VIEWPOINTS : Beef Up PUC’s Power to Rein In on Utilities : It Should Be More Deeply Involved in Their Budget Plans

The issues faced by the California Public Utilities Commission in the next two years will change the lives and budgets of every person and business in the state, but the agency can do almost nothing about any of them. Other states, which lack the sophisticated staff enjoyed by the California commission, are even more powerless. The trouble is, regulators are prevented by law and custom from telling utilities how to spend their money.

The problem starts with the commission’s lack of control over utilities’ operating budgets, which cover payroll, fuel costs and other day-to-day expenses. These expenses are passed directly to ratepayers, and account for 60% to 70% of electric rates in California.

The PUC members and their staffers have repeatedly said that they will not tell executives how to run their utilities, or even how much it should cost to run them. Hence, expenses keep rising: As long as this year’s increase for each item is no more than a certain percentage above last year’s, it is approved.

Real control over operating expenses would require hands-on experience in running a business, preferably a utility. But imagine the screams if commissioners or staffers were recruited from utility management ranks. Yet without serious management experience, how could Lee A. Iacocca or Sanford C. Sigoloff have accomplished their cost-cutting at Chrysler and Wickes? The present regulatory system keeps this needed expertise off the commission and its staff.

In 1983, the reverse occurred: John E. Bryson, a year after leaving his PUC seat, became a senior vice president of Southern California Edison. The outcry was tremendous, even without evidence of impropriety. No utility manager could ever join the PUC and maintain credibility.

Push for Higher Rates

Does this lack of expertise make a difference? For more than 15 years, utilities claimed their rates were pushed uncontrollably upward by inflationary fuel and labor costs. Since 1982, these firms have enjoyed a 60% decline in oil prices, and inflation has been below 4.5% every year. Instead of granting huge rate cuts, all three of California’s electric utilities want to raise rates, and the PUC is going along. A commission with management skill would insist on rate reductions.

A second reason for the PUC’s ineffectiveness is the approach that it is legally required to take in reviewing capital spending--outlays for equipment and facilities. The PUC examines major capital projects just once and looks at only one project at a time. It cannot intervene in the design or construction of a project after giving the initial go-ahead. And, as the utilities have successfully argued, the PUC is at least morally, and perhaps legally, required to force customers to pay for any approved project--no matter how late, costly or unnecessary it proves to be.

Moreover, because the PUC cannot set a statewide spending limit, utilities keep adding projects and capital costs. If the PUC took a comprehensive look at all of the proposed projects, it could save money for customers by choosing the best ones and dropping the rest.

California’s three electric utilities recently have completed nuclear plants and major construction programs. Yet, according to the most recent data available, only Southern California Edison plans to decrease capital spending over the next five years, and that by a paltry 6%. San Diego Gas & Electric, with the second-highest rates in the nation, says it expects its capital spending to rise nearly 12% over the same period. Pacific Gas & Electric is reconsidering its spending plans. But in 1986, even after huge overruns on its Helms hydroelectric plant and its Diablo Canyon nuclear plant, the utility projected a further capital spending increase of 20% over four years.

First, the PUC could not reconsider its approval for large, long-term projects. Now, it still cannot bring total spending levels down.

Finally, the PUC is hamstrung by the goals of the current regulatory system. Experts as far apart as John Kenneth Galbraith and George Stigler agree that the present system was designed to protect utility investors and to provide “universal” utility service--that is, service to every household and business.

In the 1920s, these were important goals. Utilities were often used as the basis of holding company pyramids that sold practically worthless stock to the public for billions of dollars, and investors needed protection. Some utility managements, trying to compete for market share against others in the same area, set prices so low that they went bankrupt. State regulators were vital in ending both the fraud and the bankruptcies.

Also, only those in densely populated areas could get utility service. Now, nearly every home and business in America has it. To build this vast distribution network, we had to promise monopolies to utilities. But with this network built, we no longer need the monopolies or the inefficient regulation that goes with them. We can now have competition in a free market, with various suppliers of electricity and gas selling to customers over common--and still regulated--distribution systems. Just as one food store sells the canned goods of many producers, or one local telephone company delivers the long-distance service of many long-distance carriers, we can have one network deliver any utility service from many suppliers.

Greater choice would bring lower costs: A customer might buy cheap hydroelectric power from one supplier instead of more expensive power from an oil-burning producer. Now, only a handful of big companies have those kinds of options. Our goal should be to provide that to all utility customers.