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Interview: david freeman
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Freeman has run five public power authorities--the Tennessee Valley Authority, the New York Power Authority, the Lower Colorado River Authority in Texas, the Sacramento Municipal Utility District and, most recently, the L.A. Department of Water & Power (DWP). Freeman worked for the Federal Power Commission during President John F. Kennedy's administration, and he became the first person to coordinate the national energy policy under President Lyndon Johnson. Freeman left DWP in April 2001 to become the state energy advisor to California Governor Gray Davis. Freeman says that electricity, which he calls the "oxygen of modern civilization," should not be allowed to fluctuate in price and reliability on the open market. FRONTLINE interviewed Freeman on April 4, 2001.
In the world of electricity, one of the things that hasn't really been talked about very much is, why did we have regulation to begin with?

Because [electricity is] a natural monopoly. ... It's a very capital-intensive thing, and you didn't want to have duplicate wires going down the streets. ... So in order to not have duplicate equipment that the consumers are paying for, the idea was that each utility had its assigned area, called a franchise. The deal was that they had a legal responsibility to have enough power so the lights were always on, and we didn't have rolling blackouts. In return, they were given a price that reflected the cost of building the power plants plus a reasonable profit. ... So we had kind of a cost-based regulated system that brought electricity to all of America, and it worked rather well. ...

How did we wind up having public power and having public regulation?

... [Public power] got its great boost in the 1930s, when we tamed the rivers and created a lot of hydropower in the process. ... This surplus hydropower was sold to the municipal systems and to the [Rural Electrification Administration] co-ops, who ... brought electricity to rural America. If you're old enough, you remember when electricity didn't exist on the farm. The private power companies never made it beyond the city limits, because it wasn't economical. So it took ... money from the federal government and some technical knowledge in the idea of forming co-ops, which was one of the big deals of the New Deal. That brought electricity out into the rest of America.

So the marketplace didn't cause the private utilities 60, 70 years ago to extend the coverage of electricity in the country?

On the contrary. It wasn't profitable, so they didn't do it. ... It was a major, almost revolutionary change in the lifestyles of people on the farms, and it only happened because of governmental action. ...

You say [the public power system has] worked rather well. We're told it's inefficient, it built nuclear power plants, rate payers had to pay for it, [it created] overstaffed organizations that were ossified and needed to be loosened up.

Let me just tell you something, having dealt with electric power customers for the last 25 years. The customers are interested in two things: the price and the reliability. And I think you'll find that the customers of the Tennessee Valley Authority ... are very, very happy with their performance. ...

Deregulation promised to reduce the prices because the regulating system was so awful.  But what's happened?  The prices have gone up 30 percent, 40 percent, 50 percent.  So give me those good old days, I say. The truth of the matter is that the price of electricity for public power is lower. Just look at California. Where are the lights on and not blinking? In Los Angeles, where we have public power, and in Sacramento, and in Anaheim, and in Glendale and all these public power cities. They can huff and they can puff and they can say what they want to, ideologically. The plain truth of the matter is California is a vivid demonstration that public power serves the people, and private power has been an abysmal failure as far as the consumer is concerned. ...

They say that it's not working in California because it was dumb deregulation.

Deregulation is dumb, if you want to use those words. But it's inherently a bad idea in its purest form, which is the way the free market people say. Something like electricity, that cannot be stored and is the oxygen of modern civilization, cannot be allowed to fluctuate up and down in price and in reliability and availability under a free market. We've had a vivid demonstration that it is inherently a dumb idea if you don't combine it with a public power presence to make sure that there's always a surplus.

But they say that wherever deregulation has come in, things have improved. It may take some time, [and] you may have to work out the rules, because you're changing the structure and the rules. But we know that from the gas business and from airlines and from everything else in this society.

Look at the facts. What's happened to the price of natural gas under deregulation? You ask the consumers of natural gas in California or anywhere else in the country, where half the homes are heated with natural gas, how they feel about that product's price today. The price has gone up 50 percent to 60 percent. Consumers are angry about the fact that a free market turns out to be very expensive. Now, the freedom is for the producer to pick our pockets, literally. I'm not saying that they're doing anything illegally. But the very fact that they are free to charge what the market will bear is turning out to be very expensive for the consumer.

They say that when they deregulated natural gas, prices went down [and] demand went up. Now, that's sending a price signal to people to either conserve gas, which the economists say, or it gives an incentive to gas producers to drill for more natural gas. What's the matter with that?

Think of what they're actually saying. They're saying that the market price for natural gas became so low under the free market, when there was a surplus, that the producers stopped drilling. And so the market really wasn't satisfactory for the producers. Then, when they stopped drilling, it shifted with volatility into a shortage, and now the consumers are paying through the nose. Aren't they making the case that that kind of volatility is unacceptable, to either the producer or the consumer, and that there needs to be a kind of a floor and a ceiling? Because [in] the free market, it's OK for the price of fur coats to go up and down. It's OK for carrots to go up and down, or almost anything else that you can do without or that you can store.

It's not OK for the oxygen of life in this high-energy civilization. That's the lesson we need to learn. The economists, they have an interesting word; it's a Freudian slip. They call it "externalities."

Externalities?

That's their word for saying that the impact on the consumer, you just have to live with it. After all, it's kind of like deregulating the police department and saying, "Well, we have a shortage of police, a few people get murdered, it doesn't matter. Then we'll hire more police and it'll all work out." They are without any human feeling as to the impact on the consumer, or, actually, the impact on small, independent producers when the price gets too low. This volatility, what we're learning, is no good. ...

The economists have a religious belief that there's no market price that could be bad, and there's nothing that's regulated that could be good. But look at this industry. We grew from nothing to having the best power system in the world, and at the lowest prices under regulation. And what's happened under deregulation? We've got the whole state of California ignoring their education problems, ignoring everything and focusing entirely on fixing something that wasn't broke. If that's not a vivid example of the fact that we shouldn't be doing it, I don't know what is. ...

What they say is that the nature of the deregulation in California, which they, Enron as an example, objected to, was such that it left certain preferences in for certain people. It didn't really open up the marketplace, and the result was the utilities got caught in the middle. They said it was political problems that created this, not the free market, because there never was a free market.

The latest lament of the free marketeers is that we didn't do it right here in California. But they're just dead wrong, because as a matter of fact, for the first year and a half, when there was a surplus, the prices did go down. But the price was so low that Enron or anybody else didn't put any capital into building new plants. Our economy came roaring back, the demand went up, and these free marketeers didn't build any power plants because it didn't pencil out. Now we're in a shortage and they're taking us to the cleaners. ...

My position is that the reason that the governor and the legislature want to create a California power authority is so that we'll be in charge of our own destiny, and we won't have to hope and pray that the Enrons of the world will build us power plants. If they don't, we'll do it ourselves. ...

They would reply and say, "What we really need is ... rules, and we need a cop on the beat to guarantee competition. That's what we don't have."

Isn't that oxymoronic? The free market needs a cop? It's kind of like George W. Bush saying we need a national energy policy. They've got one. It's praying for mild weather. That's their policy.

They don't want to do anything that will benefit the consumer by putting a cap on prices; like toughing up the standards for the mileage of cars that will save more oil than you'll ever find in the Arctic; or doing anything that will really get us off of the imported oil that affects the people that give the big money, like the automobile industry, the oil industry and people like that.

What they point to is natural gas. They say natural gas began to be deregulated under Carter, was completely deregulated under Bush Senior, and that for most of the past 10 years, we've had low prices for natural gas. Can't we do the same thing with electricity?

It's factually incorrect. All that was deregulated was the wellhead price. The transportation of natural gas was regulated quite well by FERC, from the inception of that industry until two years ago, when they just went on a sit-down strike ... [and] stopped regulating both the wholesale price of electricity and the transportation of natural gas and left it to the market. The price of natural gas has gone through the ceiling out here in California, because the transportation, which costs less than a dollar [per thousand cubic feet], went up in price to $15, $20. It's still way up there. Now the wellhead price has tripled also. If their idea that natural gas is a great success story for deregulation, they're going to get chalk therapy at the election booth, because the people of this country are paying the price, and they know what's happening. ...

Loretta Lynch [the president of the California Public Utilities Commission] says that electricity isn't Democrat or Republican. It's something that people really need.

That's a true statement.

But she also said that in the natural gas area, for instance, one of the reasons for the price going up in November, as you noticed, was that there was market power that was exercised, manipulation of the market ...

Well, Loretta has her point of view. It's more fun to say that they're conniving and plotting, and in a conspiracy, but it's simpler than that. If you and I were both laying on the operating table in a hospital, about to go under and we both needed oxygen, and the loudspeaker said there's just enough oxygen for one person, we'd be each bidding everything we had to get that oxygen. There doesn't need to be a conspiracy. When there's a shortage of something vital to life, the consumers bid against each other to bid the price up. And the producer cleans up, legally, doing what comes naturally, charging what the market will bear. That's what's happening, and the fault lies in a lot of people. ...

So we're getting what we deserved, in California, anyway?

No, because the federal government still has the responsibility to regulate the wholesale price, and they're not doing it. We're maybe the approximate cause, but they're still in the chain that could've stopped the damage, and they didn't do it. In fact, they're stubbornly refusing to do it. The law is not discretionary. The law says that the rates must be just and reasonable, and nobody thinks that there's a competitive market. That's why I say they're on a sit-down strike.

Somebody like [Enron CEO] Jeff Skilling says, "The phrase 'just and reasonable' should be struck from the federal statutes. Let the market decide, not a bureaucrat."...

He hasn't looked at the history of the electric power industry. I worked for the old Federal Power Commission that administered the same law in 1960, 1961, 1962. We started then systematically regulating the wholesale price of electricity. Can he say that this country lived through a disastrous electric power era, from 1960 until 2000? Of course not. The electric power industry was one of our success stories. The prices actually went down, in real terms, over that period. The system expanded. ...

Mr. Skilling has made an awful lot of money advocating his point of view, and I think it's great that we have a country where everybody has the freedom to speak, including me. But he has a self-interest in this argument, and he's done rather well at it.

Ken Lay, [Enron's founder], says ... "Give us some time. Give the market five years to shake out, and you'll get a stable market which will meet supply and demand and behave in a way that will bring people power in a way that's going to be to the benefit of everyone."

You tell the businesses of California and the consumers of California to pay these prices for five years, and they'll spit in your eye. This is the failure to recognize that this has an impact on human beings. If the price of electricity goes up, bread comes off the table, food comes off the table, clothing is not bought. For people in the lower income groups, they have to make choices, and it creates real hardship. ...

We interviewed Severin Borenstein [the director of the University of California Energy Institute], who says that we need to give deregulation a chance; that all we're seeing in the markets across the country are growing pains. Give it time, it'll work.

That's an interesting theory of life. You had a system that worked. You try, in California, the first state to really try deregulation, and it becomes a train wreck. It blows up in your face. And so the answer to that is "Give it time," where a more logical reaction is, why don't we just stick with what we got? It's working. ...

Where will [California] be by [the time this documentary airs]? ...

The fact that the state of California has decided to take charge of its own destiny is going to leave some room for private enterprise to participate in the generation business.

We are not carrying a toothpick anymore. We're carrying a club. If the private companies don't build the power plants, we can build one. ... No longer are we going to be at the end of the pipeline, caught short. If we have to go out and get our own gas resources, if we have to build a [liquid national gas] terminal somewhere so that we can import gas from all over the world, we will do it. ...

So don't feel sorry for California. We may have a little flickering of the lights here and there this summer, but we are the first to experience the pain of deregulation. And we're going to be the first to get rid of it in its pure form, which is very opposite to the public interest. ...

PG&E goes bankrupt, Southern California Edison goes bankrupt. They're just private companies--and that's their problem?

We hope they don't go bankrupt, and I think that we worked out arrangements so that they will not go bankrupt. But we don't see them emerging as giant power plant builders from the ashes that they were almost in. These are companies that are going to have to find their way over a period of years. In the meantime, we can't wait. The system of private enterprise has failed California in the electric power field and run us short of natural gas, so we have decided to supplement what they do with self-help. I guess we can say that we are now free, or becoming free. Those curves will cross about 2003. We will have a surplus, and we will stay in surplus from now on.

But what do we do in the interim? ...

The people of California, speaking as one person, will show how much electricity we can do without. We're going to have a World War II-type conservation effort in California this summer, and it's starting right now, today. The governor's program will pay people not to use electricity. ... Between the price signals and the cash and all the rebate programs, we've got $1 billion worth of conservation programs. We're going to show these out-of-state generators and the in-state generators that we don't need all of their stuff at these high prices, and we will knock the top off of the demand curve. ...

It sounds like you agree with [Energy Secretary] Spencer Abraham, with Treasury Secretary [Paul O'Neill] and with President Bush, "Let California handle it on its own."

We have no choice. I don't agree with them, because they have let us down by failing to regulate the price. But what we're saying is that we will engage in self-help. That doesn't mean that their policies are right, because they're not helping us with our conservation programs as they should, and they're not putting a ceiling on prices, so they have let us down. But I'm saying to them, "Don't feel sorry for us. We have an economy that is as large as the sixth nation on earth, and we're united, and we have a program." But just recognize that there is a judgment being made about what this administration thinks about California. ...

In some ways, though, we knew all this from 60 years ago. Have we forgotten the lessons of history?

I don't think that we know them well enough to use them. ... There are not many people that lived through the era when there was no electricity in most of America, where it took federal action to bring electricity to rural America, and where the prices were very high in other places until the public power yardstick came in and provided an example that electricity could be priced more economically. The public versus private power debate was a pretty big thing, even through President Kennedy.

But now public power has become accepted. As I mentioned to you earlier, even in conservative areas like Nebraska and Tennessee, public power is considered homegrown. It's no longer ideological where it's working. But it's still an ideological issue to the religious believers in the marketplace.

Is this an attempt, in a sense, to dismantle the last legacy of the New Deal?

I don't think it's that thoughtful. I think it's the epidemic of deregulation, which is being inflicted on small nations around the world. They're trying to privatize power systems and things, and it's people who have this religious belief that if it's a private enterprise outfit, it's just got to be efficient, and if it's public, it's just got to be inefficient, and that's just wrong. There are just too many examples of inefficiency in the private sector and too many examples of efficiency in the public sector. ...

Speaking of efficiency and inefficiency--you just conducted some negotiations on behalf of the state of California. You were appointed by the governor to provide power to the state for quite a few years out. But you're negotiating in a situation of scarcity and crisis, so how could you get prices that were...

Because there is an understanding of people in the marketplace that in three or four years, we're going to have a surplus. And there were a lot of people who took a lower price today in exchange for a contract that extended into the years when they didn't know whether they'd have a market or not. ...

Did you have to make any concessions on potential environmental fines with any of the companies for creating more power in California? Did you have to give them any kind of guarantees at all against, let's say, being sued for overcharging?

No, we gave them no guarantees about being sued for overcharging whatsoever, and as far as the environmental law is concerned, they all know they have to obey them. We, in some cases, said that we would pay the mitigation fees for going beyond the limits to keep the lights on this summer.

What is a "mitigation fee"?

In other words, fees they have to pay the air quality district for so much per pound of pollutants, because I wanted to get the power generated at a reasonable price. It's cheaper for the state to pay the mitigation fees, because I knew what they were going to be, and the entrepreneurs didn't.

So in order to make this deal, you really did have to sacrifice some protection for the environment.

No, we didn't. The air quality districts make the rules. I just worked closely with them. They have decided that the fees for mitigation [will be used for] putting [traps] on diesel exhaust systems from buses that will control more pollution than what's emitted. The net result will be a cleaner environment.

But I guess the suspicion is that in order to make these deals, the generators wanted two things. One is this mitigation of environmental damage fees, and the other is that the state of California, the Public Utilities Commission, and others are coming after them. The ISO has gone to the FERC and said...

But on the second point, there were no concessions made at all. On the first point, it is in the public interest that those power plants operate this summer. We have a severe shortage, and my primary job was to help keep the lights on at as low a price as I could, and we carried that out. It's the air quality districts that have decided, in order to cooperate with a power emergency, that it was better to charge a fee for the pollution, let them pollute, and then use that money to control other forms of pollution that are even worse. That was a decision by the air quality boards.

Okay. But there's no...

Listen, I take this subject very, very seriously. I testified in favor of acid rain legislation when I was the chairman of the Tennessee Valley Authority. We're putting pollution control equipment on every one of our plants that we can, and we have 75,000 customers signed up for really green power, and that is renewable energy. I don't take a second place to anybody on the importance of the air quality levels, and it's a big fat lie that the air quality rules are inhibiting the construction of power plants; they're not.

The power plants weren't built because these capitalists didn't want to invest their capital at a time when the price was low. And, of course, you've got to comply, and of course it costs a bit more money to put pollution control equipment in, but it's very cost-effective in terms of human health. So we are not watering down any of the air quality laws in this crisis, and we are calling the people who are blaming the environment for this shortage big fat liars. ...

You praise the era of the regulation of utilities. But it brought us [Rancho Seco], Diablo Canyon--$26 billion that ratepayers had to pay off.

Sounds terrible, doesn't it? And everybody in California would give their [eye]teeth to get the prices that we had under all that horrible regulation back again. Deregulation promised to reduce the prices because the regulating system was so awful. But what's happened? The prices have gone up 30 percent, 40 percent, 50 percent. So give me those good old days, I say. I think most every other customer would like to go back there. ...

Is it true that he who controls gas and the transmission of gas controls the price of electricity?

Pretty much, because so much of the electricity is powered with natural gas, and it sets the price for all the rest in a deregulated environment. But under regulation, if the hydro cost one cent, it was priced at one cent. But now, everything's priced at the high price of gas.

And the manipulation of the gas market ...

Well, I don't call it manipulation. I think it's all legal. They're decontrolled, and there's a shortage because they slowed up on drilling and slowed up on building pipelines. And with a shortage and the [FERC] falling down on the job, the price has gone through the ceiling. It's the same as electricity, and we have a situation where we can't afford a shortage. ...

So I get this correctly--Loretta Lynch [of the California Public Utilities Commission] is talking about suing over the intent of El Paso to jack up prices. The ISO has sent a $6.2 billion bill, if you will, to FERC, saying these are overcharges. But you don't seem to be saying that this is the fault of the companies.

I don't know about all that stuff. I know what the cause of the high prices is. It's the shortage in the absence of regulation. And I have no evidence that anybody's done anything illegal. ... But do you criticize a private company for doing what you allow them to do? It's too late for the blame game. I'm focusing on what we need to do to pull these wagons out of the mud, and the power authority is the vehicle to get us into surplus again. All of this conspiracy stuff, people like to read that. But I think it's counterproductive, because the public needs to understand that there is a real shortage, and we need to conserve this summer.

I thought you believe in just and reasonable rates.

I do.

Shouldn't the companies be held to just and reasonable rates?

They should, and I hold the federal government fully and completely responsible for not doing their job. But...

So you don't believe that the companies were charging just and reasonable rates?

Of course they're not. There's no question about that. But if the law enforcer doesn't enforce the law, and if the cop says it's OK, do you expect self-policing by the companies? I'm just being realistic. We ought to make it illegal. I'd like to see an excess profits tax enacted. That hasn't been seriously considered yet. I'd like to do something about it. I must say that simply saying there's a conspiracy sounds good, but I haven't seen any evidence of it. ... And before I accuse somebody of actually being a crook, I need to have some evidence. ...

We went and we filmed the Department of Water Resources' trading operation for buying power. Then we went to Houston, and we saw El Paso's 50,000 square feet of marketing going on. And we saw Enron's floors and floors of people, with meteorologists predicting the weather. It looks like the little league versus the major leagues.

It might very well be. The state has just recently entered into the ballgame. This is a new activity, but...

It looks like no game. It looks like we've got nobody at the plate. ... I'm talking about the Department of Water Resources on a daily basis trying to get electricity into the state, and dealing with these legions of MBAs, with their computers and their meteorologists behind.

There's no question that the industry is taking us to the cleaners with a shortage. We have to buy something that we need, and there's not enough of it. This is a horrible situation. That's why we tried to enter into as many long-term contracts sooner. But we can't invent power plants, and we couldn't buy power that just wasn't available. ... You just have to recognize that there is a real shortage, and the only way to balance our budget is either through rolling blackouts that we don't control, or through conservation measures that we take on individually and voluntarily. ...

We have market power. The people, if they act out of their own self-interest, can cut back on how much we use, to where we can avoid the brownouts and just show a lesson to these people in Houston that we've got a way of counteracting their tactics of holding up the price. ...

Jeff Skilling [Enron's CEO] says that deregulated prices in marketplaces always give us lower prices.

Tell Mr. Skilling to come to California, and I double-dog-dare him to go to San Diego and pick up anybody on the street, or talk to anybody who gets their light deal next summer, and say that to them--he'd better duck.

He says, "It's morally indefensible that he can't choose his utility company as a consumer."

It's morally indefensible that we have to pay the prices that he's charging. He lives in Texas. He can choose what he wants.

Did you know he says, "In Texas, you still can't choose which utility company you pay for the electricity that comes to your house." He wants to do it just like we do with phone companies now, and long distance services.

That's his point of view, and I don't really have any fundamental disagreement with him on that particular point. But the fact of the matter is that we had that system in California, and nobody wanted to play because there was no savings involved. ... The deregulation system gave every consumer the right to switch their power supplier, but the prices are so high, nobody got any savings out of it. [Skilling's] company, Enron, came out here and said they were going to play in the retail market, and then they withdrew.

No, they said they withdrew because the market was stacked against them. The existing utility controlled all the power lines; they control access.

The losers always say things were stacked against them. They came out here and they just really didn't get the job done, and they withdrew. That's what happened. ...

Enron says that the problem [with] deregulation in California was that you couldn't do long-term bilateral contracts, and that once you allow people to do exactly what you were doing, the marketplace will work.

It will work if there is sufficient electricity generation so that people can have enough. It won't work if you have a shortage, because you can't possibly have long-term contracts for 100 percent. That's not wise, because you might really overpay that way. So there's no question that there are a lot of specific deficiencies in deregulation. But pointing them out is not an argument for deregulation. They're trying to turn things on their head. They're saying, "Deregulation was wrong because of A, B, C. Therefore, we ought to go to deregulation." It's clever, but not persuasive.

Why is it that they point to Pennsylvania over and over again? We ask, "Where has deregulation worked?" They say, "Pennsylvania."

There's a surplus and there are caps. It's not pure deregulation. It is a hybrid of regulation and some marketplace activity. And as far as I can find out, there have been no massive, significant decreases in price. They say it works because it hadn't exploded yet. It worked in California the first year, too. You could have said that. They're a couple years behind us, and I wish them no ill. But the jury is still out on whether it's going to become a train wreck or not. ...

So the 20-some-odd states that were contemplating deregulation, like California...

They're going to look at what's happening here. And if they've got an ounce of sense, and I think they do, they're going to at least wait and see whether that train wreck occurs in Pennsylvania and how we get out of it. I think deregulation is run into the California train wreck, and it's not going to go anywhere very fast. And that is a good thing. Let's see how we work our way out of it, and maybe there'll be a hybrid system that makes sense of public enterprise and private enterprise reinforcing one another.

(Editor's note: The Los Angeles Department of Water and Power, a public utility, was not required to sell off its generators under deregulation. Thus, when the power shortage hit last year, Mr. Freeman, then head of the utility, was able to sell excess power at the prevailing high prices. The California ISO has named L.A. Water and Power as one of the generators charging "excess prices." The case is pending before the FERC.)

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