Utility, Regulator Go for the Throat

“The CPUC’s Actions Should Have You Seeing Red,” exhorted a full-page newspaper ad that appeared from Bakersfield to Sacramento in September.

The advertisement accused California regulators of trying to shift $500 million of the state’s electricity costs to Northern and Central California customers. It prompted a deluge of e-mails and phone calls that tied up the staff and switchboards of the state Public Utilities Commission. But what made the advertisement most unusual was its sponsor: Pacific Gas & Electric Co.

The unorthodox campaign was just one skirmish in an increasingly nasty battle between the state’s chief regulator and its largest utility. For months, they have tussled publicly and in court, casting one another as villains in the energy fiasco that caused blackouts earlier this year and forced the state to buy power for financially ailing utilities.

“The relationship . . . is very sad, like a marriage gone bad, in that both parties are significantly to blame,” said Michael Peevey, a former energy advisor to the governor.

The PUC leadership portrays PG&E; as a litigious rogue utility that shipped billions of dollars to its parent company in the early days of deregulation and then abandoned its duty to buy power for its customers in the darkest hours.

PG&E; has portrayed the commission as a turf-obsessed tyrant whose tardy decisions drove a mighty utility to bankruptcy.

Behind the harsh words are high stakes: the health of a company that serves 13 million Californians and, by extension, the state’s economic well-being.

The end battle may be waged in federal court. Since filing for Chapter 11 bankruptcy protection last April, PG&E; has moved to challenge PUC decisions that it alleges caused the utility’s financial undoing in the first place and will keep it in trouble if left to stand.

The PUC, after holding off for months, has moved in Bankruptcy Court to thwart what the panel’s president calls PG&E;’s “jailbreak” from state regulation.

“If California cannot control the cost of a fundamental necessity, the state will have a harder time keeping the economy healthy,” PUC President Loretta M. Lynch said in an interview. “What is at stake here is the health of the economy and the pocketbooks of California ratepayers.”

PG&E; is challenging a regulatory body that suddenly changed its politics and personalities after appointees of Democratic Gov. Gray Davis took over.

During more than a decade of Republican domination, the PUC took a relatively laissez-faire approach toward utilities. Lynch, a feisty lawyer who prides herself on her independence, is part of a three-member majority appointed by Davis that is considerably more activist. Two carry-over appointees of Republican Gov. Pete Wilson are free-market advocates who often side with utilities. They now tend to be on the losing end of close votes.

Disputes Are Wide-Ranging

Some friction between regulators and the regulated is the norm, but the conflicts between the PUC and PG&E; have become unusually intense, said officials for both entities.

“I don’t want you to think we sit around here frothing at the mouth, thinking about how we can pick a fight with the PUC,” said Dan Richard, PG&E;’s senior vice president for public affairs. “By the same token, we made clear that we believe some of the things they are doing are unlawful . . . and a lot of what happens there has become political.”

Last summer, Richard and Lynch met and discussed the need to avoid letting the clashes become personal. “I don’t know” whether they have, he said.

“I hope not,” said Lynch. “From my perspective, it has not.”

Personal or not, the disputes are wide-ranging and have absorbed countless hours and dollars. PG&E;, based in a downtown high-rise complex across town from PUC headquarters, has tangled with state regulators over issues ranging from whether the company’s electricity rates should remain frozen to whether PG&E; could sell an old, inactive power plant.

The PUC is investigating whether the utility improperly transferred money to its parent, PG&E; Corp. Utility officials have accused regulators of attempting “retribution” for the company’s challenges to the agency’s authority.

Like most of what goes on at the PUC, the issues are complex and intertwined. Many grow out of the fact that PG&E;, like Southern California Edison, this past year found itself unable to recoup the full cost of buying power because customer rates remained frozen by the PUC under the state’s deregulation plan.

The upshot, PG&E; officials said, is that the company’s shareholders were improperly being required to subsidize ratepayers.

PG&E; also contended that PUC policies prevented the utility from making extensive use of long-term contracts that would have insulated the company from volatility in the wholesale electricity market. PUC officials said that they did eventually authorize such contracts and that PG&E; took advantage of them.

The utility faults the PUC for waiting too long to impose a customer “surcharge” in January and a record rate hike in March. By then, PG&E; had slipped into a morass of unpaid bills and poor credit. Company officials said the PUC was loath to take the action because it did not want to politically alienate the public.

But Lynch scoffed at that. “People have criticized me for not acting soon enough,” she said. “People have criticized me for acting too soon . . . for not increasing [rates] enough, and for increasing them too much. . . .

“Some people excoriated us for being toadies of the utilities. . . . We are trying to do our job fairly, to get power at a just and reasonable price.”

Reacting to Widening Rift

Lynch said PG&E; keeps clashing with the commission because it is selfishly and single-mindedly pursuing a business plan based on the failed deregulation scheme. Part of the company’s goal, she said, is escaping PUC regulation.

“No other utility has tried to be the poles and wires company they tried to be and essentially walk away from their historic responsibility to serve their customers,” she said. “They are going to leave their customers in the lurch, all for the greater good of their business.”

The rift with PG&E; is a sensitive matter even among commissioners. For example, usually outspoken Wilson appointee Richard Bilas declined to comment except to say: “There clearly is a strained relationship between the PUC and PG&E;, and I believe no small part of it is due to the reorganization plan that PG&E; came forward with in the bankruptcy proceeding.”

Mike Florio, senior attorney for the Utility Reform Network, put it more bluntly: “The reorganization was like a gift-wrapped finger to the governor and the PUC.”

In the plan, PG&E; proposed legal steps that would put its remaining power-generation capability, mainly hydroelectric facilities, out of the reach of state regulators. Rather than being regulated by the PUC, the assets would be regulated by the Federal Energy Regulatory Commission.

Disputing Degree of Accountability

Lynch said a federal regulator 3,000 miles away would not supply nearly the degree of accountability provided by the PUC. “It will not figure out what California customers need and get it,” she said.

But PG&E; officials denied that they are shopping for a soft-touch regulator. “It’s not that we want to escape PUC regulations, although PUC regulation has frankly broken down,” Richard said.

Rather, he said, removing the hydroelectric facilities from PUC purview would “harmonize” the company’s generation facilities by completing a process that began when it had to sell power plants a few years ago under the state’s deregulation plan.

PG&E; and the PUC have battled over less weighty issues too. Last week PG&E; appealed a PUC decision to disallow about $150 million in utility expenses that the commission previously had approved. Earlier, Lynch blasted the utility for not getting PUC permission before allowing a power company onto PG&E; land to hook up to the grid.

In another episode, the PUC blocked PG&E;’s attempts to sell a Kern County plant that had been closed to a company that intended to reopen it to produce electricity.

Lynch said a state law blocked the PUC from approving the sale of one of the utility’s generation assets until an executive order of Gov. Davis cleared the way for the sale.

PG&E; officials said the PUC opposition made no sense in light of the governor’s call to put more electricity on line.