PUC Pushing Free-Market Revolution

In less than a decade, the impeccably conservative Republicans of the California Public Utilities Commission have unleashed the most far-reaching deregulation of telecommunications, natural gas--and now electric utilities--undertaken by any state or nation.

Whether they achieve their intended result--lower consumer prices and a competitive climate for California industry--or stir up the business and consumer woes that have plagued deregulated trucking and airlines will take years to assess.

But rather than continue micromanaging utility companies’ business decisions--and risk dictating bad policy--the five members of the PUC prefer to let the marketplace have its way with the state’s power and telecommunications industries.

Back in the 1970s, different commissioners with more confidence in government planning bet on the conventional wisdom that soaring oil prices would never return to earth. The consequence: State programs that promoted new energy sources but also locked in higher energy costs than might otherwise have lingered after oil prices collapsed in 1986.

“And over the past 20 years, those higher costs have pushed more energy-intensive manufacturing to other states,” said Lynn Reaser, chief economist of First Interstate Bank in Los Angeles.

That fateful look in the crystal ball weighs heavily on the current commissioners and their brilliant, if occasionally imperious, president, UC Davis law professor Daniel W. Fessler.

“Simplified regulation--less green eyeshade regulation--if we can bring it off, will reduce the regulatory burden on California’s economy,” Fessler said, “especially now as we’re opening this world of competition.”

*

Throughout its 83-year history, the PUC’s decisions have cast long shadows on a state whose sprawling growth has been linked inextricably to energy and measured by the march of telephone and power poles into distant suburbs.

“We have been always one of the first states to be on the cutting edge of technology,” said Fessler, citing California’s high per capita access to telephones, electricity and other basic services compared to the rest of the country. “And we have--I think anybody would concede--one of the most reliable infrastructures for the delivery of energy on the face of the earth,” he added in the resonant boom that has helped make his contracts law classes popular.

With much of its free-market revolution yet to take hold, the future of the PUC was threatened last year. Statehouse planners weighed a transfer of some of the agency’s authority to the state Energy Commission. Fessler, considered the commissioner with the closest ties to Gov. Pete Wilson, led a stalwart defense, and in the end Wilson called for eliminating the Energy Commission instead.

Having hung on to their power, what the commissioners want to do is substitute market forces wherever possible for traditional command and control regulation, including the conventional rate-setting authority that has kept tabs on the state’s investor-owned utilities--including Southern California Edison Co., San Diego Gas & Electric Co., Southern California Gas Co., Pacific Bell and GTE.

Rapid changes in technology and federal law have brought competition to industries that for most of this century trudged along as “natural monopolies.” Electricity, gas, water and phone service, it was assumed, would always be public services that could be delivered most dependably and cheaply by companies given exclusive franchises in their markets--and then watched hawk-like by the PUC to assure that consumers’ interests were protected.

Now, technology--particularly in telecommunications and in generating electricity--has changed that. New devices have made it possible for new companies to compete with utilities. And the technology is so complex and evolving so quickly that withdrawing from micromanagement is the commissioners’ most fervent hope.

Competition “puts the customer in the decision-making responsibility, not the commission,” Commissioner P. Gregory Conlon said. “Regulation is just a surrogate for competition.”

Deregulation of long-distance telephone calls, with the 1984 breakup of AT & T, started the PUC down the free market path. In the decade since, long-distance rates have dropped 63%.

This fall, the commissioners are expected to release their plan for bringing competition to regional toll calls--such as those between Los Angeles and Riverside or Irvine and Santa Monica. Already, more than 120 companies are waiting to get into that business, said Commissioner Norman D. Shumway, a former Republican congressman from Stockton.

“Next is deregulation of the dial tone”--local calls--with a goal of consumer choice by 1997, Shumway said.

The commission considers the deregulation of natural gas--which also began after a federal lead in 1984--a stirring success, as well.

Commissioner Patricia M. Eckert recently had the cost-benefit picture researched for the deregulation of wholesale natural gas. In the mid-1980s, high-priced, long-term production contracts were renegotiated in light of falling gas rates. For the $10 billion invested nationally by gas buyers in the one-time restructuring of contracts, $80 billion in payments was saved over a decade.

The commission next wants to open up natural gas pipelines within the state to competition. Conlon and other commissioners want to expand on an experimental program that gives some residential customers a choice of natural gas suppliers.

California’s high electric rates--which run about 50% above the U.S. average--have proved a tougher nut.

“We started scratching our heads in 1980,” said Edmund J. Texeira, a 37-year commission veteran and director of its Division of Ratepayer Advocates.

In the mid-1980s, the PUC made its first attempt at stabilizing energy prices, implementing a state policy to promote renewable and domestic fuels, thereby lowering California’s dependence on foreign oil. That reliance had left the state more vulnerable than any other to the oil shocks of the 1970s, resulting in gas lines and mile-high prices for natural gas and electricity.

In spring, 1985, the PUC ordered an auction that led to the state’s electric utilities signing contracts to buy power from independent power producers--many of which made their electricity from solar, wind, geothermal and other sources.

Today, California has more diverse sources of energy than any place in the world. Some technologies--notably wind power--are becoming competitive. Although rates are high, Californians’ monthly power bills are much lower than the national average because energy conservation programs have been so successful.

The bad news is that many of these 1985 contracts were pegged to high oil prices. Until cost adjustment clauses take effect starting in 1997, the pacts are pushing up utilities’ energy costs. Big industries that cannot cut their energy consumption are hard hit--or hitting the road to other states.

“This hangs like the proverbial sword over the economy of California,” said John E. Bryson, chief executive and chairman of SCEcorp., parent of Southern California Edison. Bryson, who served as PUC president from 1979 to 1982, estimates that in 1996, the independents’ contracts will cost Edison $1 billion more than it would otherwise pay for electricity for its customers.

Until the commission adopts its proposal to deregulate the electric industry--a plan that calls for all customers to have a choice of power providers by 2002--a new auction of power contracts at more competitive rates is being held up.

The delay has brought the strongest criticism so far of the electric deregulation plan. The state’s independent power producers are furious, saying that 5,000 jobs and $1.5 billion in investments are being jeopardized. Environmentalists remain deeply suspicious that deregulation will sacrifice renewable energy on the altar of commerce.

“It’s not a debate about whether to have competition. The environmental community has promoted competition for years,” said Ralph Cavanagh, energy policy director of the Natural Resources Defense Council. “It’s over how competition should proceed.”

Even as they take on such far-reaching issues, commissioners have sought to rule apart from the political fray.

*

In 1912, reform-minded Republican Gov. Hiram W. Johnson tried to insulate the commission’s predecessor agency from political influence by enshrining its autonomy in the state Constitution and transplanting its headquarters from Sacramento to San Francisco.

But in carving out such independence--at the time, from the railroads and their political allies--Johnson also embedded a legacy that rankles critics to this day. Commission decisions can be overturned only by the state Supreme Court--something Fessler acknowledges happens about three times a decade.

Consumer groups say that gives them no practical recourse if they feel ill-served by the blizzard of regulatory decisions that occupy the commission’s time between big policy moves. They also object that, unlike judges, the commissioners are free to have private conversations with parties to their decisions.

That puts residential and small business consumer groups at a big disadvantage versus the utilities, said Robert Gnaizda, senior partner and co-founder of San Francisco-based Public Advocates Inc., which campaigns at the PUC for consumer protection and minority opportunities. “When some well-paid lobbyist wines and dines a commissioner and gives him a 100-page document with a seven-page summary, you can’t know what he said, so you can’t refute it,” Gnaizda said.

Last fall, the commission was forced to withdraw its initial proposal for deregulating regional toll calls when it was learned that phone company executives had been at PUC headquarters the night before the commission vote. After years of public hearings and discussion, changes were made that night that uniformly favored the utilities.

The big utilities pay $100 million to $150 million a year to attorneys who represent them before the PUC, Gnaizda estimates. In contrast, he said, consumer group attorneys--who are awarded fees by the PUC when they win a case--have averaged $500,000 in lawyers and experts fees and court costs annually in the past decade.

“Most of the effective consumer groups won’t appear before the PUC,” Gnaizda said. “It has a bias, sometimes unintentional, for the powerful.”

Fessler, although seen by many as the commission’s strongest consumer advocate--would rather see less, not more, courtroom procedure.

“The old trial model of confrontation--of everybody starting with the most extreme position and then assuming that the judicial process will move them in the direction of a more reasonable outcome--is crazy if you’ve got 15 people staking out extreme positions,” Fessler said.

He has also campaigned for an end to state laws that ban commissioners from meeting behind closed doors for procedural discussions.

Nonetheless, bills pending in the Legislature would toughen the open meeting rule or allow judicial review at the appellate court level. Assemblywoman Gwen Moore (D-Los Angeles), chairwoman of the Assembly Committee on Utilities and Commerce, supports the measures.

“Dan Fessler is a very bright and insightful individual . . . and (he) provides a leadership that probably has not been present in recent times,” Moore said. “But the PUC has the power to impose billions of dollars in rates on ordinary ratepayers. . . . We have to make the system as fair and open as possible.”

No matter what rules they follow, the commissioners have launched policies that could lead to a smaller, less-powerful agency. After the bugs are out of deregulation early in the next century, many commissioners see renewed emphasis on the interests of yesteryear, such as safety and consumer fraud, and attention to new concerns such as data security in telecommunications.

When the Northridge quake hit, “it wasn’t an accident that the (utilities’) spare parts were there,” Fessler said. “It wasn’t an accident that the contingency plans were there. . . . And that will be on the agenda when I’m long gone.”