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Imagine the regulator as private detective. Outside the hearing room and unencumbered by bothersome process or protocol, the Public Utilities Commission member engages in a "sting" operation, inviting a utility representative for an ex parte chat on the balcony of a seaside resort hotel, where both have been attending a conference devoted to industry issues. Little does the regulatory affairs rep know that the conversation is being captured by a video camera for a Los Angeles television station. As often happens at conference settings, the utility lobbyist is using the opportunity to engage in an informal conversation about a pending case before the commission and to promote a specific desired outcome in what has been a highly contentious proceeding. The regulator is using the occasion to try to dig up dirt on the president of the agency. As the regulator presses her questions about the corporation's campaign contributions to the spouse of her colleague (the spouse holds a seat in the state legislature) and details of utility meetings that led to a favorable decision on a controversial business deal, the utility executive grows increasingly uncomfortable. This is not how things are usually done. A few days later, the utility dutifully files a notice of ex parte communications, describing the meeting and summarizing those aspects of the conversation that pertain to the relevant proceeding but neglecting to mention the more troubling aspects of the meeting. Far fetched as this may sound, this is what Lee Schavrien, vice president of regulatory affairs for Sempra Corporation’s San Diego Gas & Electric utility, has alleged in a lawsuit recently brought against Loretta Lynch, member of the California Public Utilities Commission. Video portions of the October 1 conversation in Carmel were aired on November 15 by KCBS-TV as part of an investigatory series called “Power Plays” that, according to the news promo, “blows the whistle on the secret world of backroom deals and influence peddling. . .” Lynch also took the TV crew on a tour of her deluxe hotel room -- paid for by the conference organizers in return for her appearance as a featured speaker -- explaining how lavish freebies offered to regulators result in undue industry influence. Energy companies engage in lobbying 24/7, and backroom negotiations had benefited the utilities with sweetheart deals “worth hundreds of millions of dollars,” she said. The TV investigation also raised questions about CPUC president Mike Peevey and why the utilities and power companies would begin making contributions to his wife, Carol Liu, a state Assembly member. “Commissioner Peevey met with and pushed a deal between San Diego Gas & Electric, Calpine and San Diego’s parent company to build two huge power plants,” KCBS quoted Lynch as saying. Lynch also indicated that after leaving the commission at the end of this year, she intends to write a book further detailing what goes on behind the scenes of energy regulation. In his personal injury lawsuit, Schavrien alleges that the secret taping violated his right to privacy and caused harm to his reputation. Lynch countered by calling the suit “frivolous” and saying she is just doing her job, looking out for California utility ratepayers. Subsequently, Sempra filed a complaint with the commission, seeking to prevent Lynch from voting on several upcoming decisions that affect the company’s utility subsidiaries, including a contentious case, assigned to Lynch, in which affiliate Southern California Gas has been accused of manipulating natural gas prices and abusing its monopoly control over the gas delivery and storage system during the power crisis of 2000-01. In a formal statement, Sempra’s usually mild-mannered communications staff used strikingly harsh language: “Commissioner Lynch is a disgruntled, lame duck commissioner who was removed from her position as commission president due to her inept leadership during California’s energy crisis. Her failed leadership contributed greatly and deeply to the energy crisis.” This is not the first time Lynch has played Nancy Drew. In December 2000, as the state of California was on the verge of its long winter of power outages, Lynch -- then president of the CPUC -- launched an investigation into whether non-utility power plant operators were purposely keeping their plants off the market. CPUC staff appeared repeatedly, unannounced and after hours, at several generation facilities, demanding to see operating logs and maintenance records. While the commission’s jurisdiction over the non-regulated facilities was unclear at the time, Lynch declared the surprise visits to be justified by regulatory police powers meant to protect the health and safety of Californians. This reporter’s attempts to obtain the records of these surprise visits, or any other documents, memos or findings from the investigation, were rebuffed by the agency, which declared them exempt from public records laws. Some twenty months later, in September 2002, Lynch made another unannounced appearance, this time at a California State Senate committee hearing to release the findings of her investigation into “generation withholding” by power plants operators. “Had the generators produced the power they had available,” the report claimed, “most of the statewide outages and service interruptions could have been avoided.” No matter that the report was based on circumstantial evidence rather than specific findings of untoward activity, and that it used aggregate data that the California Independent System Operator and the Federal Energy Regulatory Commission both later dismissed as “inappropriate” to sustain the allegations. According to FERC staff, while some withholding had occurred, in 90 percent of the instances cited by the CPUC, there were legitimate reasons for plants being out of service, including maintenance and many instances where the ISO had told them not to operate in order to protect circuits from being overloaded, or because the plants were located too far from where the energy was needed. Somehow, those conclusions by FERC and the ISO did not generate the same kinds of headlines as Lynch’s accusations. Lynch was hailed in the general media as a defender of California consumers against the rapacious out-of-state generators. Appointed by then-Governor Gray Davis to the commission in 1999 (twice, actually, but that’s another story), well before the energy crisis, Lynch had been a dutiful Davis Democrat and his staff director of planning. She became president of the CPUC under a recently changed law that allowed the Governor to choose the commission’s president rather than the prior system of rotating chairs by a vote of members. Her tenure as president was, to say the least, tumultuous, largely because of the coinciding power crisis, but also because of her personality and demand for control. The agency, which had always been something of a paragon of openness and public access, suddenly clamped down. Several longtime staff members were rooted out and replaced, supposedly for being too friendly to regulated companies. Media access to the staff members who actually did much of the agency’s work became severely limited. Lynch had as early as June 2000 determined that the restructuring of power markets was a failure and charted a course to wrest control back over the marketplace and restore command-and-control regulation over the utilities. The campaign included the suspension of customer choice, a refusal to allow utilities to exceed their frozen rates despite runaway costs, an investigation into utility parent finances that delayed dealing with the energy price spikes by crucial months, and a media attack castigating all market participants as pirates and plunderers -- as if everyone was doing Enron’s bidding.

Even now, we can only debate about how much this effort to return to traditional ratemaking and use of regulatory police powers contributed to making the energy crisis worse. There’s plenty of evidence that, for all of the commission’s consumer protection rhetoric, its actions exacerbated the problems and alienated anyone who might have tried to restore sanity to an insane situation. Some attribute Pacific Gas & Electric’s decision to enter Chapter 11 bankruptcy as a direct result of CPUC policies and to the utility’s belief that it would never find fiscal relief in the regulatory forum while Lynch was in charge. At one point during the worst of the crisis, legislative Republicans circulated a letter demanding Lynch’s resignation. “We have no confidence that Loretta Lynch will play a constructive role in solving the energy crisis in the weeks and months to come,” wrote Assembly Republican leader Bill Campbell in March 2001. “Leaders seek to eliminate the barriers to progress. Loretta Lynch stands in the way of a quick solution to California’s energy problem.” Political operatives took to calling her the “Rose Bird of energy,” likening her to the former chief justice of the state Supreme Court who was driven from office. That’s about the worst insult a California Republican can toss around.

In the independent power industry, to which she showed the greatest of hostility, Lynch was known as “Hurricane Loretta.” The financial community had another term for her -- “regulatory uncertainty.” Whenever credit ratings agencies cited the need to remove regulatory uncertainty from the marketplace before investment-grade ratings could be applied to California’s struggling utilities, people generally understood that to mean, “Get rid of Lynch.” Ironically, when Lynch eventually was removed as CPUC president, it was mainly because of her rebellion against Governor Davis’ effort to contain the power crisis by empowering the Department of Water Resources (DWR) to become the utility’s proxy power purchasing agent. She openly refused to support a $10 billion bond issuance to finance the DWR purchases, and to this day, she pursues an unrelenting attack on DWR’s requests for rate reimbursement of its costs to buy power under the unfortunately high-priced contracts it entered during 2001.

The Legislature had essentially given DWR the power to determine the reasonableness of its own actions and purchases, which violated Lynch’s belief that the CPUC should have that authority. Even after Davis replaced Lynch as president of the agency (appointing Mike Peevey), she has continued a personal crusade against DWR. At the CPUC’s December 2 business meeting, Lynch again accused DWR of padding its annual revenue needs by hundreds of millions of dollars, and decried the agency’s “inaccurate accounting” and “bloated revenue requirements” and excess expenses. Even though she will be leaving the commission soon, Lynch promised, “the struggle with DWR will continue” as long as the high-priced contracts remain in effect. The Bottom Line: Is Loretta Lynch a consumer protector or a regulatory disaster? For me, the answer is: Both. I can’t wait to read her book.

Arthur O’Donnell is Energy Central’s Editorial Director. The Business Electric is found exclusively in Energy Central.