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Interview: nettie hoge
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Hoge is the executive director of The Utility Reform Network (TURN), a utility watchdog and consumer advocacy group based in San Francisco. Hoge says that electricity is an essential commodity that should not be left prone to the vagaries of the free market, and that FERC has abdicated its responsibilities of enforcing "just and reasonable" rates and has become instead an apologist for the free market system. FRONTLINE interviewed Hoge on March 23, 2001.
... From your perspective, why are we in this problem today?

I think the problem is essentially that we've taken electricity--which is an essential commodity, which everybody needs to use in a non-discriminatory basis--and we've given it over to market mechanisms, and the market is ruthless. So we're seeing the exercise of market power and the profligate greed of people who have us in a bind. We gave over regulation of the generation assets--the plants that make electricity--to multinational corporations who have absolutely no concern for how much we pay, or what pain it puts the California economy in. ...

Electricity, you would say, is not your regular kind of commodity?

No, electricity is not Q-tips and bubble gum. It's an essential commodity that everyone needs. It's absolutely essential that it be available in a predictable manner to keep the economy going, and that it be available for everybody on a non-discriminatory basis to have justice and equity. And it's really hard to get it started, because there's huge investment in large power plants.

So it's not going to be subject to a regular market mechanism. It doesn't work. ... I believe that essential commodities with high capital entry cost and inelastic demand make a really good argument for rational oversight and regulation--in order to assure stability--and centralized planning, which would mean resource allocation, and fairness to the regular old ratepayer who needs this to live. ...

During the passage of AB-1890, the deregulation bill, how did people talk about that at that time?

When deregulation was being passed, people were trying very hard to criticize, downplay, or make a mockery out of the monopoly--in the same way that people criticize government. So the word that was going around was, "Well, what do you want? Do you want your utility to continue to be run by Homer Simpson?"

And utilities, in turn, were behind this deregulation, weren't they? How did this happen? ...

The legislation that was ultimately passed out of California was basically channeled from the corporate headquarters of Edison and PG&E. It was written by the people who work for them. It was part of a grand scheme that was agreed to in the governor's office in the summer of 1996, between the governor, the large customers of energy--that would be your huge industrial users--utilities, and the independent energy producers, those folks who ultimately ended up owning the power plants. There were no small consumers anywhere near the room. ...

But my understanding is that consumer organizations forever were complaining about regulations, utilities, PG&E, Southern California Edison. Here, there's a deregulation and the marketplace has opened up.

The problem with regulation was very much like the problem with our political system right now. The regulators knew what they had to do; it was quite certain what would give just and reasonable rates. But they didn't do it; they were captive of the utility industry, much like the Federal Energy Regulatory Commission is now. Just because you have a regulation doesn't mean it works. The Texas newspapers were screaming about how all the companies that had bought the plants in California were just going gangbusters.  There were 600 percent increases in profit from quarter to quarter.  So we knew where the money was going. The position of citizen advocates at the advent of this whole notion of deregulation was, yes, there is a problem; we're paying too much for electricity, but it's not because we need to go to a private market, it's because we're doing regulation incorrectly. And we did months of testimony about what was wrong with the regulatory scheme and how it should be fixed so that it would be fair for small ratepayers.

What do you mean, "just and reasonable rates?" Where does that come from?

There's a mandate in every state and a mandate at the federal level that electricity rates be just and reasonable. And that means that they be relatively closely related to the cost of production--that whoever decides to provide electricity gets reimbursed for the cost of production, plus a reasonable opportunity to make a fair return on equity. ...

It sounds like government control over free market capitals.

Not a bad idea, in retrospect. ... We'd take some risk, they would produce electricity, and they would be given the opportunity to get a fair return on that. There were excesses, so we paid more than we should have. The nuclear power industry was probably the biggest excess. However, in retrospect, it was clear that even with the excesses, that system worked better for the average ratepayer than this current reliance on a market that's manipulated and not working.

You miss the old regulated Homer Simpson utilities?

... Electricity deregulation has been a failure on three counts. First of all, prices are exorbitant. Second, reliability has suffered. We're having blackouts. And third, we're on our way to putting aside environmental concerns and letting the environment suffer so that we can build more plants. ... This is a dismal failure on all three counts: fair prices, reliable system, and environmental concerns.

I was talking with PG&E. There was a real anguish in the voice of the people that I spoke with at PG&E--at the highest levels--that they actually had to cut out power in California, that they were involved in blackouts. It was almost like a cultural shock to them, they said. It never happened before. So you and PG&E are actually closer together, then.

For all of the excesses of the monopoly utilities, the one issue is that when they had control of generation and distribution, and an obligation to serve, over 100 years, they took seriously the obligation to serve. They would dispatch at all costs and make sure the lights stayed on, at all costs. The new owners of our generation plants have no such culture, no such bias, no such concern. In fact, they're happy to take their plants offline when they can see higher profits by doing so. ...

Earlier, you made a remark about [Loretta Lynch, the president of the California Public Utilities Commission]. Loretta Lynch seems to be someone that the Republicans in the legislature here are calling for her head, basically. They want to impeach her. Why?

We have a regulator in California, who for the first time in probably 16 years, through three administrations of PUC officials, has stepped up [to] the plate and said, "Show me your facts. I want to see your hand. I'm not going to give you rate increases without you proving that you need them. I'm not going to rush to judgment. Let me see your books. How much of your utility resources did you upload to your parent holding company and take out of the state?" Is that an issue that we should examine when we determine whether the utility deserves a bailout? It's a person who has been fair and reasonable, and that's something that the powers that be are not used to. ...

What is uploading?

In California, recent audits show that when the utilities were going [through] the transition from regulation to deregulation, they transferred approximately $8.8 billion of assets that really belonged to ratepayers up to their parent company. They used those to do things that would profit their parent company. Meanwhile, they allowed the utility to be this withering arm and go bankrupt.

But $8.8 billion went to buy assets in other states that were unregulated assets, to repurchase stock for the parent holding company and to give large benefits to management. That money is gone. The utility ratepayers don't see it anymore, but the people that are running the holding company are profiting from it. At the same time, they're screaming, "The sky is falling; please bail out the utility." ...

Wasn't the federal government supposed to be involved in this deregulation, in making sure [energy companies charge] just and reasonable rates? What happened here?

When we sold our power producing plants to generators who had corporate headquarters in Texas or the South--out-of-state corporate headquarters--we lost control over them. In other words, the state could no longer tell them what to do. The state regulation was gone. At that point, the only oversight in regulation was at the federal level, and it was housed in the Federal Energy Regulatory Commission, [which] has a statutory mandate to assure that the rates charged customers are just and reasonable.

What the FERC did is they said, "We're not going to look at the rates; we're going to assume that because the market is wonderful, magic, and efficient, that any rate produced by the market mechanism is per se just and reasonable." Soon after that, they issued their own decision, which said, "Whoa! Prices are out of control. They're not just and reasonable."

But in the face of their own decision that prices were not just and reasonable, they stood back and refused to intervene. They could have fixed the California problem in a nanosecond. What they would have done would be to impose cost-based caps on a region-wide basis and they stepped back and said, "No." They left California twisting in the wind. ...

So I understand that you're saying that the FERC--the Federal Energy Regulatory Commission--has the power already, under the law, to bring this whole situation under control.

The Federal Energy Regulatory Commission--the FERC--has not only the power to bring this system under control, it has the mandate in law to assure that the rates we pay are just and reasonable. And it has failed utterly in its obligation.

Why aren't they doing it?

There's a number of explanations for why the Federal Energy Regulatory Commission is failing to step up to the plate. The first one is that they're apologists for a market mechanism that they set into play in 1988, and ever since that time, they've been going down the stairway of the market. Their mantra is, "The market will save us; all we have to do is suffer through the current environment." In reality, that's not their job. They're not to make distinctions between the benefits of market versus regulated enterprises. They're supposed to use the tools they have to assure rates are just and reasonable. ...

The other explanation is that we've got a political dynamic going on, where the new Federal Energy Regulatory Commission, which is beholden to an administration that was put in office by the very people that are making windfall profits in deregulated states, would say the party is over. They don't want their own supporters to lose their windfall profits.

Now wait a second here. In the 1990s, the executive branch of government is in control of the Democrats and Bill Clinton, so this is not a Republican or Democrat issue.

It's true that the Clinton administration didn't step up to the plate. There were arguments from there that they weren't going to intervene in front of the new administration. By November of last year, we had enough time to know that this was not a summer [spike] problem. ...

But you don't fault the Democrats? My understanding is that Mr. [Jim] Hoecker, who was head of the FERC under Clinton, basically has the same policies as Mr. [Curt Hebert], who is currently head of the FERC, who is a Republican. It seems you're bucking sort of a bipartisan approach to how to deal with the electricity market.

It could be that you're right; that there was a bipartisan notion that we would try this market mechanism. But at the point in time where we saw we had a dismal failure and it was time to intervene, unfortunately, we were in the situation where the people who were least likely to intervene--i.e., those generators from Texas who had put the administration in power and were reaping windfall profits--there was no hope that FERC would intervene. ...

You said the feds aren't acting; they are acting. They just passed $69 million in refunds and $54 million in refunds.

The federal government has really, really late in the game woken up and decided they'd better do something. What they've done is symbolic. Sixty-nine million dollars is chump change in terms of the $13 billion that was vacuumed out of this economy. ... The feds are asleep at the switch. They are looking the other way because they're apologists for some kind of market rhetoric and ideology that they committed themselves to and will follow blindly, regardless of the consequences to the California economy.

The federal government, the energy secretary, and the head of FERC have both said that price caps are the work of the devil; that we don't need it.

They're not in California paying the cost of electricity. Imposing price caps on a regional basis for a reasonable amount of time until the system is stabilized is the only rational solution. And [FERC Chairman] Hebert and the secretary of energy are not supposed to be market apologists or theorists about what the best medicine is. Their responsibility, under the Federal Power Act, is to assure that rates are just and reasonable. They should be using whatever tools are necessary, not to opine about the future, but to assure that just and reasonable rates are in place now. And in my view, they've completely abdicated their responsibility to the citizens of California. ...

What does natural gas have to do with all of this?

First of all, natural gas makes electricity. All of the power plants that we have online and we're looking at--not all of them, but the vast majority of them--are dependent on natural gas. When people deregulated, they deregulated primarily because natural gas was so cheap that they felt like there were going to be new plants put online with new turbine cycle that were going to be so cheap that they just couldn't wait. They were falling all over themselves to get to that electricity.

After we divested the plants and we sold them off in California, we sold a lot of them to people who had conflicts of interests in the fact that they owned either the gas or the pipelines that would bring the gas to the electric generation. There are allegations--not yet proven--that those folks, when they saw that electricity was deregulated, understood how incredibly powerful it would be to use market power to put constraints on the delivery of gas, so they could win on both sides--high gas prices [passed] through for electricity generation, and high gas prices for home heating.

In fact, evidence of this is seen by the fact that, even though natural gas prices increased during the last six months at about 50 percent on a national average, at the California border, those prices quadrupled. That was cause for alarm.

So it's 50 percent nationally and 200 percent in California?

Quadrupled.

Four hundred percent.

Yes. Four hundred percent at the California border. So we're looking at 50 percent increases nationally and 400 percent increases at the California border, and you have to ask yourself, "What's going on? It's the same commodity." The problem is it has to be transported to California, and there were folks who had incentives--very large incentives--to withhold capacity for delivery so that natural gas prices would increase because of a supply crunch, which would mean that electricity prices would increase, and they would profit on both ends of the calculus. ...

Ken Lay, the head of Enron, says you're exactly right, that the problem is that we haven't had total deregulation, that the people who control the transmission lines are a blocking point in a real deregulation and a real free market; and once we have that real free market, things will be pretty good.

... The FERC--the Federal Energy Regulatory Commission--just recently released and took away the price cap on gas transportation. As soon as that happened, prices for gas at the California border quadrupled.

El Paso was able to use pipeline capacity and basically block the entrance of gas, because its affiliate would benefit from that. What Mr. Lay would like to do is have laissez-faire capitalism and say that people could buy transmission rights. People with market power would buy those transmission rights in a future market, and they would then be able to control where electricity was dispatched, not somebody who is considering the public interest and the necessity of making sure that everybody has equal access to electricity.

Making it totally private could very easily put it in the hands of those people who could manipulate it to extract the maximum profit, and that's what we're seeing in gas pipelines. ...

Mr. Lay would say, "Let the retail rates rise with the market and you'll get the profit necessary to build more plants [and] take care of all the needs that you could possibly have."

The supply-siders, who are the same people that are reaping excess profits right now, seem to think that we can build our way out of this. My response to that is, it's not a supply problem, stupid. If it was totally a supply problem, why would we have excess prices at five o'clock in the morning on Christmas Day, when nobody but Santa is working?

So we have low prices when there's not great demand.

If it's a supply and demand problem, then when we have low demand and all the energy that we have available--which is more than our demand--should be putting forward electricity and should be at reasonable prices. When we have spike demand, we should have high prices because we can't find enough power. But in reality, once the prices went out of control, rather than seeing spikes that followed demand, what we saw was a plateau of high prices. In other words, when demand was low, prices were still high, and when demand went lower yet, generators started taking power plants offline so supply would be tight.

In the old days, when the utility ran that, if supply and demand were relatively stable, we'd have all the lights on at reasonable prices. What I'm trying to say is that it's not a supply problem. There is some supply incremental problem related to more need to build, but it's a market power manipulation problem. ...

The president is saying that what we do need to do is create more energy supply, because of this crisis.

Right. What the president is saying is California's lights aren't on, so let's go extract oil from the Arctic. They aren't even related. The supply-siders are using the fact that they're manipulating market power as a way to push their long-term agenda, which is, "Give up environmental constraints, forget about the environment, let us exploit resources as fast and as furiously as we can and get around what we consider constraints on profits," which are environmental constraints. You see it all over the place. It's in the front-page paper. ... It's the wrong medicine. In fact, it's not a medicine; it's destroying our environment and our economy.

Isn't this kind of déjà vu all over again? I mean, didn't we go through this, 60, 70 years ago? Isn't this the reason why we have regulations?

When we first decided that it would be wise to regulate electricity, we had market power being exercised by fragmented folks who were exploiting the fact that electricity was real time--that market entry was high and that people needed electricity.

The other thing that's different between electrons and Q-tips is that, if I don't like the price of Q-tips, well, I'll do without for a little while. But with electricity, we have what we call inelastic demand. There's a certain amount of electricity that we need in order to keep going, and if you have market power and inelastic demand, you are absolutely up against the wall. People who regulated electricity understood that. We forgot it because we got sold snake oil by a lot of laissez-faire capitalists, who said that it was going to be too cheap to meter because natural gas was cheap. We got sold the bill of goods.

When the first crisis took place this past summer, what was your reaction in San Diego? ...

My reaction was, "Oh, man, here we go. We're in for Mr. Toad's Wild Ride." This is an extraordinary example of everything that went wrong. It was clear that we couldn't immediately intervene and put a control on prices, because we'd lost control of that by selling off our power plants.

It was also, "Wow! Why do we have a supply problem overnight? We've had this system going on for three and a half years, since deregulation." Supply problems are kind of a gradual thing. You don't just like overnight wake up and say, "Oh, guess what? We have a higher demand, we have a higher supply." I looked at the demand figures and they were not as high as was claimed. So it was pretty clear [that] we were being taken to the cleaners. ...

And they sort of disciplined the market. I mean, we've gotten used to these high prices.

The tragedy of that is that we then saw the quarterly profits rolling in. We saw all of the market players in California showing record prices. ... The Texas newspapers were screaming about how all the companies that had bought the plants in California were just going gangbusters. There were 600 percent increases in profit from quarter to quarter. So we knew where the money was going.

As of the time we speak, $13 billion more has been shipped out of the state to pay for electricity than we spent during the same period of time last year. What's going on? This is not an overnight, "Oh, my goodness, we didn't build enough plants ten years ago." This is the exercise in market power. It's traditional. It's textbook. This is going to be in the history books and it's going to look like what Standard Oil did to us.

Should Governor Davis let the utilities go bankrupt?

He doesn't need to let the utilities go bankrupt. There are reasonable proposals out there. What he has to understand is that the utilities did ship almost $8 billion up to their parent company. They did go gangbusters during the first three and a half years of deregulation. They collected close to $20 billion more in revenue than they needed to pay their costs and get a reasonable return on equity. So now, they have to tighten their belts. We can make them solvent without bailing them out, and we can do that in a way that would make sense to California ratepayers and would give us more control over our energy future.

I can see people saying, "What are you talking about? Here in California, you small consumers are paying very low electric rates, let's say, compared to New York and other parts of the country. You just want your cheap rates. It just costs more to make electricity. We all know that."

It costs more to make electricity. That's true. Natural gas prices have gone up. We're willing to pay the costs of buying electricity at cost, plus a reasonable return on equity. What consumers are objecting to--and what is unsustainable in this economy--is continuing to pay windfall profits that are extracted by the use of market power. Our economy can't sustain it. ...

You opposed deregulation?

Yes.

Completely?

Yes. We believed it was a bad idea. We put on alternative testimony to say that doing regulation properly was a better solution. ...

[Some say that deregulation is] going to be difficult, but in the end, everything will be OK.

One could make that argument if we didn't see so much evidence of manipulation of market power. Again, let me say, with electricity, manipulation of market power is very, very simple and it's the biggest problem. Electricity can't be stored and it has to be dispatched across a central grid. Now, traditional economics theory says [that] if nobody controls more than 40 percent of the market and you have five or six players out there, you're going to have competition. There's even a whole theory that quantifies that.

But with electricity, even if you had four or five players in the state, because of the way we distribute electricity in a particular service market where electricity was necessary, you might very well have one supplier exercising a complete monopoly. And how do you fix that? You don't fix that by getting more people to buy plants, because there might only be one plant in a given geographical area and they can extract the highest price possible.

Even in places like Pennsylvania, which has been touted as an example of deregulation that works? Where there is some regulation, there is some capping of prices?

Pennsylvania and Illinois have been touted as working. Let me tell you a story about Illinois. When they deregulated, they deregulated with long-term contracts. They had a few suppliers and they said, "From now until the day of deregulation--the day of reckoning--you're going to be on a long-term, fixed price contract." So they looked good. The problem is, when deregulation finally occurs, and they still only have a few suppliers and they don't have any long-range contracts in place, they're going to be in the same place we are.

We've already heard from New York that they're having problems with deregulation. Other states are following suit. Pennsylvania--mark my words--has propped up its system through a thing called buying credits, which makes it seem like in the short run that there is an advantage to switching. But as supply tightens in Pennsylvania, we're hearing signals of the same kind of problems. ...

So it's not a California problem?

It's not a California problem. It is the problem of allowing folks who are deregulated have incentives for maximizing profit in every opportunity in the world to exercise market power, have control over our resources.

Nationally.

At every different jurisdiction. Yes, nationally.

... [We spoke to Robert Glynn,] the CEO of PG&E today.

PG&E was instrumental in creating this [deregulation] legislation, and they profited mightily under it for the first three and a half years. As I said, they had close to $10 billion over and above the cost of service, plus profit, and PG&E itself put about $4 billion up to its parent company. PG&E took $3.2 billion to New England and bought the entire New England electric system. That's owned by their affiliate, under their holding company structure and going gangbusters, extracting profit in New England.

So the utility itself has been isolated from the resources of the holding company, and it's sort of set out to die like some gangrenous appendage. But I don't have a lot of sympathy for that. I think that's a management problem, and it's resources being taken from the ratepayer to profit the shareholders. ...

You mentioned the word "greed," Nettie. Well, why is it greed and not benefiting the shareholders [of those utility companies]?

I think that it's greed because there's reasonable returns. If you see the pain of exercising market power, you know you're not playing fair. You're extracting windfall profits by manipulating the system. If you want to market, play in a fair market and realize a fair return. ...

As one guy put it recently, one former PG&E executive who works with FERC, "One person's gouging is another person's fair profit."

That's a fine response if all you're doing is having a bunch of gladiators fight it out in the market. But who is at the bottom of this chain? You and I and the small businessperson who has to sell pizza? We're the ones who have to buy those electrons in order to keep the economy stable. That's why we regulated electricity, so that we could have price fairness and stable prices. If we're going to go out there and play market dynamics to see who makes it in the shareholder stock market, we're going to put the economy in a great deal of pain. ...

This isn't just like a game of capitalism. It's not a board game. This is a situation of trying to make an essential commodity with inelastic demand--which is required for the stable maintenance of the economy--available on a stable basis at fair and reasonable prices. The laissez-faire market has not proven itself capable of providing that guarantee. ...

People are saying that maybe California deserves it. I mean, we've been making tons of money in California, we have Silicon Valley, we have an economic boom, and it's just a redistribution of the wealth. And we've had low electric rates.

We haven't had low electric rates; we've had stable electric rates. But they've been 50 percent higher than the national average. The reason that we haven't had a big problem with electricity and the reason we were allowed to let electric rates flow up to that high price is that we have a benign climate, and we weren't causing a ton of pain on average by paying too much for electricity.

Now, we're not only paying too much for electricity, we're paying exorbitant costs. Electricity that was trading at less than $25 a megawatt hour is now trading at $430 to $500 a megawatt hour. That isn't just a redistribution of wealth. That's exploitation of market power, and it's the extraction of windfall profits. It's bad for everyone in the long run. ...

David Freeman, down in Los Angeles, who runs the L.A. Water and Power, told me that he thinks the result of all this is going to be more public power--that, in fact, in the end, this will be something good.

I hope he's right. If you look around at California and you see who's doing OK, it's public power. ... It's those public power systems that own their own source of generation, those public power systems that make their own electrons who are able to provide electricity to their own customers at fair and reasonable prices and sell it to the rest of us dupes at a profit. ...

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