Davis Walks a Political Tightrope on Energy Prices

When Gov. Gray Davis looked at the soaring electrical bills in San Diego this summer, he no doubt saw something familiar: a revolt in the making.

Davis was chief of staff to Gov. Jerry Brown in 1978 when rising property taxes forced elderly people out of their homes, and a taxpayer uprising resulted in tax-slashing Proposition 13.

This summer, electric bills doubled and even tripled in San Diego. Homeowners became frightened. Some small-business owners were forced to shut their doors. Initiative promoters began contemplating ballot propositions similar to one that would have undone parts of California’s 1996 utility deregulation if voters had passed it two years ago.

Could deregulation, which many call the root of today’s price crisis, produce a Proposition 13-like revolt? “I wouldn’t dismiss that possibility,” Davis said. “We have a real challenge, and we have to meet it head-on.”

As he signed bills last week aimed at easing the short-term crisis in San Diego, including one that caps residential bills at an average of $68 a month, Davis said he intends to immerse himself in the highly complex issue in coming weeks. He will meet with experts and is considering convening a daylong summit before proposing solutions in November.

The governor has no shortage of people offering suggestions. Environmentalists are using the opportunity to push for more conservation and a heightened emphasis on renewable energy sources such as wind and solar power.

Republicans are pressing him to sign a bill on his desk earmarking $150 million to bail out San Diego Gas & Electric and its customers. If Davis signs that measure, however, he would be setting a precedent and might be obligated to use taxpayer money to assist other major utilities as deregulation takes full effect statewide.

Donors Back Deregulation

Deregulation retains support among many of Davis’ political benefactors, including the California Manufacturers and Technology Assn. and utilities themselves, although they do want changes. PG&E; gave his campaign committee $85,000 last year, and has given $37,500 so far this year. Edison donated $105,000 last year, and Sempra gave him $61,000.

Candidates seeking legislative seats in November can run populist campaigns and bash utilities. Davis, however, has been careful not to attack utilities, focusing instead on out-of-state companies that generate and sell wholesale power.

He doesn’t want to damage utilities. They are major employers of union workers, who are among Davis’ labor backers. What’s more, utilities’ stock, still viewed as a safe investment, is held by many pensioners, who consistently vote in high numbers.

“Ultimately, our national leaders need to address whether deregulation of an essential commodity is a good thing,” said Harry Snyder of Consumers Union in San Francisco, one of the few consumer advocates who spoke out against deregulation when the Legislature was approving it unanimously four years ago.

Davis said that if deregulation is to work, the “pain” must be spread among all concerned--power generators, utilities and, at least to some extent, customers.

“We need to make deregulation work,” Davis said last week. “I believe it can work if we act responsibly. It cannot work if people say, ‘I’m taking mine and I don’t care about anyone else.’ That is a prescription for disaster.”

In his first year and a half in office, Davis has reveled in good fortune. He hasn’t faced a drought or a major natural disaster. He has presided over an expanding state economy and record budget surpluses. But the threat of sharply rising utility bills statewide could change all that; it may be Davis’ first crisis.

“People throughout this state are in the same boat as the people in San Diego,” Davis told reporters after speaking to business leaders last week in Sacramento about the need to solve the problem. “They just haven’t felt it yet.”

They will. The effects of utility deregulation are expected to have spread throughout the state by 2002, which means that higher utility bills are almost sure to arrive in California voters’ mailboxes as Davis is running for reelection.

The price of electricity, like property taxes or gasoline prices, affects everyone. Monthly electric bills of $200, common in much of California, already take big bites out of people’s paychecks. Double that amount, and many family budgets will be strained, if not broken.

With wholesale natural gas prices having quadrupled, people, particularly in colder Northern California, could see spikes in winter heating bills. The gas component of utility bills, unlike electricity, is not capped and is subject to market fluctuations.

Next summer, PG&E; and Edison customers could see some of the electricity price spikes felt in San Diego, experts said, as the rate freeze on electricity lifts and demand continues to rise. The supply shortfall probably will continue next summer, as only one new power plant is scheduled to be completed in the state by next July; two others could come online later next year.

Davis’ chief political strategist, Garry South, called the energy situation a political time bomb.

“There are triggers that are going to be pulled between now and 2002 that will encompass most of the areas in the state,” he said. “There needs to be serious progress in coming up with a long-term solution before we have another election in California.”

At every opportunity, Davis publicly points out that he was not in office in 1996 when the Legislature and Republican Gov. Pete Wilson deregulated the electricity industry, the single act most often blamed for the San Diego crisis.

But Davis will be in office when the bills come due. And as South said, “There is no such thing as Republican electricity and Democratic electricity.”

The 1996 legislation that deregulated electricity temporarily froze rates for Edison and PG&E; customers. That freeze will end no later than March 31, 2002--shortly after the next gubernatorial primary election.

The San Francisco Chronicle reported on its front page last week that PG&E;, which serves most of Northern California, could have $15 billion on extra costs--reflecting the gap between what it pays for wholesale electricity and what it can bill customers under the rate freeze--to start passing on to consumers come April 2002, unless something is done.

PG&E; Corp. Vice President Dan Richard said that the end of the rate freeze has nothing to do with politics two years hence. Still, the PG&E; forecast drew more attention in the Capitol to the emerging statewide problem.

Gas Prices Also Soar

In 1998, Davis opposed Proposition 9, an initiative pushed by Santa Monica consumer advocate Harvey Rosenfield that would have undone key parts of deregulation. Proposition 9 failed as utilities spent $40 million to kill it. In 2002, when Davis runs for reelection, a similar initiative almost certainly will be on the ballot.

“This has Proposition 13 written all over it,” Rosenfield said. “There undoubtedly will be a ballot measure if the Legislature tries to stick the ratepayers with the bill for the utility companies’ greed and the politicians’ mistake. No question about it.”

Added Snyder: “I don’t care how much [the utilities] spend. It will pass. It is a different ballgame.”

Even if Davis manages to fashion a solution to soaring electric bills, he will have another energy-related problem: the price of gasoline, which now hovers near $2 a gallon in much of the state.

Governors have little control over the price of a barrel of petroleum. Davis has required that oil companies remove the additive MTBE, an agent that reduces air pollution, from gasoline by the end of 2002 because it fouls ground water. MTBE accounts for as much as 15% of a gallon of gas. Take that out, and gasoline supplies will fall unless there is state or federal action. And that will add pressure to raise pump prices.

“I wish I could make it rain beer,” Davis said, responding to a question about the combination of rising electricity and gasoline prices. “There are certain limits to what the governor and Legislature can do. We can’t repeal the law of supply and demand.”