California Rate Hike Is No Quick Fix For State's Energy Crisis

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NEWS ANALYSIS Rate Hike Is No Quick Fix For State's Energy Crisis David Lazarus, Chronicle Staff Writer

Sunday, December 24, 2000 ©2000 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/12/24/MN59540.DTL

The electricity rate-hike-in-waiting announced last week may help bail out California's cash-poor utilities, but it won't salvage the state's dysfunctional power system.

Going forward, state and federal authorities will have to come up with a plan to boost California's electricity supply while at the same time stabilizing the sky-high wholesale prices that now threaten to boost consumers' monthly bills by more than 25 percent.

Good luck.

Possible solutions to California's energy mess, say industry players, run the gamut from ignoring the problem and hoping it goes away to storming power plants and arresting senior executives.

"So far, we've been dealing with symptoms of the problem," said one power- industry official, requesting anonymity. "The next step is the more critical one. We have to fix what was not addressed in the original deregulation legislation."

There is broad disagreement over how this can be done. Federal regulators are placing their faith in the market's ability to "self-correct" and have lifted caps on wholesale power prices. Supply and demand, they believe, will eventually find common ground.

Gov. Gray Davis and other California officials are demanding that rate caps be restored to curtail what they say is price-gouging by greedy electricity generators.

And most consumer groups want nothing less than a scrapping of deregulation altogether and a return to the former, state-controlled system.

If there's one thing that all sides do agree on, it is that California is woefully lacking in sufficient generating capacity to meet the state's surging demand for electricity.

No major power plants have been built in California for the past decade. At the same time, Silicon Valley has emerged as a high-tech engine of growth, personal computers and the Internet have become mainstays of homes and offices,

and the state's population is expanding by more than 500,000 a year.

Is it any wonder, then, that officials have called energy emergencies almost every day for the past few weeks as the power grid strained to keep pace with demand?

Even yesterday, with many businesses closed for the holidays, power supplies were sufficiently tight to prompt the California Independent System Operator to issue concurrent all-day Stage One and Two electrical emergencies in Northern California, signaling that power reserves could dip below 5 percent.

"It was unusual until this winter," California ISO spokeswoman Stephanie McCorkle said of the weekend warnings. "It's not unusual any more."

Meantime, PG&E and Southern California Edison are grappling with a combined $8 billion in losses stemming from runaway wholesale electricity prices.

CONSUMERS WILL PAY THE PRICE

A pending rate increase -- the size has yet to be determined -- is intended to restore both utilities to financial health. The Public Utilities Commission is expected to vote on the matter at its Jan. 4 meeting.

Industry insiders estimate it could cost about $10 billion to construct enough new plants and to upgrade transmission lines to handle California's daily electricity load.

While that is an enormous sum, Loretta Lynch, the PUC president, said consumers need to keep things in perspective. "We've spent more than $10 billion since the summer alone paying pirate generating companies for their electricity," she said.

Like the governor, Lynch wants the Federal Energy Regulatory Commission to play a more active role in imposing order on California's dysfunctional energy market.

If federal regulators refuse to take on this responsibility, she said it will be up to state authorities to create "a hybrid system where we have more protection for consumers and more accountability."

Easier said than done. Consumer protection and greater accountability for market players can only mean one thing: more rules. But any attempt to impose fresh restrictions on power companies and utilities could hinder construction of much-needed plants.

"The more rules you have, the less you encourage investment," said Gary Ackerman, executive director of the Western Power Trading Forum, a Menlo Park trade association for electricity generators and marketers.

What power companies want, he said, is for the political firestorm now scorching energy issues to die down and for business to return to normal.

"They'd like to get through this period as quickly as possible so we can have less interference from the state," Ackerman said.

That's unlikely. If anything, government authorities will grow increasingly bold in their efforts to bring power rates under control. Calls for action will only increase as soaring electricity demand next summer exacerbates the state's already fragile condition.

Legislators are expected to submit a variety of bills addressing different aspects of the energy crisis. But it remains to be seen whether anyone will have the stomach, or the political muscle, to tackle anything as sweeping as the original 1996 legislation that dragged California into its current deregulation quagmire.

"There's no question that the '96 bill is an ineffectual piece of legislation," said Paul Patterson, an energy-industry analyst at Credit Suisse First Boston in New York. "The question is, what are you going to do now?"

What indeed. At this point, suggestions for change range from sober and straightforward to just plain out there.

Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights in Santa Monica, has a very clear notion of what should happen to straighten out California's power market.

"The governor should go in with search warrants and marshals and the National Guard, and he should see why power plants are charging so much," Rosenfield said, apparently not joking. "Seize a plant and arrest a couple of executives, and it's all over."

Meanwhile, Michael Shames, executive director of the Utility Consumers' Action Network in San Diego, more reasonably argued that as wholesale electricity prices continue to surge, public outcry for regulatory action will grow in volume.

"The public is not going to accept free-market solutions," he said. "The government will have to be involved."

While the government figures out its depth of involvement in re-regulating the power market, most observers take heart that at least one recent measure from federal authorities should provide a short-term fix.

Federal regulators last week said utilities now can cut one-on-one deals with power generators, instead of buying all juice through the central California Power Exchange. The goal is to lock in more long-term contracts and thus reduce utilities' exposure to the volatile daily "spot" market.

With more long-term contracts in place, all players in the state's power equation are hoping the situation will stabilize long enough for more substantial remedies to be sought.

One idea making the rounds is for a statewide energy authority to be established. This agency would be responsible for almost everything related to electricity -- who produces it, who uses it and how it gets from one place to another.

Backers of this idea liken the proposed agency to Caltrans, which oversees California's transportation infrastructure, albeit not always efficiently.

But, like nearly all ideas for changing the way California handles electricity, creation of a statewide energy authority would be very expensive. Equipment and personnel costs alone would run into the many millions of dollars.

There will be answers for California's energy problems, but they will not come cheap.

"A lot of bills have been rung up," said one industry insider. "At some point, they're going to have to be paid."

Until then, the state will just have to muddle through.

Matthew Stannard contributed to this report. / E-mail David Lazarus at dlazarus@sfchronicle.com.

-- Martin Thompson (mthom1927@aol.com), December 24, 2000


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