California and the Energy Crisis

Let's talk a little about your California period. You came to California to salvage the L.A. Department of Water and Power. What were some of the problems there and how were you able to turn that around so quickly? Because when the energy crises hit California, that utility was in pretty good shape.

Actually, I came to California a bit earlier to help put the ISO and PX together, at the behest of a prior administration.

Explain what that is.

The Independent System Operator, the agency that handles the transmission system, which actually worked pretty well. The whole deregulation scheme was a great failure, but they did move the kilowatt hours to the extent that they could.

I came to L.A. in '96, and I took advantage of the prospect of deregulation by persuading the city council to let me get rid of over 1,000 people, cut our costs, and I got the utility down to where it could compete, if it had to. Then I recommended, and it was agreed to, that we not go down the deregulation road, because I didn't know whether it was going to work or not. I can't say that I knew it was going to fail the way it did. But, at heart, I'm ... well, I seem to be audacious, [but] I'm a fairly conservative person in terms of taking risk. It's not very risky to take on a utility when it's at rock bottom. One of the secrets to my success is, I've been a sort of a utility repairman, and I take these outfits over when they're in trouble and, usually, they're going to come back up. Then I get the credit for it, so ...

But two things: One is your father repaired umbrellas, right?

Right.

And you repair utilities. But, secondly, nobody else wants the job.

That's right. So you don't have much competition.

That's right.

But in any event, I spent a couple of years getting our costs under control, and then laying out these environmental programs. We just didn't go down the deregulation road. When the stuff hit the fan, L.A. had the lights on. I was known as doing more for race relations in L.A. than any Jewish person ever had: I was the Jewish guy that kept the Christmas lights on.

I see. I see. But you also solved some of the water problems, because L.A. had bad relations with some of the local communities, right? Or one in particular?

The water situation was one where we had stolen that water fair and square from the people up in the mountains, in the Owens Valley. That feud had gone on for eighty years pretty much, and included some dynamite at one time. But I went up there and worked out a peaceful settlement with them where we were, then, obligated to keep the dust [down]. You see, when we took all the water away, we created a dust bowl at the bottom of that former lake, so we had an obligation to grow some crabgrass or something; and we've done that. It's a really a beautiful thing that L.A. has done. They've invested several hundred million dollars. If you go up there now, it looks like a golf course, and then some of it is under water.

So I'm very proud of having [a settlement] ... against the opposition, I might say, of a lot of people in city government. I went up there and worked out a settlement, because the people up there were reasonable about the terms of the settlement, and we worked it out. Someone said the other day that you don't bring people together by killing them. They were talking about the Middle East. And you don't bring people together by screaming and hollering at them.

The best management advice I ever got was from a board member. He said to me, "If somebody working for you screws up, and seems pretty dumb, they don't get any smarter by chewing them out. If they're really bad off, well, you have to get rid of them. But, usually, by coaching them and training them, and working with them, you can get them to improve. But shouting at them and chewing them out, it doesn't make them any smarter." It's hard to remember that, but that's very good advice. So, in fact, I just keep driving that point home, [that] in order to get respect, you have to show respect. That's the true secret of leadership.

Now, from L.A., you moved to Sacramento.

I was drafted.

You were drafted. You didn't have to put on a uniform, but you just had to help save the state.

The governor called me and in the household that I grew up, it's an honor to be asked by a president or a governor to help. Gray Davis caught me down in Houston trying to get some natural gas for L.A. I was on the airplane that evening, and I was at work in Sacramento the next morning.

Is the job you have now the job he gave you then?

No, the job he gave me then was to negotiate some longer term contracts with these thieves, so that instead of paying them thirty cents a kilowatt hour, we could at least bring it down to five or six, even though that price has been cursed ever since then as being too high. But it was one of the best things that we did, because it not only brought the price down immediately, somewhat, but it was a financial instrument by which new power plants were built to overcome the shortage and bring the price down in the future.

People that have no understanding of basic economics keep saying, "Look, Dave, the market price is down lower than what your contracts were." And I say, "Hell, yes; it's because we've increased the supply and we go the spot market price down. But the long-term price has to include the cost of capital." Still, we paid more than we would if we had real competition. But it was the smart thing to do at the time. No one's ever written a story about what would have happen if we hadn't had done that. We'd still be in the soup for years later.

What do we know now that we didn't know, say, a few years back about why unregulated markets don't work?

We had no idea that we were being manipulated and gamed the way we were. We figured they must be doing something wrong to get us, but there was a belief that this was a marketplace where people were participating and competing. What we found out is that when we came close to shortage, they would pretend that there was even more of a shortage. Without regulation, we didn't know what they were doing. They had phantom sales so that they filled up the transmission lines -- even though they weren't filled, it caused the prices to go up. There was all kind of tricky stuff going on.

It turns out that you can't have a deregulated electric market, because you can't stand that kind of volatility. If the price of oranges go up, you don't eat oranges for a while, but you can't not eat electricity because the GNP goes to zero with no electricity. Just as they found out in Italy the other day, and 50 million people in the east the other day. So we did a big conservation program and we got power plants built. People have forgotten that we got out of that problem in three or four months. People were predicting blackouts every day in 2001, and we didn't have any. Gray Davis has gotten a really bum rap on this energy thing, because we averted the kind of statewide blackouts that they had back east. Enron is dead; we're still alive, thank God.

In your present job, you are addressing some of these problems; that is, trying to find alternative sources, if any.

Yes. Our responsibility as the Power Authority, which is the shorthand name, is if the private companies won't build it, we will. Having that as a backup gives us the ability, in California, to say "If you don't like our prices, if you don't like our environmental laws, you can go back to Texas. We'll just build these facilities ourselves." Thus far, we haven't had to do more than just have that threat. But I think that ability is very important, and we emphasize demand side programs and renewable energy, rather than more polluting. But natural gas plants need to be built, too, to have something during the peak load when the wind isn't blowing and the sun isn't shining.

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