Reason Magazine - Contributors > Carolyn Lochhead

• Electrifying Performances
  

  It was a great Di Fi Moment.

  On January 31, Dianne Feinstein, the senior senator from California, gazed down from the dais of the Senate Energy and Natural Resources Committee and lambasted out-of-state electricity producers for charging outrageous prices to Golden State utilities during the wee hours of the morning.

  California consumers, living for weeks on the edge of rolling blackouts, were mostly asleep at 3 a.m. and demand should have been low, Fein-stein argued. But wholesale electricity prices went as high as $2,400 a megawatt-hour.

  Feinstein wants temporary federal price controls on wholesale electricity. She says that will give California breathing room during its energy debacle. The reactions of Feinstein and her junior colleague, Sen. Barbara Boxer, to California’s energy woes are instructive. Though neither had a direct hand in the misguided restructuring plan, they nonetheless suggest why it will be a long time before things get back to normal.

  Finding little traction that day, Feinstein delivered one of her signature blasts, developed during her days as mayor of San Francisco and honed by years on the political stage. It was part threat to the producers, veiled in a call for moderation, and part plea, clothed in an offer of mediation.

  She acknowledged, as everyone does now, that California went astray when it freed wholesale electricity prices but left consumer rates fixed. She listed things the state has done, from increasing retail rates 9 percent to speeding approval of power plant construction. She said she had urged Cisco Systems chief executive John Chambers and the mayor of San Jose to drop their opposition to a new generating plant in their backyard.

  "However," Feinstein continued, in a soliloquy aimed squarely at placing the chief blame with the producers, "when spot power at 3 a.m. in the morning is 500 times higher than it would be normally, that to me, in my simple self, is price gouging, any way you look at it. So I am making a request -- which you can ignore -- as the senior senator from the state involved, that you go back to your CEOs, and you ask them,‘Please, don’t price gouge. Please, California is trying to work their way out of this situation. Give them an opportunity to do so.’ I’m going to be around here for six years. I’ll be on this committee, and I’m going to watch the situation.

  "All of you have made a lot of money off of this. And I don’t begrudge that. All I’m asking -- you can ignore it -- is to please give this state an opportunity to work its way out. Please recognize that if you’re going to sell power at 3 a.m. in the morning and charge 500 times the going rate, that there are some of us that might look at that as very real and very profound price gouging."

  "Now, you may say, ‘Well, she’s very naive to say this.’ But in my nine years as mayor of San Francisco, I had a relationship with CEOs, that anytime I went to them, and asked them to do something voluntarily for the city, I never was turned down.

  "[Pacific Gas & Electric] knows that."They always responded. And Chevron responded. Bank of America responded. Every big corporation in the city.

  "This is really the first industry I’ve seen -- the power generation industry -- that really is willing not to care what happens, not to care about the people that are being thrown out of jobs now, about the small businesses whose rates are going up dramatically.

  "All I want to do is ask you to relay that message to your CEO. He can tell me to get lost -- that’s OK -- but if you just do me the favor, just relay that message, I’d appreciate it."

  After Sen. Feinstein wrapped up, Keith Bailey, president and CEO of The Williams Companies, an Oklahoma energy supplier, responded. "Senator," he said, "I don’t have to go home to relay it to the CEO because I am the CEO of Williams." Bailey insisted that costs are "driven by competitive markets"and that’s the reality."

  Sen. Boxer has been less engaged than Feinstein in the power fiasco. Still, she has been quick to side with the consumer groups that wield enormous clout in California. Boxer introduced a flurry of legislation that she said would "bring an end to chronic electricity shortages, while providing Californians with much- needed financial relief."

  One bill would impose a windfall-profits tax on energy suppliers. The 100 percent tax on any profits deemed "unreasonable" by regulators would go into a trust fund to provide rebates to consumers. Another would require utilities to tell consumers how much electricity they use during peak hours and how much that power cost the utilities.

  At the same hearing, Boxer said she wanted "to expose the myth that environmental laws are responsible for the electricity crisis," placing a New York Times editorial into the record. But even she acknowledged that faux deregulation was a mistake."You’re right, Mr. Chairman[Sen. Frank Murkowski (R-Alaska)], when you say that the deregulation that was pushed in California by Pete Wilson -- and the legislature, Democrats and Republicans together -- didn’t fully deregulate," she said. "It said you can’t pass the price on to consumers. However, Mr. Chairman, I would say to you, if in fact [utilities] could, prices could go up, you know, 1,000 percent, 600 percent. So I ask you, whether in the real world, consumers would accept that kind of increase?"

  Consumers surely would rather not see that sort of price hike. Politicians, despite their role in creating such problems, want to be associated with soaring energy costs even less. But they may ultimately have little choice, and the paralysis that the prospect of rate increases inspires in California’s politicians now may only exacerbate problems later.

  "The last thing elected officials in general want to be associated with is outrageous electric bills or outages," says John Fielder, a senior executive with Southern California Edison. "But both of those are certain."

• Plane Deal
  

  If you had booked a last-minute flight from Los Angeles to Denver on United Airlines last February, it would have cost you $622. But on the same day, you could have booked the same flight on Frontier Airlines, which was trying to lure passengers away from United, and spent only $189, saving yourself 70 percent.

  It's been 20 years since Jimmy Carter deregulated the airline industry, and by any measure the experiment has been a huge success. Since 1978, fares have dropped by 40 percent in real terms, while the number of flights has increased by 50 percent. Passenger boardings have soared, from 275 million to 581 million. Jet travel, once limited to those with expense accounts or a lot of money, has become accessible to ordinary people. Consumers have saved billions of dollars.

  Naturally, the federal government is preparing to intervene. Small airlines like Frontier, which fear that the large carriers are using unfair practices to crush them, and business travelers, who pay high fares when they book flights at the last minute, want to put Washington back behind the ticket counter. The Justice Department, the Transportation Department, and the chairman of the Senate Commerce Committee all appear to agree that a renewed federal presence is warranted there.

  With the recently announced proposals by six of the nation's biggest airlines to consolidate their marketing operations, a regulatory crackdown on airlines--building in Washington for months--is now a certainty. The only remaining question about reregulation is what form it will take--and whether federal intervention will help or make matters worse.

  The proposed marketing consolidations announced in April between Delta and United (the nation's biggest carrier), and between American and USAirways, stop short of outright mergers. But like the similar proposed agreement announced last January between Northwest and Continental, these marketing partnerships would involve sharing passengers and frequent flier programs, and achieve much the same results that mergers would.

  What's the problem? Government officials contend that the big carriers have entrenched themselves at "fortress hubs"--United in Denver, Northwest in Detroit and Minneapolis, and Delta in Atlanta--where they dominate 80 percent or more of all flights. From these hubs, critics say, the big airlines can attack anyone who dares enter "their" airports to compete. The big airlines can flood the routes of upstart rivals with rock-bottom fares--but just long enough to kill the intruder. After that, the big airlines can jack up their prices again.

  Such "predatory pricing," officials say, has caused business fares (typically booked at the last minute) to soar, low-cost airlines to disappear, and small cities, especially in the Southeast, to lose service. Critics, including government officials, representatives of smaller airlines, and some economists, claim that unless the new ticketing and marketing arrangements are stopped by federal intervention, the major airlines and their hubs will become ever more forbidding to competiti