Fractious PUC to Test Leadership

On the campaign trail, Arnold Schwarzenegger vowed to make California friendlier to business.

But when Schwarzenegger takes office this week, the new governor is likely to discover how little control he wields over essential elements of the state’s economy, in particular the power grid that keeps industries running and the telecommunications network that connects them.

Oversight of those crucial areas falls mainly to the state’s Public Utilities Commission, a fractious agency so riven by personal animosities and ideological splits that industry and consumer groups alike complain about it.

“Dysfunctional” is how the five-member panel is described by state Sen. Debra Bowen (D-Marina Del Rey), who chairs the Senate Energy, Utilities and Commerce Committee.

“There’s a lot of discord among the commissioners,” she said.

Schwarzenegger transition team member and former PUC Commissioner Jesse J. Knight Jr. agreed. “They are a disparate group for sure,” Knight said last week. He added, however, that Schwarzenegger was committed to working with the commission.

He doesn’t have much choice. Barring any resignations, the earliest Schwarzenegger could reshape the PUC is in early 2005, when two of the commissioners’ six-year terms end.

Although all five commissioners are Democrats appointed by Gov. Gray Davis, they differ sharply on the role of an agency that regulates companies with a combined workforce of more than 125,000 Californians and annual revenues of $40 billion.

At one end of the spectrum is President Michael R. Peevey, 65. The former president of Edison International’s Southern California Edison Co. strikes a more conciliatory tone with corporate giants such as SBC Communications Inc. and PG&E; Corp. than previous President Loretta M. Lynch.

Lynch, 41, firmly holds down the other end. The former defense attorney’s aggressive consumer advocacy alienates many of the industries under the commission’s purview.

Divisions within the commission split along those lines, with former Davis aide Susan P. Kennedy frequently siding with Peevey and former electrical worker Carl W. Wood aligning with Lynch. Former San Francisco public defender Geoffrey F. Brown is typically the swing vote.

Accompanying the ideological differences are often icy personal relationships.

“There are personal frictions,” Wood acknowledged.

They manifest themselves in slights that only a bureaucrat could appreciate. Earlier this year, for instance, Peevey said Lynch had “hogged” several important telecommunications projects and reassigned them to Kennedy. And at a public meeting, Peevey chastised Lynch for trying to assign herself to other telecom cases.

Trying to Ease Rancor

Since he became president in January, Peevey said, he has been trying to improve the commission’s dealings with the companies it regulates and, lately, trying to ease the rancor among commissioners.

“It seemed before that the PUC was at war with everybody,” said Peevey, who was appointed to the commission in March 2001. “I just felt it was necessary to take a different tack and work more cooperatively with people.”

Many in industry welcome Peevey’s approach.

“At least now there’s a willingness to listen to the regulated industries,” said Fassil Fenikile, who left the commission’s senior staff in February to manage regulatory efforts for SBC. “They look at issues in a more balanced way than before.”

Peevey’s leadership will be tested in the next year as the PUC grapples with key policy decisions in the regulation of the telecommunications and energy industries. The bottom lines of both businesses and ordinary households will be affected.

First, the PUC is setting the permanent wholesale rates that SBC and Verizon Communications Inc., the state’s two dominant local phone companies, can charge competitors to use their lines. The decisions will shape the future of telecommunications competition and innovation in the state.

The commission also faces tough energy issues in the aftermath of the shortages and rolling blackouts that crippled the state in 2000 and 2001.

One is the bankruptcy reorganization of PG&E; utility unit Pacific Gas & Electric Co., which will increase electricity rates for the next 10 years. Also on the agenda are a ruling on Southern California Edison’s request to build a big power plant in San Bernardino County and a decision on how to ensure future power supplies -- by building more plants or contracting with existing operations.

Despite the welcome mat that Peevey and Kennedy have rolled out for business, few who follow the agency say it is discarding altogether the tradition of consumer advocacy cemented by Lynch.

Peevey is focused on creating competition where he can and on balancing consumers’ interests with those of regulated industries, which he says must remain healthy to boost the state’s economy. He says he also looks for ways to protect the environment. For Peevey, what’s good for competition, whether or not it helps old monopolies like SBC, is good for consumers.

“In my working career, I was a union official for seven years. I used to appear before this commission as a consumer advocate. I was with Edison and then founded two for-profit companies that competed with Edison,” Peevey said. “I’ve seen things from different perspectives and different walks of life.”

Protecting Consumers

Lynch points out that the PUC’s charter mandates that commissioners protect the interests of consumers against the power of the monopoly utilities. Previous commissions under Republican governors, she contends, had run roughshod over consumers by caving in to utilities’ demands.

“I believe that economic regulation is a fundamental underpinning of what it means to have a stable economy,” Lynch said. “Otherwise, you get what we saw just a taste of in the energy crisis, which is: Companies that can, do hold you over a barrel for the price of a fundamental economic necessity, and they just don’t care what the consequences are.”

Utility consultant Mitchell G. Wilk, a PUC president under Republican Gov. George Deukmejian, says differences on the commission tend to be philosophical and can be “pretty case-specific.”

Indeed, Peevey surprised some with recent votes in which he sided with Lynch and against Kennedy, who since joining the commission in January has written proposals more tolerable to the utilities. And in SBC’s contentious effort to raise wholesale rates, he and Lynch, among others, have said they don’t expect the rates to change much.

‘Not Best Friends’

Even so, “they are not the best of friends,” said Wood, 55.

That tension makes decision making more tortuous, staffers and PUC watchers say.

The disagreements, from petty procedural spats to profound pronouncements on the commission’s role, have spilled over in public meetings and resulted in numerous split votes. The atmosphere is so hostile at times that Brown views one of his roles on the PUC as to act as a peacemaker.

“I want to reduce the level of acrimony,” said Brown, 60, who was appointed in January 2001.

The internal rifts affect the “quality of the debate,” said Michael Shames, executive director of advocacy group Utility Consumers’ Action Network. “The greatest disappointment in the commission is the incivility and lack of respectful discourse among them.”

The undercurrent stems from the energy crisis, when Lynch and the other commissioners were shell-shocked by soaring prices and power outages. Critics said the PUC and the Davis administration seemed paralyzed for a while, and the industry faulted both for delaying price increases and withholding authority for companies to enter into long-term contracts.

“All the answers were not good,” Lynch said. “They were bad and ugly, and good wasn’t in there.”

Davis brought Peevey, then running an energy consulting firm, into the administration to help respond to the crisis. And the governor asked Kennedy, 43, then his Cabinet secretary, to handle several facets.

Relations between the Lynch-led PUC and Davis’ inner circle of energy advisors worsened over rate increases, dealings with other agencies and other issues. Lynch, soon frozen out of policy decisions, began publicly criticizing the price of the long-term contracts that Davis signed to procure sufficient power.

Davis, who had said he wanted his appointees to think and act as he would, could not control Lynch. Under a 1999 law, Lynch had become the first PUC president to be appointed by a governor; previously, the commissioners voted in their own president. Last New Year’s Eve, Lynch learned she would be the first to be replaced by a governor.

Davis never said publicly why he removed her from the post.

Former PUC commissioners Knight and Wilk say Peevey and Kennedy have brought needed balance.

“The part that Loretta doesn’t get about regulation is the nature of balance,” said Wilk, who also is helping the new administration formulate energy policy.

“Mike strikes a better balance,” he said of Peevey. “Everything Loretta says and does is so predictable that she no longer can dispassionately look at these issues.”

To Kennedy, who noted that “Peevey and I think a lot alike,” the pendulum had swung so far in favor of consumers that the commission had become anti-business and its decisions were hurting the state’s economy.

“We were lurching from one regulation to another. We were not being consistent,” she said. “We were anti-investment and anti-business. We don’t have to be anti-business to protect consumers.”

But even some in industry say the PUC has an active role to play in finding that balance.

“I’m a free-market true believer,” said John Sumpter, vice president at Pac-West Telecomm Inc. in Stockton, an SBC competitor.

“However, I also know that if the market is not free and openly competitive, then we have to have regulation. The whole purpose of regulation is to try to duplicate what would happen in an open market.”