Davis, a Democrat, was elected governor of California in 1998. While he says he is suspending judgment on the merits of deregulation, Davis thinks that California's plan was deeply flawed. Further, he says that the energy companies who profited wildly from California's energy crisis should help fund the state's recovery efforts. At the time of this interview, Davis' advisors were negotiating settlement alternatives with some of those power companies. FRONTLINE interviewed Davis on May 1, 2001.

Well, there's no question that the law passed in 1996 was flawed. It deregulated the wholesale market, meaning the price that the utilities had to pay energy companies for power, but not the retail market. As a matter of fact, it reduced rates to customers and froze them for five years. So that was an inherent conflict.

Secondly, it failed to do what every other state did which deregulated-- which is to say to the people who bought the power plants the utilities were forced to sell off, "You must sell us that power back here in California. You must serve our needs first." So it was flawed in that it didn't require California to have a first claim on the power plants. It deregulated part of the market, but not all of the market.

But over the last nine months now, you have been pretty direct in your description of the generators, the traders, and so on. Are they really snakes and profiteers?

The generators have made more money than God. I mean, they've made 700 percent, 800 percent, 900 percent profit. They haven't improved the service. They haven't improved the product. They're just selling us back our own electrons that are sitting here in California. ...

In 1999, the entire state--including public power authorities at municipal levels--spent $7 billion for power. In 2000, a year later, for approximately the same amount of electricity, $32.5 billion--a 450 percent increase. And it's going up this year. So ask yourself ... why are we paying these energy companies so much more money for the electrons we bought two years ago for $7 billion?

And some people say this year it'll cost us maybe $70 billion?

I don't know what it'll cost, but it'll be too much, whatever it is.

But did this just sneak up on you? When did you become aware that this was a big problem?

We started focusing on this in earnest late summer and early fall. There are two things I can do, and one thing I can't do. I can build more power plants. In the 12 years before us, not a single plant of major consequence was built. I've approved 13 major plants. Eight are under construction as we're talking. ... [And] we've had to ask people to conserve power to help us over the hump. So I've signed $800 million worth of conservation initiatives to get people to save at least 10 percent a month.

The third problem is the price problem, which is entirely in the federal government's jurisdiction. We can't control it, and the federal government has been siding completely with the big energy companies in Texas, and not with the public in California.

You're talking about the Federal Energy Regulatory Commission?

Yes.

They haven't been doing their job?

Correct. ...

But recently they put out an order trying to, they say, mitigate the prices this summer.

That was a Trojan horse, and that had more holes than a piece of Swiss cheese. All a generator has to do is sell it to a middle person who can sell it to a public power authority, and there's no application to the generator as to what price they can charge. Plus, they make us charge customers a surcharge to make sure the humongously profitable generators get even more money out of our ratepayers. There are about five flaws with that proposal.

So that's not going to help with prices this summer?

It will make matters worse.

Why would they do that?

I don't know why they're doing it. I have to assume that their motives are positive, not negative. But they don't understand the severity of the problem in this state. And once a regulatory agency finds that the market is dysfunctional, which they did last summer, and the rates last summer were unjust and unreasonable, it just should just refund the excess profits. That's what the law requires them to do. They're the Federal Energy Regulatory Commission, and they will not do that. They will not pull the trigger.

Well, today, Williams AES--one of the generators--refunded $8 million.

Yes. Peanuts. ... These people have made hundreds and hundreds and hundreds of millions of dollars of profit off of California alone. ...

But you're still buying electricity from [those power generators]?

Because if we didn't intervene in the market in January, the lights would have been off from January 18 until today, because they drove our two utilities to the brink of bankruptcy. They said, "We can't sell the utilities any more power because they're not creditworthy, so you need to find us a creditworthy purchaser." And we were the only creditworthy purchasers standing around.

But even in your negotiations with them, with the [California Department of Water Resources], they have questioned the creditworthiness in the state of California, haven't they?

And have charged us a credit penalty, too. Can you imagine that? The state of California--they're questioning our credit. These people have no shame. None.

... Why have you kept these contracts secret?

Because David Freeman, who I hired to negotiate contracts with the energy companies ... said it would be very detrimental to release the terms, the specific terms, of a contract, because the next person is not going to offer us a better deal than the contract we just put in the newspaper. So he's negotiating. We've done that at his request.

However, yesterday we released about a 60-page document full of facts and figures about our proposal to resolve this issue, the revenue bonds we want to sell--all the information that Wall Street needs, that the treasurer needs, and that the Public Utilities Commission needs, to implement my plan. So we've released everything except the specific terms of the long-term contracts. ...

Your projection is that, by 2003, there will be ample generation available?

Correct. ...

We have the details on the contracts you've signed with Duke Energy, as an example. ... Why sign long-term contracts with such high prices?

Because David Freeman believed that was the best deal we could cut with the generators at a time when we had no leverage. But still, he's a wily old fellow--he ran the Department of Water and Power, ran the New York Power Authority, ran the Tennessee Valley Authority--and even with no leverage, he was able to cut a pretty good deal. Over a 10-year period, we were able to get prices averaging 6.9 cents. ...

The logical question is, if you're locked into long-term contracts--which I assume the ratepayers or the taxpayers of California are obligated to pay--and at the same time, you have a surplus by 2003, then we, long-term, will be locked into paying for electricity at a very high rate, no?

I'm assured by David Freeman and his team that they have cut the best possible deal, so that this year about 40 percent of our power is purchased through long-term contracts rather than on the spot market; next year about 55 percent; the next two years about 70 percent. Then it drops back down to around 60 percent, because we expect by about year five, the price of electricity will have fallen, and the spot market may be the cheapest way to buy power. Today it is absolutely the most expensive. ...

[Former Energy Secretary William Richardson, former Treasury Secretary Lawrence Summers, former Secretary of State Warren Christopher--who is also on the board of Southern California Edison--were all pushing you to raise rates and do something.]

Everybody wants me to raise rates and sock it to the ratepayers--everybody. But I am not going to do that. I, reluctantly, after months of holding out, had a partial rate increase--a fraction of what they want me to raise. ...

You said some time ago that you could have solved this whole problem by raising rates--and now you have. Do you regret not having raised rates?

I've only raised rates a very small portion of what the true rates are. We paid 450 percent more in 2000 for power than we did in 1999. Therefore you would need a rate increase of a commensurate nature. The rate increase I propose basically exempts 50 percent of the population because they're the most efficient users of power--using just their baseline amount. The next quartile pays about 10 percent, and then the final quartile about 35 percent. ...

I did that on purpose, because I do not want to shock our economy into a recession, and I do not want an outraged citizenry to pass an initiative that would eliminate deregulation. Why? Because we're very well down this process as it is--flawed as it is--and we're counting on getting more power plants on line by the end of 2003 so we have a surplus of power. If that initiative were to pass, investment would be withheld, and it would take years and years longer before we had a surplus of power.

So you still back deregulation as a concept?

I don't know if I would do this if I had to start over again. This is a hell of a mess. But ...

Well, you did endorse it. Everybody endorsed it.

No, I didn't take a position on it in 1996. I did oppose eliminating it in 1998 when there was a similar initiative on the ballot, because I think you can't unring the bell. But clearly everyone has to do their part. I'm doing my part, building plants at a record rate, having historic conservation levels. The only people not doing their part is the federal government that is siding with the energy companies against the interests of the people of California.

But as I understand it, you still think deregulation is the way to go? Or do you?

I'm suspending judgment on that. I'm here to solve a problem. The problem is getting reliable electricity at affordable rates, and I'm going to have essentially a blended solution, which will include the creation of a public power authority that will be the builder of power plants of the last resort.

If the private sector says to itself, "But wait a minute. I don't know that I want to build enough plants to make sure that California has a surplus of power, because that's driving down the price of my product" ... then the public power authority can step in and make sure we get to that 15 percent margin of supply over demand.

When we interviewed Mr. [Robert] Glynn, the CEO of PG&E, we pointed out to him that the ISO and others say that the generators have overcharged at least $6.2 billion, and that number is rising. We asked him, "Would you sue them to get the money back?" He said, "Well, not yet." But I said, "Then who's going to pay for this?" And he said, "The ratepayers are still on the hook." Are the ratepayers still on the hook for this overcharging, or are you going to get it out of the generators?

I am working my tail off to make sure the ratepayers are not on the hook. They did not ask for deregulation. They should not be viewed as the sole source of solving this problem. I don't want them to pay a disproportionate burden. Edison has sued the generators, and our [memorandum of understanding] with them allows us to work with them to collect that money and make sure it goes back to the ratepayers. We are hopeful of persuading the bankruptcy judge in the PG&E matter to give us the same authority with PG&E.

So you still want to go after the generators?

Yes, because the authority that oversees them--the Federal Energy Regulatory Commission--has said that their rates are unjust and unreasonable. ... So they found these people guilty a year ago--they just haven't agreed on the sentence.

But we talked with [FERC chairman] Curt Hebert and we got--

Lots of luck.

What do you mean "Lots of luck?" ... He's the guy you're turning to give you the money back.

He is the chairman of the commission, but he has not been overly sympathetic to California. He's more of an ideologue than a problem solver, and he believes that the market should work its will no matter what the casualty, no matter what the pain, no matter how far down in the mud California's dragged. And as the governor of this state, I obviously see the issue quite differently.

Well, he's saying you just want him to give you short-term relief price caps, which won't solve the problem.

"Problem," meaning fattening the balance sheet of already enormously wealthy energy companies.

Profiteers, pirates?

You can call them anything.

You've called them all these things, haven't you?

And those are all deserved adjectives. I mean, they basically are threatening the economic well-being of the flagship of America's economy, and they're doing it by selling a very pedestrian product--electrons--without having added one iota to the quality of the product or the quality of service. Now you tell me, in Economics 101, how that works. ...

Your office has been in settlement discussions with Duke Energy. Our information is that those settlement discussions have involved everything from Duke Energy being relieved from its obligations under these various charges made by the ISO and the FERC, to them supplying energy on a long-term basis in California. Can you comment on this?

... Duke came to us. They volunteered to come to us and made a number of suggestions to some people on my staff. I don't know how I would characterize them, but there have been some discussions going back and forth between Duke and members of my staff. ... I know that Duke made a number of demands, including that the attorney general drop its investigation. We have no intention of asking the attorney general to do that. ...

They also want you to withdraw all your complaints before the FERC. They want you to call off the investigations of the Public Utilities Commission, in exchange for, they say, a lump sum payment.

Yes. First of all, I think the entire amount of money owed Duke is in the $100 million range. That may sound like a lot, but given the huge sums of money these people make, it really isn't. And we are not about to call off the dogs when that may be the best vehicle available to us to get justice for the ratepayers of this state--meaning the PUC's investigation and the attorney general's investigation.

So you don't look at this as a possible, let's say, universal global settlement, so that you can basically get on with the business of building power plants?

Here is my general approach to the energy companies. You have already charged the utilities a 50 percent credit penalty for the power they were buying from you. You're charging us a penalty. You're not going to get two bites of the apple here. You're going to have to have a very substantial reduction of what you expect to pay us back--otherwise you are jeopardizing the whole future of the deregulation experiment.

There are several states in this country that have stepped back from deregulation, because they see the pain inflicted in California, and they don't want it. Texas has not even gotten into deregulation. Nevada has stepped back. Several western states have decided they'll just wait. So if they want to jeopardize their entire American market, that's what they're risking by not being part of the solution.

When I saw these documents, I saw this line, and I wanted to read it to you, because I wanted to see what your reaction was. "When they proposed that the governor"--meaning you, after you agree to all of this--"will continue to indicate that the California crisis is an aberration due to the flawed legislation, not a necessary consequence of deregulation, and will not advocate scrapping deregulation in wholesale power markets. ..."

Well, you can tell that's the first time I've heard that phrase. ... This gives you some sense of where these people are coming from. They want all their money. They want to bleed California dry. And they want to make sure that this tidy little deal they got going called deregulation, I guess, is spread to the other 49 states. What I'm trying to do is protect the 34 million people of this state to make sure they have reliable power at affordable rates. We are doing our job by building plants at a record rate and promoting record conservation. ...

I guess the other part of this is that, in these documents that we got our hands on about the settlement negotiations, Duke also pledges political support for you--public relations support--if you'll go along with all of this.

Well, listen. I have not been briefed. I have no idea what Duke promised. But trust me, we will not do anything that is the slightest bit unseemly. We'll not call off any investigations. I'm determined to do two things--keep the lights on, and keep the rates reasonable. And to do the latter, I have to pursue every avenue available to me to investigate and pursue any claims against the generators for unjust charges. ...

Mr. Glynn, the CEO of PG&E, was talking about the electrons leaving the state. We asked him about dollars leaving the state from PG&E: "Shouldn't they come back to relieve the ratepayers in California?" And he said, "No way. You're dreaming." ...

I think Mr. Glynn, while he may have been within his legal rights to seek bankruptcy protection, certainly dishonored the traditions of a company that had served California for nearly 100 years. He gives everyone a $50 million bonus on the way into bankruptcy, and uses a lot of profits thrown off by the utilities in the early days of deregulation to finance utility purchases in the East and throwing off profits to their unregulated subsidiaries.

So PG&E's holding company and affiliated companies have done very handsomely at the expense of their regulated utility that they've kind of thrown to the dogs here in California. That may or may not be legal, but it certainly doesn't inspire confidence, and it's not the way to win the hearts and minds of the people you serve.

Some people would say that, in a sense, what Washington is doing to you is giving you what you deserve--because you're a Democrat in a Democratic state and they're not going to come riding to your rescue. They don't want you running for president, and they don't want California to prosper under your reign.

Well, there's 34 million in this state, and many of them are Republicans and Independents. Many of them voted for George Bush, and all of us consider ourselves part of America. I don't think it profits anyone to forsake the biggest state in America and the state responsible for one-eighth of the economy on what is clearly unjust and unreasonable activity. A federal agency found that, and yet nobody is willing to offer the relief that the law says California is entitled to.

We're not going to take this sitting down. We are fighting back. We're going to march on Washington with a host of Republicans, Democrats, business leaders, legislators. We're going to make people know that they're ripping us off and have them look us in the eye and say, "You're just in bed with the energy companies. You don't care about the public that you are sworn to represent." ...

How significant is the economic impact of all this on California and the region?

It certainly doesn't help if you have to spend 450 times for a loaf of bread or for any other staple of life. Electricity is an essential of life. Electricity and water really do have life and death consequences. ... And people who pushed deregulation unbridled need to realize that even the citadel of democracy--the New York Stock Exchange--has circuit breakers. If a stock drops a certain percentage, they cease trading. If the market drives 500 points, they cease trading. We need a circuit breaker to make sure that the rough edges of deregulation do not work a hardship on ... any citizen of this state. ...

When we were at the Enron Corporation, we talked with their meteorologists who advise their traders. They're predicting a summer which is two degrees above normal on the West Coast, actually on all coasts. That wouldn't be too good, would it?

There are so many scenarios here. We tried to prepare for the worst summer in 40 years and build assumptions based on that. We're preparing for the worst, but we're hoping for the best. And I've told people the end is in sight. I will have enough plants online by the end of 2003 that we will have retaken control of our energy destiny. Between now and then, we need everyone to conserve at least 10 percent. I'm paying them if they conserve 20 percent, and we are paying them if they put energy-saving devices in their home or their business.

And this is part of a transition to a more deregulated marketplace, or a deregulated ...?

Well, we're trying to patch and fix and put a cast on a broken system here. You can call it what you want, but we'll continue to purchase power in a private market. We'll have a public power authority, which will also have the ability to build power or finance power. And more importantly, we'll have more power than our economy provides. All of that will give us leverage we don't have today.

What do you tell the people who need ... the electricity, or people who can't turn their thermostats down because they're elderly and they need the heat? What do you tell them in this two- to three-year period?

That we are doing the level best we can to make sure power is available, and to minimize hardship and to call on everyone to conserve to their utmost ability--and to make it financially attractive to them to conserve.

Meanwhile, people have to join us and fight back against the federal government that has dropped the ball, that is in bed with these energy companies, that wants them to make more money than they've made before. And the energy companies are what have driven this financial crisis to the point where it is now. They're the reasons PG&E's in bankruptcy. They're the reason Edison is almost in bankruptcy. And they're the reason we have to finance this past debt out over a 15-year period. ...

So how much will rates have to go up or taxes have to go up in order to pay for power plants, the debt from the past, the current purchases of power to reimburse the surplus, etc.? How much are we looking at?

... We believe you will not have to pay more than the current rate structure proposes--which is, for 50 percent of the public, nothing; for another 25 percent, only a 10 percent increase; and for the remaining 25 percent, a 34 percent increase. However, any conservation they engage in will drive those prices down.

OK, I'm not going to sit here and argue numbers with you. I'm just telling you that when we talk to people on Wall Street and elsewhere, they tell us the numbers don't add up--that you can't pay for what is the equivalent of something like $17 billion or $18 billion of what you want to pay off with that rate structure.

Well, again, those questions are best addressed to the financial analysts we have. ... But the investment banking firms, when they listened to our proposal for revenue bonds, said this was a sound proposal and they gave us high marks. They are basically the jury of this process, because they're the ones who advise their clients whether or not to purchase these bonds. ...

California is the sixth largest economy in the world. Is what's happening here an economic threat to the rest of the country?

There's no question that California, in the last three or four years, has been privileged to add disproportionately to the economic growth of America, and to contribute to its technological productivity. Now, in the space of a year, we've spent 450 percent more for power than we did the year before, and bought essentially the same amount of power. This year, that number's likely to go up. That can't go on forever and have us continue to be the economic engine for America. ...