From: mlk@pkns.com
To: gfergus@brobeck.com, richard.b.sanders@enron.com, sbishop@gibbs-bruns.com
Date: 2001-06-11 14:53:00+00:00
Subject: Union Tribune Editorial Sunday, June 10, 2001

Loretta Lynch, President, California Public Utilities Commission



June 10, 2001

Lynch was appointed March 22, 2000. Previously she was director of Gov. Gray 
Davis' Office of Planning and Research.
Question: What is this summer going to be like in terms of blackouts? What is 
the economic impact going to be?

Answer: I don't think anybody can predict. They are wild guesses or at least 
estimates based on assumptions that we don't know. Three factors influence 
the level of blackouts. One is how hot it's going to be. The second is 
conservation and whether folks will really step up to the plate, both 
business and residences, and conserve their hearts out and load shift to 
non-peak times. We reduced the load 8 to 9 percent in March and April and 
slightly more (11 percent) in May. We're going to have to do better than that 
to avoid blackouts.

The third factor is making sure that the generation that can run does run and 
right now we're doing an abysmal job of that. We have record levels of 
unplanned outages at generating plants. This week 10,000 megawatts were out 
of 35,000 megawatts (42,000 megawatts including municipal utilities) in state 
capacity. Historically, there has only been 3,000 to 4,000 megawatts off at 
any one time.

Does the PUC have no control over when utilities take a plant off line?

Utilities yes, private generators no. Since November the unplanned outages 
have been three, four times what history would show over a 20-year period. 
Exactly what explains that is the heart of one of our investigations.

What can the PUC do about it?

We have been in the plants since mid-January. In January we had 25 days of 
stage 2 alerts, two days of stage 3 in 31 days. We started going in those 
plants although we've had lots of difficulty getting into plants on time and 
most importantly getting the operations and maintenance logs.

Why don't you get an injunction from a judge to tell the private companies 
they have to give the PUC everything it wants?

Frankly, because in this last 100-day period I was trying to not be that 
aggressive, I was trying to work it out with these generators. And we have 
made significant movement with some of those generators.

Is it illegal for a privately owned power company to shut down in order to 
drive up prices?

Isn't that the multibillion dollar question? That's where you match you legal 
theories.

Is the PUC joining in any of these legal actions against FERC and the private 
power generators?

You know we actually asked for help from FERC in getting data from generators 
because FERC has wide access to all sorts of market data. I talked to (former 
chairman James) Hoecker directly in September. He said, 'No problem. You just 
send us your data request and we'll make sure they comply.' But we had no 
informal help from the FERC and so we filed a motion, in November, I believe, 
for FERC to compel those people under its jurisdiction to give us basic 
documents. FERC has yet to move on those motions to compel.

Is the PUC is joining in any of the civil actions?

At this point we haven't joined in the private civil lawsuits.

What else can the PUC do?

Well there's a ton of stuff that the PUC does in front of FERC. We appear on 
electricity and natural gas issues and we continue to file formal complaints 
to that administrative agency. For instance, it was the PUC that brought the 
complaint at FERC against El Paso Corp., three weeks after I became president 
of the PUC. We complained about anti-competitive activity. We have brought 
all the motions at FERC to prevent the generators from re-upping their market 
price authority.

If FERC does nothing and allows this market-based rate authority to continue, 
what would you do?

California is experiencing the real time consequences of justice delayed is 
justice denied. Eventually the administrative procedure act would allow us to 
go to court but frankly a variety of utilities and other folks have been 
trying to kick it up to either the D.C. Circuit or the 9th Circuit. 
Preliminary responses from the courts have been that they have failed to 
exhaust administrative remedies.

What's in store for San Diego in terms of price hikes?

Bottom line, it's unrealistic to think that San Diego can continue to be 
charged in the 6 to 7 cent range when everybody else now is being charged in 
the 10 to 11 cent range. But I can't prejudge the level because we're just 
starting to hear the evidence.

How do you think the escrow accounts -- 'our individual charge accounts with 
SDG&E' -- are going to shake down eventually?

Frankly, that's an issue that's also before the commission. What the 
legislation clearly says is that there's this balancing account that San 
Diego is billing things into as a regulatory accounting matter but that's not 
the end of the inquiry. They put the money in and they charge it to a 
regulatory account and then they come to the PUC. Then the PUC judges the 
reasonableness of those charges. And the separate watch dog component of the 
PUC, the Office of Ratepayer Advocates, has done some preliminary analysis on 
SDG&E's charges up through I believe August of 2000 and has questioned a 
large percentage of those charges as unreasonable because of SDG&E's failure 
to hedge when they had hedging opportunities.

Utility executives criticize the PUC on two major counts. They say only half 
the utility plants had to be divested but the PUC set the rate of return and 
other restrictions in such a fashion that it really encouraged utilities to 
dispose of the other half. Second, they say that when the PUC eventually 
allowed them to enter long-term contracts, it did not spell out procedures in 
case the contracts turned out to be unfortunate moves. How would you respond?

The first part wasn't on my watch in terms of the rate of return. That was 
set by the prior PUC. However on that question of rate of return and 50 
percent versus more I think SDG&E is a little separately situated because I 
do think there were some encouragement of SDG&E selling off in order to be 
able to merge. The rate of return may have been lower than the utilities 
wanted . . .

And the criticism about long-term contracts?

I think the long-term contract issue has been painted in simplistic terms and 
it's not a simplistic question. When the utilities came to the commission in 
2000 seeking permission the commission acted faster than it usually acts. On 
July 21 of last year PG&E and Edison came to the commission and said they 
wanted authority to enter into direct bilateral contracts. By Aug. 3 we said 
yes.

But they claim that you did not give them the ground rules.

Oh, we certainly did. We applied the historic reasonableness test. But they 
wanted an up-front guarantee that they would not be second-guessed and my 
concern on that was heightened because they have all these unregulated 
subsidiaries. Because they're now energy trading in the market . . . The 
facts are they did enter contracts and we can show you the contracts they 
entered into in August, September, October and November of last year.

When California's deregulation law was being shaped, why was nobody concerned 
about abuse of market power by the private generating companies?

It is truly astonishing and I believe it's because of an ideological bias 
from my predecessors who said, 'Well, we will have a flood of competition 
into this market because it's just a commodity.' But, in fact, this commodity 
is uniquely situated to not have a flood of competition because you have high 
capital barriers to entry. You have long lead times to increase supply. It's 
a fundamental economic necessity which can't be stored and you can't choose 
not to buy it, there's no effective substitute.

Other states such as Texas and Pennsylvania appear to be doing deregulation 
right. Do you believe it can be done right?

I think the jury's out on that question. Texas started from a position of 
supply and is energy independent and does not report to the FERC in terms of 
its own intrastate transmission grid. Pennsylvania already had an integrated 
utility sharing relationship with other states. The utilities had buy-back 
contracts with the plants that they sold so that they got long-term contracts 
at the time of sale. The utilities also sold a much smaller percentage of 
their plants. I say California went the farthest fastest with the least 
amount of safeguards.

In retrospect, what was the central flaw in this deregulation plan?

The central flaw was not to realize the market power would be exercised by 
the sellers of a fundamental economic necessity for which there is no 
effective substitute.

In the current argument over temporary price caps, the Bush administration 
says this might diminish short-term pain but in the long term would 
discourage new supply. What's your reaction to that?

My reaction is price caps or cost-based pricing is an absolute economic 
necessity for California. The market is broken. Regardless of who broke it 
and how it broke, it's broken, maybe irrevocably. Until we can make a market 
work here we must have some protection for our economy. We really are going 
back a hundred years and reaching back, these companies are re-creating the 
kinds of trust that led to trust busting.

The economy can't withstand this and in terms of the supply argument, yeah 
supply is a state issue. Gov. Davis is streamlining and we have all these 
plants being built and plus we are conserving like never before. We have 
supply coming on line, it's being built, it's not being abandoned and if it 
were abandoned in the unlikely event the people that sunk in hundreds of 
millions of dollars into an investment decided to walk and abandon their 
investment, which isn't rational economic behavior, then the utilities could 
take those over and build it at cost-based building or the power authority or 
whoever. Most of those plants entered the permitting process when the price 
cap was $250 a megawatt.

Talking about rational behavior, it's certainly in the political and economic 
interest of the Bush administration not to see California's economy go in the 
tank, not to see the economy of the whole West Coast be hammered and suffer 
accordingly. If you presume rational behavior on their part, you'd have to 
presume that they're doing what they think is the right thing.

But once again it's a question of are you going to stand on your ideology 
regardless of all facts to the contrary or are you going to try and fix given 
the actual facts that are at play in that market? I think even the most 
committed free market person, if they're principled, recognizes that you need 
a market cop in any market. This market's being gamed in a myriad of ways.

Are you getting anywhere with the FERC in making the arguments that you're 
stating here?

The question right now is who is the FERC? I have not met formally with the 
two new FERC commissioners since they've been confirmed which just occurred 
last week. I look forward to a transition period where the FERC gets off its 
ideology and gets back to practicality and doing its job as a regulator.

Will that happen as long as George Bush and Dick Cheney are saying quite the 
opposite?

California needs to do what it needs to do to protect itself, but I do think 
we may have an opportunity in transition. We can't count on it, but we 
shouldn't close the door to it.

The new electricity plants coming on line for the most part are natural 
gas-fired. Would we still be in a crunch if natural gas prices remain high?

The PUC has been doing everything it possibly can in the last two months and 
will continue to do it in the next several months to encourage utilities to 
add natural gas infrastructure. The other thing is they have to inject 
natural gas into storage right now, even though we know that the price of 
natural gas is too high. California is being gouged on natural gas.

Isn't everybody else being gouged on natural gas prices?

No, God no. Prices at the California border are two to three times higher 
than anyplace else in the country. The problem here is the El Paso line is 
the market maker for the price of gas coming in to California because of 
anti-competitive behavior which I believe was intentional to raise prices. 
That evidence is being heard at the FERC right now.

Are you expecting anything from that administrative law judge at FERC?

We have to be hopeful. The astonishing thing here is that we, California, 
cannot count on the federal government to do its job.

Lynch was interviewed June 1 by members of The Union-Tribune's editorial 
board.






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