Use Eminent Domain as a Power Tool

Gov. Gray Davis should follow Pacific Gas & Electric’s example and admit that his electricity program is also bankrupt. The governor’s primary objective was to keep the utilities from bankruptcy. He has failed. He should admit his failure and reformulate his policy. Whatever he does must be based on a clear understanding of the problem.

The people of California have a right to buy electricity at fair prices. Producers of electricity are entitled to a fair return on their investment. Before 1998, a balance between these two points was struck by the Public Utilities Commission using cost-of-service pricing. Utilities presented their production bills, the PUC reviewed them, determined a reasonable rate of return and set a rate high enough to cover both. California became the second most efficient user of electricity in the country under this system, and its utilities prospered.

In 1996, the electric power industry, with promises of lower prices, induced Gov. Pete Wilson, the PUC and the Legislature to reduce the commission’s power to ensure just and reasonable electricity prices. Under the power industry’s system competition, not regulation, would set prices, and prices would go down. PG&E; head Robert Glynn represented it to be a “huge opportunity for consumers to lower their energy costs.” PG&E;, San Diego Gas & Electric and Southern California Edison, with PUC approval, then sold California’s most significant generation plants, its gas-fired units, to five multinational corporations.

These five companies led the onslaught on California consumers, raising electricity prices from $7 billion in 1999 to a projected $70 billion in 2001. California authorities have determined that 98% of the price bids submitted by these five companies--some 25,000--were based on monopoly, not competitive, pricing. Gov. Davis is right: “California’s deregulation scheme is a colossal and dangerous failure.”

No one--not Wilson, the PUC or the Legislature--provided an exit strategy if deregulation did not work. Davis has been unable or unwilling to come up with one. He failed to get on top of the problem when he took office, despite clear warning signs. He failed to see that he cannot finance ever higher prices with public funds, and he lacks the resolve to do what he must to stop them. His one effort to use tax funds to keep the utilities out of formal bankruptcy has failed, with PG&E;’s filing for Chapter 11 last week.

There are no good choices now. However, we cannot continue down the road Davis has chosen. It leads to financial ruin. We cannot rely on private companies building new generation plants because the same price gougers will control how the new electricity gets priced. We cannot rely on the Federal Energy Regulatory Commission or President Bush. California can only rely on California to solve this problem.

As a first step, Gov. Davis should do what he threatened to do in his State of the State address: use the power of eminent domain to recover the gas-fired generation plants that the price manipulators are using to set monopoly prices. He can pay “just compensation” to the owners but not one dime more.

The governor should now recognize California’s vital interest in protecting itself from these prices. Eminent domain is a reasonable tool to use to achieve that goal. It has been used in less compelling circumstances. For example, eminent domain was used in the early 1980s for George W. Bush’s investment team to assemble the land on which the Texas Rangers’ stadium is built, from which he and his partners profited handsomely. If eminent domain can be used for private profit, it can be used to protect the vital interests of the state of California. The plants should be divested to private ownership, but only to companies that are under PUC jurisdiction.

The PUC also should be used to plan how California can move forward to an improved cost-based system of regulation. What we cannot do is to continue on with the current plan, which is to have the governor set electricity prices behind closed doors, working with the very people who are suspected of unlawful price fixing. PG&E;’s bankruptcy provides the governor with a new opportunity to move to a more effective program.

The governor should now stop using public funds to buy electricity. He should urge Edison to join PG&E; in reorganizing under bankruptcy court protection. This will allow all parties to contest the unpaid billions of dollars of receivables owed to the power producers and their associates. This will send a message to Wall Street to stop funding such outrageous and predatory practices because they don’t pay.

The state attorney general should conduct a criminal grand jury investigation into the alleged wrongdoing by the power generators. He should also join in the private litigation that asserts that the power producers violated the state’s antitrust laws. He should follow the investigative trail to Houston, Tulsa, Atlanta and wherever else it leads.

Finally, Californians are going to have to make a short-term sacrifice to get a long-term gain. The governor’s call last week for conservation does not go far enough. Each city council and mayor and all boards of supervisors should be required to come up with an emergency conservation plan. We need to cut consumption to the point where we can meet it with current supply. We cannot put an unfair burden on business because this will cost jobs. People with lower incomes and fixed incomes need to be protected.

PG&E;’s bankruptcy filing removes the foundation of the governor’s plan. He should remember the example of FDR, who likened himself to a football quarterback who tries one play and, if it did not work, then tries another. But for heaven’s sake, try something. We must show our fellow citizens that we know how to act effectively in solving this crisis.