti-business in terms of generalities, have been very careful in appointing public utilities commissioners. They have been, in general, the mainstream,” he said.

“You’re not going to see a significant difference,” Allen predicted. “You’re not talking about political issues, but economic and energy-related issues that are not decided on philosophy, but on facts and projections.”

Still “notions of balance” vary. And, as Wilk observed: “The industries we’re regulating are facing significant challenges.”

The commissioners’ conclusions will inevitably be colored by their personal views of the role of government in the economy. Vial, whose term has less than two years to run, defines his view as that of a “social democrat” who believes that government exists to provide basic systems, or infrastructures, for all of society. For him, market forces favor the economically powerful in a society in which wealth is distributed very unevenly.

“We’re living in a framework of national policy where the emphasis is more than ever on market forces,” Vial said. “My social agenda says: Be sure you protect those who don’t have market power.”

His Deukmejian-appointed colleagues have greater trust in the benefits of competition and market forces, though it may prove to be only a matter of degree. For example, while Hulett said he would be “delighted” if he could work the PUC out of a job as a regulatory agency, he doesn’t believe that to be possible. Some areas, he said, defy deregulation. The commission earlier deregulated truck-hauling within California, Hulett noted, only to see both competition and service deteriorate.

New Era of Regulation

Philosophical differences are likely to count for more in what Commissioner Duda defined as “a new era” in utility regulation--one in which the basic issue is, he said, “how to handle marketplace competition and still serve rate-payers at reasonable rates.” That will prove particularly tricky in deciding such basic but complex questions as:

- How do you set utility rates to forestall an exodus of major customers who can readily switch fuels, energy sources or telecommunications providers?

- Should AT&T;, whose rates must be approved by the PUC, be as free as its competitors to set long-distance rates within California, where it has about 75% of the market? (Because AT&T;’s major competitors are committed to undercutting its rates, the PUC influences the competition’s rates as well.)

Anticipating the new commission’s answers to these questions makes consumer advocate Siegel apprehensive. “It’s going to be a very mixed bag on this commission,” she predicted, “and I’m very concerned.”

In their deliberations the commissioners get a lot of help in making their decisions from Kerr and about 950 other members of the PUC staff, backed by a $51.5-million budget.

According to PUC Executive Director Victor Weisser, the commission has attracted talented young engineers, accountants and analysts with the promise of exposing them to major issues almost immediately.

“The issues are so many and so demanding that we have to throw people in earlier than might be best for them,” he said.

Many young professionals find it appealing to play David against the utilities’ Goliath, said Weisser, who succeeded Joseph Bodovitz as executive director last summer. “There’s a real sense of being on the side of the good guys.”

Reorganized Staff

Under a major reorganization that may prove to be Bodovitz’s major legacy to the PUC, the commission split its staff into two divisions: The “public staff” represents utility customers, while “evaluation and compliance” personnel advise the commissioners and ensure that utilities carry out commission orders. Previously, the staff was split into industry groups.

Creation of the public staff division, whose recommendations have set more than one utility executive’s teeth on edge, gave “a higher profile” to the agency’s representation of utility customers, said the division’s director, William Aherne, a former analyst with the Rand Corp., the Santa Monica think-tank.

Before, Aherne said, staff members both represented the public and advised the commission, a practice that satisfied neither the public nor the utilities. Both Siegel and utilities executives say they welcome the change.

The utilities hope to get a fresh hearing on some issues that date back to the Brown commission. One common theme is their desire for more flexibility in managing their companies within PUC guidelines.

“Our intent,” said Gary W. McBee, Pacific Bell vice president for external affairs, “is to try to change the way we deal with the commission, . . . to try to reduce some of the regulatory involvement we have today, streamline it and make it more efficient.”

He cited the commission’s failure to complete work on a rate case that initially was scheduled to be finished more than 13 months ago.

Wants “Banded” Pricing

For AT&T;, the goal is deregulation, said William M. Clossey, Los Angeles-based vice president for public affairs. “We want the commission to establish some sort of ‘banded’ pricing to allow us to charge between x cents and y cents per minute per mile, and give us some flexibility.”

As it happens, AT&T;’s chief competitor, MCI, says it is now prepared to back some “lightening” of AT&T;’s regulatory burden, said Eugene Eidenberg, president of MCI’s Pacific division. “I’m not saying the commissioners should walk away from their responsibilities,” he said, “but I think it is time to take a fresh look at how much regulatory requirements are serving public needs today.”

Charles E. Brown, Eidenberg’s counterpart at US Sprint, the nation’s No. 3 long-distance carrier, disagreed. “Regulation ought to stay in place for three to five years,” Brown said. “To ease up at this point would be unfair” because of AT&T;’s predominance in the California market.

Among electric utilities, said Howard Allen of Edison, federal talk of opening up the energy industry to increased competition is worrisome. The industry generates and distributes electrical power to all of its customers over a complex, interlocking and international network--not unlike the old Bell System dismantled in the name of competition.

“Some industry leaders are concerned over overly simplistic solutions based on the buzzwords of competition and deregulation ,” Allen said. “It’s not that simple, and there are differences between industries.”

In the case of Southern California Gas, the company expects a major effort by the PUC to implement last December’s order “unbundling” gas services, said Roy Rawlings, vice president for regulatory affairs. Hearings are scheduled to start next month.

Expected to Help

“I think it’s going to help us maintain our competitiveness,” Rawlings said. Greater pricing flexibility is needed, he explained, to respond quickly to competitive challenges by unregulated oil companies.

Because of the need to implement the commission’s new gas guidelines, he said, the company and the PUC public staff have struck a proposed agreement, subject to the commission’s approval, to freeze the residential rate structure until 1990. An annual cost-of-living adjustment would be permitted to reflect changes in inflation, interest rates and other expenses.

Siegel said she considers such negotiated agreements “outrageous” because they bypass normal rate procedures. These procedures unfold much like a court of law with presentation and cross-examination of witnesses to build a formal record for the eventual staff recommendation to the commissioners--a record that later can be challenged by parties dissatisfied with the ultimate decision.

Whatever the outcome of the gas company case, the commission and its staff appear intent on finding some rate-setting alternatives to the formal hearing process conducted for the commissioners by an administrative law judge.

“We have to find a way out of the morass we’re in--all of this detail and paper work,” Hulett said.

Need Quicker Response

Duncan Wyse, the PUC’s assistant executive director, said he expects the commissioners to call more hearings to determine policy guidelines. The existence of alternative fuel and power sources requires regulators to find ways to respond quickly to competitive challenges to utilities, he said.

“We have to think through how we deal with that. We can give (the utilities) more responsibility and hold them more at risk,” Wyse said.

Added Hulett: “We have to give them the flexibility to manage.”

That seems to be in line with what the utilities want from the new commission.

“We’re hoping that the new commissioners will look forward rather than backward,” said AT&T; vice president Clossey. “Technology and the market are driving this industry. There is very little that public policy-makers can do to stimulate those forces, but a great deal they can do to impede them.”

The FCC is “saying the right words--moving toward lessened regulation--and so are a number of states,” Clossey added. “We think that the less regulatory oversight there is and the greater importance the marketplace plays, the less the federal-versus-state issue becomes significant. In fact, it almost goes away.”

Pacific Bell’s McBee said minimizing federal-state friction would suit his company, too. “Whenever they have a dispute, we get caught in the middle.” AHEAD IN 1987: A HEAVY AGENDA FOR COMMISSIONERS

Electricity: The battle continues over cost overruns at nuclear plants. Also: $524 million in proposed revenue hikes. Natural Gas: New rules must be devised that will enable utilities to take advantage of federal regulation. Communications: A still-dominant AT&T; is seeking greater flexibility in setting rates for telephone calls within California. Diversification: San Diego Gas & Electric, which is also in real estate and computers, wants to form a holding company. Trucking: Deregulation has had some unforeseen side effects, leading to a move toward “re-regulation.” Tour Buses: New permits have been halted pending a review of safety regulations in the wake of a tragic accident. Utility Lobbying: Off-the-record meetings between commissioners and utility executives may get closer scrutiny.