... Is the problem in California, as [Enron CEO] Jeff Skilling said to us in
Houston, dumb deregulation?
Davis, a Democrat, was elected governor of California in 1998. While he says
he is suspending judgment on the merits of deregulation, Davis thinks that
California's plan was deeply flawed. Further, he says that the energy companies
who profited wildly from California's energy crisis should help fund the
state's recovery efforts. At the time of this interview, Davis' advisors were
negotiating settlement alternatives with some of those power companies. FRONTLINE interviewed Davis on May 1, 2001.
Well, there's no question that the law passed in 1996 was flawed. It
deregulated the wholesale market, meaning the price that the utilities had to
pay energy companies for power, but not the retail market. As a matter of
fact, it reduced rates to customers and froze them for five years. So that was
an inherent conflict.
Secondly, it failed to do what every other state did which deregulated-- which
is to say to the people who bought the power plants the utilities were forced
to sell off, "You must sell us that power back here in California. You must
serve our needs first." So it was flawed in that it didn't require California
to have a first claim on the power plants. It deregulated part of the market,
but not all of the market.
But over the last nine months now, you have been pretty direct in your
description of the generators, the traders, and so on. Are they really snakes
The generators have made more money than God. I mean, they've made 700
percent, 800 percent, 900 percent profit. They haven't improved the service.
They haven't improved the product. They're just selling us back our own
electrons that are sitting here in California. ...
In 1999, the entire state--including public power authorities at municipal
levels--spent $7 billion for power. In 2000, a year later, for approximately
the same amount of electricity, $32.5 billion--a 450 percent increase. And
it's going up this year. So ask yourself ... why are we paying these energy
companies so much more money for the electrons we bought two years ago for $7
And some people say this year it'll cost us maybe $70 billion?
I don't know what it'll cost, but it'll be too much, whatever it is.
But did this just sneak up on you? When did you become aware that
this was a big problem?
We started focusing on this in earnest late summer and early fall. There
are two things I can do, and one thing I can't do. I can build more power
plants. In the 12 years before us, not a single plant of major consequence was
built. I've approved 13 major plants. Eight are under construction as we're
talking. ... [And] we've had to ask people to conserve power to help us over
the hump. So I've signed $800 million worth of conservation initiatives to get
people to save at least 10 percent a month.
The third problem is the price problem, which is entirely in the federal
government's jurisdiction. We can't control it, and the federal government has
been siding completely with the big energy companies in Texas, and not with the
public in California.
You're talking about the Federal Energy Regulatory Commission?
They haven't been doing their job?
But recently they put out an order trying to, they say, mitigate the prices
That was a Trojan horse, and that had more holes than a piece of Swiss
cheese. All a generator has to do is sell it to a middle person who can sell
it to a public power authority, and there's no application to the generator as
to what price they can charge. Plus, they make us charge customers a surcharge
to make sure the humongously profitable generators get even more money out of
our ratepayers. There are about five flaws with that proposal.
So that's not going to help with prices this summer?
It will make matters worse.
Why would they do that?
I don't know why they're doing it. I have to assume that their motives are
positive, not negative. But they don't understand the severity of the problem
in this state. And once a regulatory agency finds that the market is
dysfunctional, which they did last summer, and the rates last summer were
unjust and unreasonable, it just should just refund the excess profits. That's
what the law requires them to do. They're the Federal Energy Regulatory
Commission, and they will not do that. They will not pull the trigger.
Well, today, Williams AES--one of the generators--refunded $8
Yes. Peanuts. ... These people have made hundreds and hundreds and hundreds
of millions of dollars of profit off of California alone. ...
But you're still buying electricity from [those power generators]?
Because if we didn't intervene in the market in January, the lights would
have been off from January 18 until today, because they drove our two utilities
to the brink of bankruptcy. They said, "We can't sell the utilities any more
power because they're not creditworthy, so you need to find us a creditworthy
purchaser." And we were the only creditworthy purchasers standing
But even in your negotiations with them, with the [California Department of
Water Resources], they have questioned the creditworthiness in the state of
California, haven't they?
And have charged us a credit penalty, too. Can you imagine that? The state
of California--they're questioning our credit. These people have no shame.
... Why have you kept these contracts secret?
Because David Freeman, who I hired to negotiate contracts with the energy
companies ... said it would be very detrimental to release the terms, the
specific terms, of a contract, because the next person is not going to offer us
a better deal than the contract we just put in the newspaper. So he's
negotiating. We've done that at his request.
However, yesterday we released about a 60-page document full of facts and
figures about our proposal to resolve this issue, the revenue bonds we want to
sell--all the information that Wall Street needs, that the treasurer needs, and
that the Public Utilities Commission needs, to implement my plan. So we've
released everything except the specific terms of the long-term contracts. ...
Your projection is that, by 2003, there will be ample generation
We have the details on the contracts you've signed with Duke Energy, as an
example. ... Why sign long-term contracts with such high prices?
Because David Freeman believed that was the best deal we could cut with the
generators at a time when we had no leverage. But still, he's a wily old
fellow--he ran the Department of Water and Power, ran the New York Power
Authority, ran the Tennessee Valley Authority--and even with no leverage, he
was able to cut a pretty good deal. Over a 10-year period, we were able to get
prices averaging 6.9 cents. ...
The logical question is, if you're locked into long-term contracts--which I
assume the ratepayers or the taxpayers of California are obligated to pay--and
at the same time, you have a surplus by 2003, then we, long-term, will be
locked into paying for electricity at a very high rate, no?
I'm assured by David Freeman and his team that they have cut the best
possible deal, so that this year about 40 percent of our power is purchased
through long-term contracts rather than on the spot market; next year about 55
percent; the next two years about 70 percent. Then it drops back down to
around 60 percent, because we expect by about year five, the price of
electricity will have fallen, and the spot market may be the cheapest way to
buy power. Today it is absolutely the most expensive. ...
[Former Energy Secretary William Richardson, former Treasury Secretary
Lawrence Summers, former Secretary of State Warren Christopher--who is also on
the board of Southern California Edison--were all pushing you to raise rates
and do something.]
Everybody wants me to raise rates and sock it to the ratepayers--everybody.
But I am not going to do that. I, reluctantly, after months of holding out,
had a partial rate increase--a fraction of what they want me to raise. ...
You said some time ago that you could have solved this whole problem by
raising rates--and now you have. Do you regret not having raised rates?
I've only raised rates a very small portion of what the true rates are. We
paid 450 percent more in 2000 for power than we did in 1999. Therefore you
would need a rate increase of a commensurate nature. The rate increase I
propose basically exempts 50 percent of the population because they're the most
efficient users of power--using just their baseline amount. The next quartile
pays about 10 percent, and then the final quartile about 35 percent. ...
I did that on purpose, because I do not want to shock our economy into a
recession, and I do not want an outraged citizenry to pass an initiative that
would eliminate deregulation. Why? Because we're very well down this process
as it is--flawed as it is--and we're counting on getting more power plants on
line by the end of 2003 so we have a surplus of power. If that initiative were
to pass, investment would be withheld, and it would take years and years longer
before we had a surplus of power.
So you still back deregulation as a concept?
I don't know if I would do this if I had to start over again. This is a
hell of a mess. But ...
Well, you did endorse it. Everybody endorsed it.
No, I didn't take a position on it in 1996. I did oppose eliminating it in
1998 when there was a similar initiative on the ballot, because I think you
can't unring the bell. But clearly everyone has to do their part. I'm doing
my part, building plants at a record rate, having historic conservation levels.
The only people not doing their part is the federal government that is siding
with the energy companies against the interests of the people of
But as I understand it, you still think deregulation is the way to go? Or
I'm suspending judgment on that. I'm here to solve a problem. The problem
is getting reliable electricity at affordable rates, and I'm going to have
essentially a blended solution, which will include the creation of a public
power authority that will be the builder of power plants of the last resort.
If the private sector says to itself, "But wait a minute. I don't know that
I want to build enough plants to make sure that California has a surplus of
power, because that's driving down the price of my product" ... then the public
power authority can step in and make sure we get to that 15 percent margin of
supply over demand.
When we interviewed Mr. [Robert] Glynn, the CEO of PG&E, we pointed out
to him that the ISO and others say that the generators have overcharged at
least $6.2 billion, and that number is rising. We asked him, "Would you sue
them to get the money back?" He said, "Well, not yet." But I said, "Then
who's going to pay for this?" And he said, "The ratepayers are still on the
hook." Are the ratepayers still on the hook for this overcharging, or are you
going to get it out of the generators?
I am working my tail off to make sure the ratepayers are not on the hook.
They did not ask for deregulation. They should not be viewed as the sole
source of solving this problem. I don't want them to pay a disproportionate
burden. Edison has sued the generators, and our [memorandum of understanding]
with them allows us to work with them to collect that money and make sure it
goes back to the ratepayers. We are hopeful of persuading the bankruptcy judge
in the PG&E matter to give us the same authority with PG&E.
So you still want to go after the generators?
Yes, because the authority that oversees them--the Federal Energy Regulatory
Commission--has said that their rates are unjust and unreasonable. ...
So they found these people guilty a year ago--they just haven't
agreed on the sentence.
But we talked with [FERC chairman] Curt Hebert and we got--
Lots of luck.
What do you mean "Lots of luck?" ... He's the guy you're turning to give you
the money back.
He is the chairman of the commission, but he has not been overly sympathetic
to California. He's more of an ideologue than a problem solver, and he
believes that the market should work its will no matter what the casualty, no
matter what the pain, no matter how far down in the mud California's dragged.
And as the governor of this state, I obviously see the issue quite
Well, he's saying you just want him to give you short-term relief price
caps, which won't solve the problem.
"Problem," meaning fattening the balance sheet of already enormously wealthy
You can call them anything.
You've called them all these things, haven't you?
And those are all deserved adjectives. I mean, they basically are
threatening the economic well-being of the flagship of America's economy, and
they're doing it by selling a very pedestrian product--electrons--without
having added one iota to the quality of the product or the quality of service.
Now you tell me, in Economics 101, how that works. ...
Your office has been in settlement discussions with Duke Energy. Our
information is that those settlement discussions have involved everything from
Duke Energy being relieved from its obligations under these various charges
made by the ISO and the FERC, to them supplying energy on a long-term basis in
California. Can you comment on this?
... Duke came to us. They volunteered to come to us and made a number of
suggestions to some people on my staff. I don't know how I would characterize
them, but there have been some discussions going back and forth between Duke
and members of my staff. ... I know that Duke made a number of demands,
including that the attorney general drop its investigation. We have no
intention of asking the attorney general to do that. ...
They also want you to withdraw all your complaints before the FERC. They
want you to call off the investigations of the Public Utilities Commission, in
exchange for, they say, a lump sum payment.
Yes. First of all, I think the entire amount of money owed Duke is in the
$100 million range. That may sound like a lot, but given the huge sums of
money these people make, it really isn't. And we are not about to call off the
dogs when that may be the best vehicle available to us to get justice for the
ratepayers of this state--meaning the PUC's investigation and the attorney
So you don't look at this as a possible, let's say, universal global
settlement, so that you can basically get on with the business of building
Here is my general approach to the energy companies. You have already
charged the utilities a 50 percent credit penalty for the power they were
buying from you. You're charging us a penalty. You're not going to get two
bites of the apple here. You're going to have to have a very substantial
reduction of what you expect to pay us back--otherwise you are jeopardizing the
whole future of the deregulation experiment.
There are several states in this country that have stepped back from
deregulation, because they see the pain inflicted in California, and they don't
want it. Texas has not even gotten into deregulation. Nevada has stepped
back. Several western states have decided they'll just wait. So if they want
to jeopardize their entire American market, that's what they're risking by not
being part of the solution.
When I saw these documents, I saw this line, and I wanted to read it to you,
because I wanted to see what your reaction was. "When they proposed that the
governor"--meaning you, after you agree to all of this--"will continue to
indicate that the California crisis is an aberration due to the flawed
legislation, not a necessary consequence of deregulation, and will not advocate
scrapping deregulation in wholesale power markets. ..."
Well, you can tell that's the first time I've heard that phrase. ... This
gives you some sense of where these people are coming from. They want all
their money. They want to bleed California dry. And they want to make sure
that this tidy little deal they got going called deregulation, I guess, is
spread to the other 49 states. What I'm trying to do is protect the 34 million
people of this state to make sure they have reliable power at affordable rates.
We are doing our job by building plants at a record rate and promoting record
I guess the other part of this is that, in these documents that we got our
hands on about the settlement negotiations, Duke also pledges political support
for you--public relations support--if you'll go along with all of this.
Well, listen. I have not been briefed. I have no idea what Duke promised.
But trust me, we will not do anything that is the slightest bit unseemly.
We'll not call off any investigations. I'm determined to do two things--keep
the lights on, and keep the rates reasonable. And to do the latter, I have to
pursue every avenue available to me to investigate and pursue any claims
against the generators for unjust charges. ...
Mr. Glynn, the CEO of PG&E, was talking about the electrons leaving the
state. We asked him about dollars leaving the state from PG&E: "Shouldn't
they come back to relieve the ratepayers in California?" And he said, "No way.
You're dreaming." ...
I think Mr. Glynn, while he may have been within his legal rights to seek
bankruptcy protection, certainly dishonored the traditions of a company that
had served California for nearly 100 years. He gives everyone a $50 million
bonus on the way into bankruptcy, and uses a lot of profits thrown off by the
utilities in the early days of deregulation to finance utility purchases in the
East and throwing off profits to their unregulated subsidiaries.
So PG&E's holding company and affiliated companies have done very
handsomely at the expense of their regulated utility that they've kind of
thrown to the dogs here in California. That may or may not be legal, but it
certainly doesn't inspire confidence, and it's not the way to win the hearts
and minds of the people you serve.
Some people would say that, in a sense, what Washington is doing to you is
giving you what you deserve--because you're a Democrat in a Democratic state
and they're not going to come riding to your rescue. They don't want you
running for president, and they don't want California to prosper under your
Well, there's 34 million in this state, and many of them are Republicans and
Independents. Many of them voted for George Bush, and all of us consider
ourselves part of America. I don't think it profits anyone to forsake the
biggest state in America and the state responsible for one-eighth of the
economy on what is clearly unjust and unreasonable activity. A federal agency
found that, and yet nobody is willing to offer the relief that the law says
California is entitled to.
We're not going to take this sitting down. We are fighting back. We're
going to march on Washington with a host of Republicans, Democrats, business
leaders, legislators. We're going to make people know that they're ripping us
off and have them look us in the eye and say, "You're just in bed with the
energy companies. You don't care about the public that you are sworn to
How significant is the economic impact of all this on California and the
It certainly doesn't help if you have to spend 450 times for a loaf of bread
or for any other staple of life. Electricity is an essential of life.
Electricity and water really do have life and death consequences. ... And
people who pushed deregulation unbridled need to realize that even the citadel
of democracy--the New York Stock Exchange--has circuit breakers. If a stock
drops a certain percentage, they cease trading. If the market drives 500
points, they cease trading. We need a circuit breaker to make sure that the
rough edges of deregulation do not work a hardship on ... any citizen of this
When we were at the Enron Corporation, we talked with their meteorologists
who advise their traders. They're predicting a summer which is two degrees
above normal on the West Coast, actually on all coasts. That wouldn't be too
good, would it?
There are so many scenarios here. We tried to prepare for the worst summer
in 40 years and build assumptions based on that. We're preparing for the
worst, but we're hoping for the best. And I've told people the end is in
sight. I will have enough plants online by the end of 2003 that we will have
retaken control of our energy destiny. Between now and then, we need everyone
to conserve at least 10 percent. I'm paying them if they conserve 20 percent,
and we are paying them if they put energy-saving devices in their home or their
And this is part of a transition to a more deregulated marketplace, or a
Well, we're trying to patch and fix and put a cast on a broken system here.
You can call it what you want, but we'll continue to purchase power in a
private market. We'll have a public power authority, which will also have the
ability to build power or finance power. And more importantly, we'll have more
power than our economy provides. All of that will give us leverage we don't
What do you tell the people who need ... the electricity, or people who
can't turn their thermostats down because they're elderly and they need the
heat? What do you tell them in this two- to three-year period?
That we are doing the level best we can to make sure power is available, and
to minimize hardship and to call on everyone to conserve to their utmost
ability--and to make it financially attractive to them to conserve.
Meanwhile, people have to join us and fight back against the federal
government that has dropped the ball, that is in bed with these energy
companies, that wants them to make more money than they've made before. And
the energy companies are what have driven this financial crisis to the point
where it is now. They're the reasons PG&E's in bankruptcy. They're the
reason Edison is almost in bankruptcy. And they're the reason we have to
finance this past debt out over a 15-year period. ...
So how much will rates have to go up or taxes have to go up in order to pay
for power plants, the debt from the past, the current purchases of power to
reimburse the surplus, etc.? How much are we looking at?
... We believe you will not have to pay more than the current rate structure
proposes--which is, for 50 percent of the public, nothing; for another 25
percent, only a 10 percent increase; and for the remaining 25 percent, a 34
percent increase. However, any conservation they engage in will drive those
OK, I'm not going to sit here and argue numbers with you. I'm just telling
you that when we talk to people on Wall Street and elsewhere, they tell us the
numbers don't add up--that you can't pay for what is the equivalent of
something like $17 billion or $18 billion of what you want to pay off with that
Well, again, those questions are best addressed to the financial analysts we
have. ... But the investment banking firms, when they listened to our proposal
for revenue bonds, said this was a sound proposal and they gave us high marks.
They are basically the jury of this process, because they're the ones who
advise their clients whether or not to purchase these bonds. ...
California is the sixth largest economy in the world. Is what's happening
here an economic threat to the rest of the country?
There's no question that California, in the last three or four years, has
been privileged to add disproportionately to the economic growth of America,
and to contribute to its technological productivity. Now, in the space of a
year, we've spent 450 percent more for power than we did the year before, and
bought essentially the same amount of power. This year, that number's likely
to go up. That can't go on forever and have us continue to be the economic
engine for America. ...
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