Prop. 80: Adjusting the Vertical

I was in little ol' Austin, Texas, last week talking to a passel of journalists about energy policy. Last time I did that it was 1998. Back then, energy reporting was considered wonky and difficult. No one had heard of an Enron energy trader. People were still obsessing over Monica Lewinsky even post-Clinton. The only way to pique interest in my sessions on energy reporting would have been to buy drinks for the house. Eight years later, they were buying me reposado tequila. Today, energy is the biggest thing this side of a Texas football player's breakfast. Energy is no less complicated an issue today than it was seven years ago. In fact, with the demise of the relatively understandable vertically integrated monopoly, it's tougher to sort out. So what's changed? In the late 1990s: Berets and blow jobs. ? Gray Davis faces Dan Lungren. ? Enron as residential energy service provider undercutting the local utility's price. ? Proposition 9-an initiative that would have rolled back much of the state's deregulation. Outspent big time. Failed miserably. Today: ? Hurricanes denude the Gulf?s energy infrastructure. ? Unions in walloping range of Arnold Schwarzenegger. ? Proposition 80-an initiative proposing to reregulate the market, while apparently preserving a vestige of competition in the electric market. May or may not affect the amount of renewables in the state. Would get rid of direct access for the future-unless you get service from a muni or community-access provider. Will be outspent. Risk of failure: unknown. Seven years and a world of difference. Since 1998, the whole concept of regulation has changed. "Command and control" is a phrase for the history books. In fact, how dare a regulator attempt to tell a regulated entity what to do without first getting permission from the credit-rating agencies and Wall Street, and partake in a Pebble Beach tee time. Up until the '90s, regulation was a bit of a boring prospect. Wolfgang Puck had more street cred than a commissioner in charge of a huge segment of the economy. Commissioners were passive-aggressive, letting billions of dollars into the rate base but coming back with a few hundred million in disallowances. Now their celebrity status is up a notch or three and "disallowance" is uttered only soto voce in the employee lounge. Commissioners understand that they have to keep utilities happy and in the black or risk the economic instability and real consumer hardship that come with rolling blackouts. Legislators-off and on-have attempted to bring consumer, environment, and labor concerns into the new hybrid market in recent bills, such as the failed Million Solar Roofs initiative, but haven't gotten far. In today's different political world, we've a different initiative. Let's compare what the new one might do and what the old one had in mind. Prop. 9 (the Utility Rate Reduction and Reform Act) was not so much about repealing deregulation as it was about curbing the opportunity utilities were given to make off with bundles of money. That included ratepayers being on the hook for utilities' questionable investments-about $28 billion in stranded assets. Prior to the initiative, the state's plan was that ratepayers would pay off utilities' investments, although utilities took some risk in the deal because they had a four-year window of opportunity to recover the costs of their stranded assets. Prop. 9 would have stopped those paybacks unless utilities could prove they would be deprived of a "fair rate of return." Prop. 80 (the Repeal of Electricity Deregulation and Blackout Prevention Act) is about putting much of the vertical back into vertically integrated monopolies. When you cut through it, The Utility Reform Network, which sponsored both initiatives, has had a serious change of heart in the last seven years. The evildoers of pre-deregulation were replaced by a new set, whom TURN considered more evil and less necessary than the original. TURN used to think that utilities were evil-even if a necessary evil-and that regulators should be regulating more, not less. TURN stood aside when AB 1890 deregulated the industry. After deregulation, the consumer group saw nonutility power plant owners and energy traders as heartless vipers swooping into ratepayers' wallets. In the days of Prop. 9, the "bad actors" in the energy business were not the Enrons of the state. They were the unscrupulous and sometimes the small-time criminals who set themselves up as energy service providers. They signed up retail clients and scammed or crammed and did not follow through. With the change in casting and the change in TURN's world view, Prop. 80 materialized. It would basically repeal most deregulation and reinvigorate vertical utility monopolies-because TURN and others think that utilities can't possibly be as rapacious as private power plant owners and energy traders. Prop. 9 materialized in a pre-bankruptcy, pre-credit risk world. No one ever considered that the biggest utility in the nation would crumble. At the time, the California Energy Commission's analysis showed that rates would have been reduced from about 11 cents/kWh to about 8 cents/kWh if the initiative passed. Be still, my beating heart. Prop. 80 kneels at the utility church of good credit. It promises that ratepayers will be around with their wallets open in order to guarantee payback for financing new infrastructure. Prop. 9 was also an antinuclear initiative. Nukes were the most expensive power to operate, not to mention the always potential accident risk. It would have made nukes compete with market-priced power. Prop. 80 doesn't address nukes. TURN has fought new investments in the state's nuclear plants' steam generators to extend the lives of the plants. But the advocates say little about the economics of continuing to run nuclear plants. The cost of operation is in line with other sources, but only if you fail to consider the price of destroying the coastal marine environment and the potential for mass destruction in case of accident. Prop. 9 obliquely addressed renewable power. The subsidies then in place would have been kept-such as they were. Prop. 80 actively encourages new renewables. However, the language is open to interpretation. The California Public Utilities Commission maintains that the initiative's acceleration of the 20 percent renewables portfolio standard obligation deadline from 2017 to 2010 is already under way through the joint-agency Energy Action Plan. The Independent Energy Producers questions whether the wording in the proposition means that utilities would have to add 1 percent new renewables out to infinity. Some renewables advocates fear it would prohibit increasing the renewables mandate from 20 percent to 33 percent, an amount backed by the energy agencies and the governor. Prop. 9 would not have ended direct access, no matter how squirrelly nonutility electric service providers were back then. Prop. 80 would be the death knell for direct access in exchange for economic certainty that utility investments would be paid back with all bundled customers bundled back up and obligated to pay. I'd like to be able to take a principled stand one way or the other on Prop. 80, but I just can't figure out what the market will morph into in the next few years. On the anti side, the vast complications stemming from deregulation are still being plumbed without the help of the Roto-Rooter initiative. Does it do any good to hand utilities a mandate when the market and regulators appear obligated in that direction already? And I have real trouble with the provision that if some parts of the initiative have unintended consequences, we would need a super-majority of the Legislature to overturn it. Will the state's economy suffer if large consumers do pick up and leave because they can't get a better deal through direct access? On the pro side, the state sorely needs the capital to invest in energy infrastructure. One way or another, it would ensure the status of renewable energy, although I would hope it wouldn't be interpreted as limiting the amount of renewables developed. If it's a positive shot for the market and for consumers, well-funded industry lobbyists couldn't easily sway the Legislature to overturn the law because of the same super-majority clause that prevents any quick changes from unintended consequences. I think the reality will be that despite the unions' financial backing, the initiative is not in their interest to pursue with more campaign funds. TURN initially saw this as a placeholder and then got overwhelmed by the pursuit of a special election and the money that unions were willing to spend on anything that smacked of anti-Schwarzenegger. Now TURN is doing its best to defend the initiative, but it is in a defensive position. It will, no doubt, be outspent. Still, I do not underestimate voters' anger toward Enron and the generators it swept up in its recklessness. It might have a grassroots chance. Ask me in 2012 over a reposado-if there are any agaves left to distill.

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Prop. 80: Adjusting the Vertical

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