State, FERC Thawing an Icy Relationship

Listen to top federal energy regulator Pat Wood -- a tempting target for California politicians -- muse on the new administration of Gov. Arnold Schwarzenegger:

“I have to confess a little tinge of excitement when I heard the governor’s inauguration speech,” Wood, chairman of the Federal Energy Regulatory Commission, said in a recent interview. “When was the last time I was excited about California?”

Now listen to Stanford University professor Jim Sweeney, a top advisor to the governor on energy matters: “We do better working with FERC rather than being opposed to each other.”

Schwarzenegger’s approach to the marketplace, Sweeney added, appears to be “very much consistent” with the view in Washington.

After years of cold acrimony between the state and federal energy regulators, such comments from Sacramento and Washington show the first hints of a thaw.

Even if just talk, the change in tone is noteworthy. In the annals of state-federal policymaking, few relationships have been more tortured than that of California leaders who suffered through the energy meltdown of 2000-01 and the federal officials who regulate wholesale power.

Consumer activists and politicians continue to assail FERC for failing to intervene more forcefully in the chaotic energy scene in 2000 and early 2001. More recently, under Wood’s watch, the agency has been vilified for what critics consider slap-on-the-wrist sanctions imposed on companies that exploited the marketplace, as well as for upholding long-term contracts the state signed at the height of the fiasco.

Meanwhile, a group of California parties, including Democratic Atty. Gen. Bill Lockyer, is appealing more than 85 FERC actions tied to the energy crisis, including its approach to computing a refund, the recent sanctions and other matters.

Yet for all the pressures, Schwarzenegger and Wood, both Republicans, may be more in tune politically and philosophically than any California governor and FERC chairman in years.

To some observers, such a rapprochement is long overdue -- and it could have a significant effect on how the ongoing issues are resolved.

“One of the huge hurdles that has been slowing recovery from the energy crisis has been the pretty poisoned relationship between the state and federal government,” said Jan Smutny-Jones, executive director of the California Independent Energy Producers Assn., a group of private power plant owners.

The arrival of a new administration in Sacramento, he noted, provides “an opportunity for everybody to say, ‘We’ve done our shouting, we’ve done our finger pointing and we’re going to stay focused on trying to fix things so we don’t have an energy crisis again.’ ”

The first glimmer of a change became apparent early in the fall. As a candidate, Schwarzenegger sent Wood an unmistakable olive branch, declaring on his campaign website that the state should “take a look” at Wood’s approach to market restructuring, known as standard market design. The idea is to make the power grid function more like the interstate highway system by paring back state and local restrictions.

The message didn’t go unnoticed: “I think the new governor is certainly talking about a lot of the right stuff,” Wood said in the interview.

More recently, a task force of advisors to the governor, including Sweeney, sent Schwarzenegger a 15-page energy policy blueprint. Although the details have not been disclosed, people familiar with the document say it jibes with Wood’s agenda -- calling for investment in power plants and a renewed move toward a competitive, deregulated energy market.

“There’s so much commonality between what we’re trying to accomplish in California and what FERC is doing,” Sweeney said.

Beyond the matter of philosophy, there are other reasons Schwarzenegger may not be as quick to declare war on FERC as his predecessor, Gray Davis. The recalled governor, who came under fire for not responding quickly enough to the energy crisis, emerged as one of FERC’s most vocal critics, saying the agency took too long to adopt price caps to tame skyrocketing costs.

Schwarzenegger lacks such personal history. “I think the new governor and his administration just have a lot less to gain” by opposing FERC, said James Bushnell, research director at UC Berkeley’s Energy Institute, whereas “the previous administration kind of staked its future on an all-or-nothing position with respect to FERC.”

Yet energy issues remain in some sense an open wound, and the potential for conflict is very much alive. Consumer activists and many politicians contend that the unhappy chapter provides an emphatic warning about the dangers of deregulation, and maintain that the state should go the opposite direction from the path sought by Wood and Schwarzenegger’s advisors.

If not, these critics contend, the new governor ultimately will face a conflict in balancing the need to safeguard California from a future energy fiasco, with the pro-market push coming from his advisors and Republicans in Washington.

“He is stuck between a rock and a hard place,” said state Sen. Joe Dunn (D-Santa Ana). “If he wants to placate the Republican administration in Washington with a better relationship with FERC, he’s going to be at odds with the people of California.”

Perhaps no single issue illustrates the ongoing tensions better than the dispute over how much money energy companies should pay California for alleged overcharges during the market meltdown.

A group of California parties has demanded $9 billion. Federal regulators have indicated that the figure may be in the range of $3 billion to $4 billion. A decision is expected in the next few months.

Unlike Davis, who vowed to take his refund battle into the federal courts, Schwarzenegger’s posture is not so clear.

“I think the Schwarzenegger administration is pushing to get back all the refunds for which California is entitled,” Sweeney said, “but we simply have not taken a stand on what the right amount is.”

Some elected officials, however, are taking a potentially more combative approach than the governor on the refund, including Lockyer.

“Regardless of what the Schwarzenegger administration ultimately decides to do, it’s the attorney general’s intent to do his utmost to bring to Californians the compensation that they deserve from the energy pirates that ripped us off,” Lockyer spokesman Tom Dresslar said.

Other uncertainties also could alter California’s relationship with federal energy regulators in the future.

In late November, Republican Joseph T. Kelliher and Democrat Suedeen G. Kelly joined FERC. And this month, William L. Massey, a Democrat who stood out as the champion of California consumer interests on the commission, left office.

Massey’s departure “means the only person from the beginning who paid attention to the West Coast and called everything right is out of the mix,” said Robert McCullough, a Portland, Ore.-based energy expert who followed California’s ordeal.

At the state level, meanwhile, Davis appointees continue to dominate key agencies involved in energy policy, including the Public Utilities Commission.

“I don’t see an end to hostilities,” said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego, “although the rhetoric may die down for a few months.”