Power to the People
Storming the plants, seizing past profits, jailing energy executives—have we gotten to the point where the radical is reasonable? Find out in part two of an SN&R special report.
SACRAMENTO, Aug. 14, 2001—California officials yesterday launched what many involved in the energy crisis see as a revolution against the power-generating corporations that have drained this state’s bank accounts and caused a summer of unprecedented blackouts.
After filing a petition last week of eminent domain in Sacramento County Superior Court, officials from the newly renamed California Department of Water and Power, accompanied by sheriff’s deputies, yesterday seized 23 power plants around the state.
These were the plants—owned by Duke, Reliant, Mirant, AES, Enron and Dynergy—that were purchased in the wake of California’s 1996 effort to deregulate the state’s electricity generation system, which has proved to be a disaster.
“This was an action I was forced to take to protect the people of California,” said Governor Gray Davis during a press conference outside a seized plant in Morro Bay. “These companies had more than adequate opportunity to avoid this fate, but they refused to restrain their greed.”
Company officials responded angrily to the seizures, vowing an aggressive legal fight and using labels that included “un-American,” “communist,” and “downright evil.”
“California’s governor is behaving like a Third World dictator,” said Jan Smutny-Jones of Independent Energy Producers Association. “This is outright thievery.”
Davis had been threatening to seize the plants since his State of the State speech in January. Even as the state’s two major utilities were driven into bankruptcy and California consumers endured nearly a month’s worth of rolling blackouts this year, Davis was reluctant to make good on the threat.
That changed last week when average prices for a megawatt-hour of electricity reached $1,900 and blackouts rolled across the state each day. California also saw its credit rating lowered once again after spending more than $15 billion to purchase power for its citizens.
Still, Davis sought to avoid the plant seizures by signing a bill that created a buyer’s cartel among all electricity consumers in California that would buy power for no more than $150 per megawatt. When some energy executives publicly indicated they might not sell to Californians at that price, Davis ordered the plant seizures.
“These companies left me with no other choices,” Davis said.
While some experts have speculated that the seizures could cause disruptions in the power supply, a Davis spokesman said no plant was powered down during the transition. That was due to utility workers with the International Brotherhood of Electrical Workers Local 1245 and Utility Workers Union of America, who welcomed the new owners. Both unions have for several months urged the governor to seize the plants.
While California now controls its power plants and sets wholesale prices, the eminent domain action could spend the next few years in the courts as government and corporate lawyers argue about the value of the plants.
Although the corporations paid just $3.2 billion for the 23 plants, the generators are expected to argue that high wholesale and future’s market prices make them considerably more valuable.
Lawyers for the state, on the other hand, will likely point out to the court that most of the corporations have had their plants reassessed at far lower values than their original purchase prices for the purpose of lowering their property tax obligations.
Meanwhile, yesterday also brought progress in California’s other recent radical actions against power generators, including the indictment and arrest of more than a dozen energy company executives on felony unfair business practice charges.
After winning a motion to consolidate their cases, the energy executives yesterday pleaded not guilty during their arraignment in Sacramento County Superior Court. As the executives appeared in business suits with a phalanx of attorneys, the scene was a marked contrast to images of them in handcuffs that were broadcast around the world last week. Their trial is expected to begin by the end of the year.
The executives also experienced a setback yesterday when the Ninth Circuit Court of Appeals refused to issue an injunction blocking California’s efforts to retroactively recover energy company profits that exceeded costs plus the 15 percent profit allowed for under the new windfall profits tax law.
Those windfall profits are expected to reach into the tens of billions of dollars. That revenue will be used to offer rebates to ratepayers in California and to help the state pay for the power plants it seized.
While the near-futuristic news story above is obviously fictional, it is a fiction based on present-day reality, and a story with the potential to appear in the nation’s newspapers by summer’s end.
Proposed laws to levy a windfall profits tax, to create a buyer’s cartel that sets wholesale prices and to file felony criminal charges against price-gouging energy executives are all now winding their way through the California Legislature.
While some involved in the crisis may question the bills’ appropriateness and details, or argue about the fallout, few question their basic legality.
In fact, when Great Britain’s utility deregulation scheme (on which California’s was partially based) also created skyrocketing prices and corporate profits, the British government in 1997 levied a windfall profits tax on various utility companies that recovered more than 5 billion pounds in past profits.
The governor and the soon-to-be-formed California Public Power Authority also enjoy near-absolute power to immediately seize power plants in California, according to both legal scholars and California case law.
“It’s ironclad,” John Sprankling, an associate dean at the McGeorge School of Law, said of the state’s right to seize the plants. “I think it would be simply a valuation case. The public purpose and necessity standards are clearly met.”
So the question is not whether California can pursue radical actions against the profiteering power generators; it is whether it should, how it would work and what the likely fallout would be.
It begins with the will to change the system, to get aggressive in actions and not just rhetoric, to decide that it’s in the state’s best interests to end the deregulation experiment and kick the energy corporations out of California.
It begins when Davis decides he really meant his recent comment that we’re at war with these corporations and decides to pull out the heavy artillery. It begins when the radical starts to seem reasonable.
Maybe it’s already begun.
California Treasurer Phil Angelides, who will head the California Public Power Authority when it’s formed in August, is already making contingency plans to start seizing plants and going after excessive profits.
“What’s most important is the generators understand that we’re willing to do it and we will do it,” Angelides told SN&R. “There are times when private property must be taken for the public interest.”
Similarly, Davis has repeatedly pledged to start seizing power plants and to sign windfall profits tax legislation if the generators’ profiteering continues, even as he claims to be philosophically opposed to both actions. Preparations are already being made for plant seizures.
“We have explored all the legal options involved and if the need arises, we will be prepared,” said Davis spokesman Steve Maviglio, although neither he nor Angelides would go into details about exactly how the seizures would work or which plants would be involved.
Angelides rejects the notion that seizing corporate assets is “radical,” pointing out that the people and government have traditionally had direct control over the power system. Deregulation, he said, was the radical action.
“Across the whole economy, we have public interest protections, but we have lost that in the energy sector in this state,” Angelides said. He cites Sacramento’s use of eminent domain 60 years ago to seize Pacific Gas & Electric assets and create the Sacramento Municipal Utility District as an example of how aggressive governmental action can benefit the public.
Angelides noted that increases in spot market energy prices this summer would invalidate Davis’ energy plan and either cripple the state or cause triple-digit increases in residential utility rates, a situation that would force the state to take drastic action: “I think we are on the verge.”
“The word ‘radical,’ I won’t really use that to talk about what we’re doing,” said Paul Van Dyke, the legislative director for Senator Nell Soto, who is sponsoring bills to levy a windfall profits tax and make it easier to form municipal utilities districts. “Radical is just a matter of what policy options that you have at the time.”
And in the wake of a deregulation scheme that Van Dyke, like Angelides, does consider radical, he said California now has few weapons to control the energy market except those that require aggressive action.
“I think we’re going to see proposals once regarded as radical be considered more mainstream,” he said, citing the notion of sending energy executives to jail as an example.
Assembly Bill 67X, sponsored by Assemblyman Dennis Cardoza and others, would impose felonies on energy generators and marketers who gouge or game the market to increase rates. Attorney General Bill Lockyer’s office is also investigating whether generators have violated any existing laws against collusion or other unfair business practices, and a spokesperson confirmed that arresting energy executives is one possible outcome of the investigation.
Cardoza spokesman Doug White denies that the threat of jail is hollow or merely symbolic: “We envision that someone would actually be locked up,” he said. “We can send CEOs, directors and CFOs to jail.”
He and others say there is evidence that generators have withheld electricity at key times as a way of driving up prices, something he sees as akin to robbing the people of California.
“If someone came in and robbed your house,” White said, “it wouldn’t seem radical to throw that person in jail.”
The idea that executives at companies like Reliant and Mirant are robbing the people of California—and should be punished accordingly—is based on many studies that have shown that plants have been taken off-line for no legitimate maintenance reasons, but simply as a means of diminishing supply to increase prices.
Price fixing is already a crime punishable with both criminal and civil penalties, but proving that crime requires showing collusion between at least two companies, and that’s the smoking gun that has yet to be unearthed.
The Legislature could create new categories of crimes, just as it did with Three Strikes and hundreds of other tough-on-crime laws passed during the ’90s, making it a criminal act to withhold vital resources like energy from the public, and setting penalties however it sees fit.
For example, if California had a law making it illegal for a chief executive officer to allow his company to decrease the output of a power plant in California without prior approval from the Public Utilities Commission, and it was proved that Enron decreased its output without justification, then CEO Kenneth Lay could be arrested, booked and face whatever penalties the law prescribed.
As with the windfall profits tax, creating criminal penalties for price gouging would mostly be intended as a behavior modification measure, with the idea being executives facing jail time or seized profits would simply stop gouging consumers.
“The purpose of the windfall profits tax is not to make money, but to make it uneconomic to gouge us,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights, which supports the tax.
Yet there are those who would take the windfall profits tax a step further by making it retroactive, something that couldn’t be done with new criminal statutes. While Soto’s current windfall profits tax bill is not retroactive, Van Dyke said she has received some pressure to do so and amend it to go after past profits.
If so, California could be looking at extracting tens of billions of dollars that have been drained from the state. The California Independent System Operator has estimated that generators used unfair market power to overcharge utilities by $6.8 billion during a recent 10-month period. Most gouging estimates are even higher.
Soto’s bill originally set the fair price for power at $80 per megawatt-hour, authorizing the state to seize any profits companies made beyond that charge and to return it to the consumers in the form of rebates. Van Dyke said the bill would be modified to allow the PUC to set that figure based on generating costs plus a reasonable profit, probably 15 to 20 percent.
If the original bill had been in place in February of this year, when the ISO said 16.5 million megawatt-hours of electricity were sold at an average price of $363 per megawatt-hour, the total overcharge that could be recovered for just one month would be an astounding $4.7 billion.
While the legality of efforts to impose a windfall profits tax or jail generators would depend on the details of the legislation and likely be dragged out in court for months or years, California’s most serious radical threat—seizing power plants—is also its most immediate and legally solid weapon.
Government officials have used eminent domain throughout our nation’s history to create the country’s infrastructure, and to seize parts of that infrastructure when deemed to be in the public interest.
As Angelides points out, even the recently released energy plan of President George W. Bush, that champion of the free market, calls for using eminent domain to seize land needed to expand the country’s electricity distribution system.
A common law principle dating back centuries, eminent domain powers have only been strengthened over the years by changes in the law, including an extensive revision of California’s eminent domain law in 1975. The basic standard for seizing property is that it be for a broadly defined “public use,” and that “just compensation” be paid for that property.
The California Supreme Court has found that “the power of eminent domain is an inherent attribute of sovereignty,” and that, “when properly exercised, that power affords an orderly compromise between the public good and the protection and indemnification of private citizens.”
That second quote came in the 1982 case of City of Oakland vs. Oakland Raiders, when the California Supreme Court ruled that even a government entity’s proposed seizure of a football franchise was a legitimate “public use.” On the federal level, the U.S. Supreme Court has validated eminent domain seizures even when government seizes property for private sector, job-creating projects.
Seldom have the courts ruled against a government entity acquiring property by eminent domain, the most notable being when the U.S. Supreme Court invalidated President Harry Truman’s 1952 order seizing most of the country’s steel mills, an action taken to thwart a threatened strike by steel workers.
Opponents use that seizure to question the legality of California seizing power plants, but a review of the court’s ruling in the case, Youngstown Sheet & Tube Co. vs. Sawyer, shows it was a narrowly tailored ruling that does little to limit government’s broad right to seize property for public use. The court questioned whether the seizure was actually for public use and noted how the justification of the action violated federal labor law.
“We are within our rights to seize these plants,” Angelides said. “It is the absolute authority of the state to do this.”
If state officials walked into power plants tomorrow and seized the facilities, Bernardo Garcia and Eric Wolfe say that they would be welcomed with open arms by the workers who run the plants.
“Our opinion is the state should have seized plants months ago. I don’t know what Governor Davis is waiting for,” said Garcia, western regional director of the Utility Workers Union of America, which represents about 7,500 power plant workers in California.
That sentiment was echoed by Wolfe of IBEW 1245, the state’s other major power plant workers union with 18,000 California members: “Our union has been promoting the seizure of power plants for some months now. We think it’s long overdue.”
While the generating companies have been raking in record profits, Garcia said none of that windfall has trickled down to the workers, many of whom have seen their pay and benefits slashed and working conditions deteriorate under deregulation.
“As far as the workforce is concerned, the ability is there for there to be a very seamless transition,” Garcia said. “Our workforce, we wouldn’t abandon the plant if the owners left. We are committed to serving the public.”
As long as the state was willing to honor current contracts and working conditions, Wolfe agreed that the transition could go smoothly: “The workforce is in place, the procedures are in place, and I would think they would be able to keep operating the plants.”
To seize property, all a government body must do is file an eminent domain action in any county court, post a bond or other guarantee with the court that the money will be there to compensate the landowner, and seize the property, with the help of county sheriff’s deputies if necessary.
Efforts to seize power plants still owned by Pacific Gas & Electric would be more complicated because of that company’s filing for Chapter 11 bankruptcy protection. To seize those plants, the state would have to get permission from the bankruptcy judge.
While the state could begin eminent domain proceedings today—and indeed, many are urging that very thing—most of the political leaders who would carry it out prefer to couple the threat with other demands, sort of a “do this or else.”
Angelides said he would like to see California and perhaps other Western states organize consumers into a buyer’s cartel that sets the price it is willing to pay for electricity. Then, if the generators aren’t willing to sell at that price, he would begin seizing plants.
“It’s a matter of who blinks first,” Angelides said.
Such a buyer’s cartel would be created by Assembly Resolution 2XX, sponsored by Assembly members Paul Koretz and Fred Keeley. Koretz’s chief of staff, Scott Svonkin, said the measure would create de facto wholesale price caps, the kind Davis and his supporters claim can only be created by the federal government.
If the generators refused to sell at those prices, “the public outrage would be deafening,” Svonkin said, and that outrage would spark broad support to begin seizing power plants.
“We are so deep into the problem that if we don’t do something bold and aggressive,” Svonkin said, “we aren’t going to get out of this as fast as we need to.”
Susan Abbott doesn’t mince words when talking about how the Wall Street investment community would view the seizure of power plants by California: “Draconian, and I would say evil, really.”
Abbott is the managing director of the power group at Moody’s Investor Services, one of the country’s top financial analysts, whose credit ratings influence the bottom lines of both states and corporations by driving up or down what entities must pay to service their debt.
Abbott said the idea of a windfall profits tax is something with which Wall Street has some experience and understanding after many American companies invested in Great Britain had to return profits under that country’s windfall profits tax. But the idea of seizing corporate property is antithetical to everything Wall Street holds dear.
“The state of California would be viewed as a place where nobody would want to do business or invest,” Abbott said. “The ripple effect would be there would be no further investment in the state of California, and there could be a big disinvestment.”
Abbott chastised Angelides for his public support of radical measures like the seizure of power plants, saying that such a seasoned financial professional, a man well thought of on Wall Street, “ought to know better.” Angelides scoffed at the criticism.
“If the price of new investment in this state is $1,900 per megawatt for power and triple-digit rate increases, that’s not the kind of investment we want,” Angelides said.
He said those on Wall Street who are critical of the radical rhetoric coming out of California are misplacing their blame: “The investment community in New York ought to be down on the generators for threatening to push California’s and the nation’s economy into a recession.”
Yet Abbott defends the power companies, saying they are simply playing by the rules that California officials created: “The companies haven’t done anything illegal as far as anyone can prove.”
Similarly, she said the idea of charging business people with crimes simply because they made their companies lots of money would scare investment away from California.
“It’s very radical. You can’t just go and arrest someone if you don’t like what they’re doing,” she said. “What happens if they decide they don’t like the technology sector, or the price of strawberries?”
To many in the business sector during these days of deregulation, eminent domain is akin to the nationalizing of assets that occurs in communist countries.
“Seizing private property didn’t work well in Cuba and I don’t think it would work here,” said Jan Smutny-Jones, executive director of the Independent Energy Producers Association, which represents many of the large generators. “It obviously would be viewed with a great deal of hostility.”
He said most of the generating companies would vigorously oppose the eminent domain action, and it would be a long and costly legal battle.
Tom Williams of Duke Energy said solving the current energy crisis requires companies like his to make investments to bring more power on-line and to do it as cheaply as possible: “Seizing plants and the windfall profits tax are completely counterproductive to those goals.”
As supercharged as all the rhetoric has become in Sacramento, and as desperate as many politicians are to find some way out of this mess, Smutny-Jones said, “I take it all seriously, because anything at this point in time is possible.”
Yet if California pursues any of the more radical ideas out there, Smutny-Jones said state officials had better be prepared to go all the way.
“You would immediately need to be in the power business completely, because I don’t think anybody would invest here,” Smutny-Jones said. “It sends a message that this is an unstable place to do business.”
Cost-benefit analysisDefenders of deregulation criticize both wholesale price caps and aggressive actions against generators as missing the point of the crisis: “Price caps do nothing to reduce demand and they do nothing to increase supply,” President George Bush said during his recent California visit.
Yet a recent Field poll shows most Californians don’t see the current energy crisis as simply a problem of supply and demand. They see price gouging as the main problem, and they also believe that supplies of electricity have been withheld from the market at key times to drive up prices.
Those two short-term problems would be largely solved by California’s seizure of power plants because public officials would be in the direct position of controlling the output of plants and setting the price of that output. The more plants the state controlled, the more influence it could have to bring down prices.
“I would assume that the state wouldn’t withhold power, and that would help the situation,” said Severin Borenstein of the University of California Energy Institute. Borenstein and others have done studies that he said conclusively show the generating companies have withheld power with no operational reasons for doing so.
Over the long term, the impact of taking over the power system is a mixed bag. On the positive side, it would end the deregulation experiment that most Californians regard as disastrous, making the state’s power-generation system directly accountable to public will.
Yet one of the biggest drawbacks of seizing power plants in California is the fact that most of them are old and in need of expensive upgrades. For that reason, some believe the state’s resources would be better put to building new plants than seizing the old ones if state officials want to get more directly involved in the market.
“The plants that these companies bought are old clunkers that you really don’t want to own,” said Ed Smeloff, a former director for the Sacramento Municipal Utilities District who this month begins his new role as head of the San Francisco Public Utilities Commission.
Seizure doesn’t just give the state control of the plants, but also of the land on which they sit, land approved for electricity generating operations that could house the next generation of power plants. “The property on which the plants sit is more valuable than the plants,” Smeloff said.
But in general, he is critical of the notion of seizing power plants: “It would be extremely disruptive at a time when you need all the plants on-line,” he said. “So I think seizing plants is a bad idea.”
Still he calls the windfall profits tax “an idea that is very appealing and worth looking at,” and he supports the idea of the state taking over the transmission system as a means of gaining more control over the market.
The Independent Energy Producers has estimated the value of all the power plants and transmission lines in California—although Angelides and consumer groups dispute the figure—to be around $42 billion, a sum that even California, the sixth largest economy in the world, would have a hard time paying.
“And that’s for a system that is largely antique,” noted Smutny-Jones.
While the age and cost of California’s power plants seem to be the most compelling arguments against state seizure, a new proposal by Assemblyman Juan Vargas would seem to mute both those criticisms, leaving only philosophical reasons for opposing the seizure.
Vargas’ Assembly Bill 35XX would require the State Public Works Board to immediately use eminent domain proceedings to seize power plants and to retain possession for just 18 to 24 months before returning them to their current owners.
Such a temporary seizure would give California all the short-term benefits of controlling the power system without the long-term hassles and drawbacks—and at a fraction of the price that permanent seizure would entail. For Californians, it would be like leasing the plants until the power supply increased, rather than buying them.
“The valuation that the PUC or a judge would place on the cost is a lot lower in the temporary scenario,” said Colin Rice, Vargas’ chief of staff. “That’s why we’re so excited about this idea.”
Vargas, a Harvard-educated lawyer, said the legality of temporary seizure is just as strong as a permanent taking. The federal government seized and returned a laundry plant during World War II, and just last year, the state of Louisiana seized a for-profit juvenile detention facility, reformed abuses and returned it to the Wackenhut Corporation.
The bill on Tuesday cleared the Assembly Judiciary Committee on a 6-3 vote, and will be heard on Monday, June 18, by the Assembly Energy Cost and Availability Committee. While the governor could seize plants temporarily even without this legislation, the bill is intended to raise the profile of the seizure issue and create a public dialogue.
Rice anticipates a legal fight with generators over the temporary seizure, but that would take place after the state took control of the plants and fixed the current problems. And by the time push comes to shove, more supplies could be on-line and the state would be ready to return the seized plants: “This problem could be over in 18 months.”
If that’s true, temporary seizure could be the silver bullet against the market’s current dysfunction and the gouging of generators. But IBEW’s Wolfe paints a different picture, concerned that deregulation is such a fatally flawed idea that some form of long-term state takeover of the system—however difficult—is the only way out.
Today, short supplies and other factors have created skyrocketing prices. But what happens when all the generating capacity now being planned comes on-line and makes supplies abundant? What happens when competition realizes its promise of providing cheap, abundant electricity?
Wolfe points to the same basic economic principles they raised in opposition to deregulation in the early ’90s, the same ones that are hurting us now. If supply increases substantially, prices will drop sharply, threatening the bottom lines of some companies, who could shut down power plants if prices don’t cover their costs.
Such is the nature of the free market.
“The state needs to regain regulation of the system,” Wolfe said. “Or we could be going through this same thing again in five years.”