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Powerful Advice 

Leaders should ignore the temptation to over-regulate energy policy and let competition reign

Wednesday, May 10 2006
Does the sensation of omnipotence that comes from stomping on the gas pedal and surging uphill, with time, addle the brain?

Might the miracle of turning night into day with the mere flip of a light switch spawn magical thinking in other realms?

Could it be that flying in an airplane too many times means one's head remains in the clouds?

Whatever the reason, it seems power — that's to say voltage, fuel, horsepower, heat — distorts the public mind.

How else does one explain — to name only the most prominent example of joule-brain syndrome — the current hysteria surrounding fuel prices? I just got a spam in my in-box from liberal San Francisco comedian Will Durst, containing the umpteenth lefty polemic denouncing President Bush's supposed lack of intervention into the high cost of gas.

Do liberals really want the president intervening more in the petroleum supply-and-demand equation behind gas prices? Don't they remember he recently ordered the invasion of a petroleum-producing country? And for that matter, do liberals really think cheap-gas-spawned urban sprawl is a good thing?

Mind you, I'm not against government intervention as a concept. Readers of this column have suffered screeds denouncing the lack of government controls to halt money laundering, corporate cheating, elder abuse, and various other areas of malfeasance.

But regulation, as it's been applied to energy markets, has not worked. Foolish rules have a tendency of creating cascades of pernicious effects. And energy is one of those areas where letting the chips fall as they may — while keeping a fierce lookout for fraud, political manipulation, environmental degradation, and other wrongs — has the potential to make us all better off in the end.

As it happens, examples of misguided efforts at government intervention pertaining to the issue of energy are popping up all over San Francisco these days.

One example: The Board of Supervisors' resolution passed in mid-April urging the city to do something about future petroleum shortages.

"Whereas, San Francisco has demonstrated leadership in confronting challenges of environmental quality and energy security," the resolution said, before "resolving" that the Board should conduct a citywide assessment of government policies on energy use. The Board then went back to its normal activity of putting in place anti-urban-land-development policies and regulations that promote commute-lengthening, oil-guzzling urban sprawl.

This magic-pill attitude toward energy regulation, in which one makes a rule and it fixes everything, would be laughable if it were unique. But it's not.

The awful thicket created by the destructive history of interplay between energy and misguided regulation is playing out in San Francisco courthouses as the city fights multiple, expensive legal battles against PG&E.

I applaud our city attorney's vigorous stance against the power giant. But I invite gas buyers dreaming of government intervention into the petroleum market to ponder electricity for a moment. There, we can see a corporate-empowering mess created by former Governor Gray Davis' attempts to fix an energy crisis with a new, regulated utility regime.

Far from being cowed by regulators, PG&E has profited from the manipulation of public regulation procedures such that it can hurl auditoriums-full of $500-per-hour lawyers at the city without denting its own bottom line. And that's exactly what observers expect the company to do with its battles against San Francisco.

In one case, PG&E has proposed terminating an agreement by which the company transports electricity the last miles from the Hetch Hetchy power generators so that it can be used in city buildings. The 1987 agreement was supposed to run until 2015, and the new arrangement proposed by PG&E could cost the city millions more. PG&E says the 2001 power system collapse changed everything, and that the changes are in order. The city last week put aside $4 million for outside legal help for the battle to come.

It's money destined to confront a company that's made its fortune in battles like these, in which it profits not by providing a better service than anyone else at a better price, but by lobbying, lawyering, and otherwise fighting to tweak the rules. This is a talent its role as a regulated utility monopoly has allowed the company to practice to perfection. And it's one made most evident by the city's other battlefront against PG&E.

There, we're facing even greater stakes as it continues a lawsuit brought in 2002 seeking restitution for $4 billion PG&E Corp. — at the time a recently created holding company — skimmed off its public utility arm, dubbed the PG&E Company, just when the money might otherwise have been soaked up by bankruptcy proceedings.

The resulting deficit was covered by increases in PG&E ratepayer fees, rather than absorbed by the company's shareholders or creditors, as the money might have been had it been an ordinary bankrupt company, rather than a regulated public utility.

PG&E says in its financial statements that the city's case, filed in cooperation with the state attorney general, has no merit, and predicts that the company will prevail.

San Francisco just earned a minor victory in this case, in that the 9th Circuit Court of Appeals just ordered that it be heard in state court, despite PG&E's wishes that the case be tried in federal court. Observers I spoke with said this will be a long, long haul, perhaps leading up to the U.S. Supreme Court.

The company's meanwhile now asking for $500 million in rate increases, permission to impose new late fees on bill payments, and wants to shut down its 84 public offices, according to The Utility Reform Network, an S.F. advocacy group. Per usual, the company will spend vast sums on lobbyists and attorneys to obtain a close facsimile of what it wants.

Before renewing the fight against the company on its own terms, however, it's worth imagining what might have happened if Democrats in California state government didn't act in 2001 as if preserving the old Pacific Gas & Electric monopoly was a cure to all that ailed the state's disastrously restructured energy market.

Had PG&E been allowed to metaphorically burn to the ground, instead of receiving a financial bailout along with favorable bankruptcy terms, other companies might have purchased the cinders. We'd have a competitive market, similar to what we have in the market for gasoline. Supply or demand shocks, rather than successful rate-case lobbying, would drive prices. PG&E would have to contend with competitors, rather than rubber-stamp regulators.

And ratepayers would be far better off.

Richard Branson, Britain's celebrity dabbler in businesses ranging from soda to cell phones, has brought on partners who are contributing $89 million to start up an airline out of Burlingame called Virgin America.

But starting up a new U.S. airline during some of history's worst market conditions isn't the maddest of his new U.S.-oriented ventures. He says his Virgin Group is plunking down $300 million to $400 million over the next two to three years for factories to make ethanol, an alternative fuel derived from plants. According to a February Q&A in Fortune magazine, he thinks the greatest opportunities lie in a substance called cellulosic ethanol, which derives its energy from enzyme-stewed chaff, the reedy and grassy residue left after the harvest of grain. The idea, he says, is to save money over time on airplane fuel. Enviro-friendly air flights would be a wonderful first for the San Francisco Bay Area. But Virgin America is having a hard time getting off the ground.

According to an April 14 article in the San Jose Business Journal, the U.S. government is questioning Branson's role in the startup, possibly in response to complaints by U.S. airlines saying Virgin's plans fall afoul of Department of Transportation rules limiting foreign ownership of airlines.

Branson's airline competitors should back off.

And for San Franciscans I have some new, energy-sensible causes celèbres.

Democrats, let gas prices climb unperturbed.

Supervisors, replace empty proclamations with proposals for fuel-efficient, dense urban design.

California, let's revisit the notion of competition in energy markets, without letting PG&E dictate the rules.

America, free Richard Branson!

Power-crazy citizens unite! You have nothing to lose but the energy confusion in your brains.

About The Author

Matt Smith


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