Funds Sought to Curb Power Costs

The state senator who piloted electricity deregulation through the Legislature four years ago proposed setting aside billions of state dollars Monday to help California’s troubled electricity market.

The state could buy back power plants, for example, or build new ones, said Steve Peace (D-El Cajon)--moves that would reverse deregulation.

His proposal shows how wide the debate over the future of California’s electricity industry has become since deregulation, launched with the promise of lower rates, instead inflicted soaring rates on San Diegans and the state’s two biggest utilities last summer.

Speaking on behalf of Senate Democrats, Peace proposed reserving $2 billion of the state’s expected $10-billion budget surplus as seed money for whatever policy Gov. Gray Davis and the Legislature decide in the next few months is necessary to bring down wholesale electricity prices.

Peace said that could include condemning power plants now owned by private companies, building new plants with state funds and buying the state’s main transmission system from utilities.

It would be cheaper for California to build its own power plants, Peace said, than to continue paying extraordinary wholesale electricity prices. Since May, those prices have cost Pacific Gas & Electric Co. and Southern California Edison $5 billion more than they are allowed to pass on to their customers, who are protected by a rate freeze until March 2002 at the latest.

“What we don’t want is to be captives of the private capital market,” said Peace, who heads the Senate Budget Committee.

Nothing in Peace’s proposal is beyond consideration by the governor, said Phil Trounstine, Davis’ communications director. Davis expects to submit a plan for fixing California’s electricity market by Dec. 1, he said.

Any of the scenarios Peace mentioned Monday would be an undoing of his own work of four years ago. Peace played a central role as negotiator of the 1996 bill that scrapped 80 years of state control over California’s three big utilities in favor of a marketplace in which private companies own power plants and competition sets the price of electricity.

Peace earned praise for his intellect and tenacity after that law passed unanimously and was signed by Gov. Pete Wilson. But last summer, when prices led to a doubling and tripling of monthly electricity bills in San Diego, Peace was scorned as the architect of a grand plan gone awry.

“Now he’s trying to buy his way out of the problem with taxpayers’ money,” said Gary Ackerman, executive director of the Western Power Trading Forum, which represents electricity brokers.

Peace said Monday that he does not see his new proposal as backpedaling.

He said California’s electricity industry would be even more troubled had the Legislature not attempted, through Assembly Bill 1890, to modify a sweeping 1995 decision by the state Public Utilities Commission to launch deregulation. “It’s not what caused the problem,” said Peace of AB 1890. The problem since then, he said, has been that the Federal Energy Regulatory Commission, with authority to control wholesale electricity prices, has failed to step in to protect consumers from price spikes.

The regulatory commission is expected to order major changes in California’s electricity markets by the end of the year. California politicians have beseeched the agency to also order energy sellers to give back some of the generous profits they earned last summer.

That’s why Peace’s proposal pleased Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego.

“It sends a message to federal regulators that California is very serious about taking matters into the state’s own hands if the federal regulators fail to do what they’ve been asked to do,” Shames said. “It is incumbent on California to protect its own interests.”

Since California launched deregulation, a handful of private firms have invested more than $3 billion to buy major power plants from utilities. Those power plant owners and the many companies that broker their electricity argue that price spikes reflect California’s fundamental shortage. No major power plants have been built in the state in the last 10 years, while demand has expanded rapidly. Although temporarily painful, those price spikes will attract companies to California to balance supply and demand, electricity sellers and free-market proponents argue.

Peace accused the companies of threatening Californians with warnings that price controls will drive away investment in new power plants. “We’re not going to allow the generators and marketers to leverage us,” he said.

Energy companies argue that they are investing billions of dollars in California. Six power plants proposed by private firms have been approved and four are under construction.

“The investment is coming here, but what we need is a stable political and regulatory environment,” said Jan Smutny-Jones, executive director of the Independent Energy Producers, an association of private energy firms in California. “Threatening nationalization does not provide that.”

Peace’s constituents in San Diego were the first in the state to be exposed to market prices when their utility, San Diego Gas & Electric, paid off debts and lifted a rate freeze that is still in place for the 22 million people served by Edison and PG & E. When market prices shot up in May, San Diegans paid those prices directly.

A political furor ensued, until the Legislature in August temporarily capped prices in San Diego.

Peace kept a low profile then but now appears to be trying to reshape his image. He has indicated interest in running for secretary of state in 2002.

The San Diego video company of which he is part owner recently created a 10-minute tape that portrays him as skeptical of deregulation. It shows Peace in August 1996, during negotiations over the deregulation bill by Jim Brulte, then a Republican assemblyman from Rancho Cucamonga. In the video, Peace repeatedly says that deregulation does not seem like a good idea but is inevitable given the utilities commission decision and pressure from the federal government.

“Keep things as they are--I’m for that,” says Peace. “But I’m not given that option.”