Hey Gray, want to solve California’s power crisis?
Why not examine how it got so bad, so fast? That’s what we did. Next week, we’ll show you how to fix it.
After the hottest May in more than a century, get set, Californians, for a long, hot summer. Have the leaders at the Capitol managed to cool the power crisis? Well, not yet.
Meanwhile, forces not well known to the public are just surfacing with agendas that could plunge the state into a meltdown, or allow it to just barely muddle through with great expense to Californians.
It’s been a few weeks “full of sound and fury, signifying” if not the “nothing” prescribed by the bard, at least not very much. It’s not clear what, if anything, has been accomplished—aside from the enactment of the state power authority, which comes too late to help this summer, and which Senate President Pro Tem John Burton told a friend might end up as the only real accomplishment to come out of Sacramento—but there sure has been a lot of talk.
Nowhere was the talk thicker than around the much-ballyhooed Los Angeles “summit” between President George W. Bush and Governor Gray Davis. But when all the rhetoric and spin is boiled down to its essential, you get the unremarkable yet remarkably foreordained result: Davis wants price caps on the exorbitant wholesale electricity market; Bush doesn’t. Bush is the president. His energy industry supporters don’t want price caps. Result? No price caps.
Even the seemingly dramatic action coming as a result of Bush’s latest thumbs down is less than meets the ear. Davis says he’ll sue the Federal Energy Regulatory Commission (FERC) to get price caps. But the Davis team just filed for administrative relief from FERC two weeks ago. The courts want to give FERC 30 days to rule. So any lawsuit by the governor, if it comes, won’t be until late this month.
Could this have been what Bill Clinton advised when Davis called him last week and sought his counsel? If so, they must have talked fast. Clinton allotted our governor only 15 minutes. They say golf is a very time-consuming hobby.
More sound for the cacophony: Five or six different plans to bail out the Edison utility, or take it over, or let it go bankrupt. Tick tock. A brewing initiative by consumer advocate Harvey Rosenfield to overturn any bailout. A lawsuit by Burton, Assembly Speaker Bob Hertzberg, D-Sherman Oaks, and former Governor Jerry Brown to try to force FERC to impose price caps. Feel-good state commercials applauding consumers for turning out a light. Stop-and-start negotiations to bring alternative power generators on-line. A $4.2 billion loan put together by Treasurer Phil Angelides to partially reimburse the state for its emergency power-buying (it’s blocked by Republicans who don’t like the record-setting $13.4 billion bond deal that would pay off the loan and a lot of other power purchases besides). Looming state budget cuts due to the overall economic slowdown. L.A. super-rich, outgoing Republican mayor, Richard Riordan, forming a committee to explore the opportunity provided by Davis’ plunging poll ratings. A draft gubernatorial executive order for “ESP” (Electric Service Preservation program), which translates to using dirty diesel generators to keep the lights and air conditioning on. The surprise Democratic takeover of the U.S. Senate.
This last development holds a small promise for California. South Dakota Senator Tom Daschle, a price-caps backer, has taken over as majority leader from Mississippi Senator Trent Lott, patron of FERC chairman and fervent price-caps opponent Curt Hebert; and New Mexico Senator Jeff Bingaman, also a price-caps backer, has taken over the Senate Energy Committee reins from Alaska Senator Frank Murkowski, a classic energy industry ally. All this probably means that Dianne Feinstein can get her price-caps bill out onto the Senate floor. But even if it passes the U.S. Senate, something by no means assured, it still faces the very conservative leadership of the House and old energy industry hands in the White House. This opportunity could be another time-consuming distraction.
One odd little story in the cacophonous mix could be more important. Bush buddy Ken Lay, head of Enron, the nation’s biggest electricity marketer, garnered some unwanted press from the San Francisco Chronicle when someone leaked to the paper a memo Lay gave to participants in a closed-door meeting with some L.A. notables last month. Among those in attendance were Mayor Riordan, Arnold Schwarzenegger, and convicted junk bond financier-turned-philanthropist Michael Milken. Lay’s purpose, as the memo made clear, was to enlist high-level support for the continuance of deregulation in California. He also criticized the just-enacted state power authority. Nobody really wants more competition. But he also stressed that deregulation can work, that prices for electricity can begin to moderate from their skyrocketing levels.
And, as it happens, some prices on futures markets have begun to go down—back down from the incredibly stratospheric to the merely disastrous levels of today, that is. Since no price control, rate hike or big conservation programs have kicked in to affect those prices, this is an interesting development. One well-placed source says that Lay, Enron and perhaps others in the energy business have an interest in cooling the price gouging.
Enron is really in the commodities business. One increasingly valuable commodity is broadcast spectrum—the airwaves over which entertainment and other communications are transmitted—a publicly regulated and sometimes publicly owned commodity. But some of that spectrum goes unused for stretches of time. A spot market is likely to emerge for the utilization of unused spectrum, just as it did for satellite time access. A company that wants to play in this new market can’t afford to be on the bad side of Democrats in a divided federal government.
But again, lower futures prices mean lower than the dramatic increases that were indicated until recently. Prices aren’t actually going down. Which leads back to Davis’ rhetorical war with Bush and his Texas friends.
SMUD facilities are getting just a little overexposed as props for pronouncements from Davis. There he was before one yet again last month, joined by other sweaty, middle-aged white men in long-sleeved shirts and ties. Davis proclaimed that Texas power companies are ripping off California and are “the worst snakes on the planet.”
“We are doing everything possible,” the governor assures, “leaving no stone unturned.” But is this a real war or merely, to borrow a phrase from Winston Churchill, a “phony war?”
Ratcheting up the rhetoric, if not the reality, Gray Davis says that California is “at war” with greedy power generators from Texas. As wars go, this one isn’t much, unless you’re an aficionado of the early days of World War II. Which is to say it’s awfully one-sided. But declaring a “war,” no matter how illusory, lets Davis start to try to change the subject—to the Bush Administration.
George W. Bush and his fellow Texas energy industry alumnus, Vice President Dick Cheney, released their energy plan and it was a godsend for Davis. A document that reads like something from the 1950s, the Bush/Cheney plan is an unreconstructed paean to fossil fuels and “our friend the atom,” with a few sops to renewable energy and conservation added late in the day in response to polls like that of USA Today, which show conservation and renewables to be very popular. Not surprisingly, since the plan is backed by the major fossil fuel, electric power and nuclear industries, it contained no relief for California, or for rising gasoline prices, and Cheney again denounced any price controls, for about the 17th time.
Davis seized this opportunity to change the subject from his own stewardship by trashing the Bush/Cheney plan. But what he is saying is very short-term and narrowly focused. Davis didn’t lay out an alternative energy policy; he merely trashed Bush’s and again called for federal price caps. But he has again raised the prospect of state action against the generators, including the imposition of a windfall profits tax and the seizure of power plants or the electricity they produce. Which was striking because several of his most important advisers had just been trashing the idea privately.
This raises the question of how seriously the governor’s rhetoric is to be taken. Is it even a bit more serious than before—with Cheney again dismissing the idea of federal price caps—or will Davis end up being forced to act? The Public Utilities Commission says it has a number of witnesses who have come forward to tell of manipulation of power plant output and maintenance outages to drive up spot market prices. Perhaps Davis is just trying to refocus blame on Bush and the power companies and will never pull the trigger.
Whatever the impact, if any, of the new dramatics, it’s clear that a great many “solutions” have been anything but. By examining the solutions that weren’t, we may just get to solutions that might be, bearing in mind that the worst time to head off a crisis is when it’s already here.
The initial centerpiece of the governor’s plan was to be the stabilizing of California’s reeling big private utilities. That, said Davis, was “essential to any solution.” It hasn’t happened. The movie version of Pearl Harbor just came out, but the governor’s personal political version arrived in April.
Conversations with his advisers made it clear that he and they had no idea that Pacific Gas & Electric was going to declare the biggest utility bankruptcy in U.S. history, blaming him for its plight just 15 hours after the governor delivered an unprecedented speech telecast statewide in which he delivered his plan to bail out the utilities, implicitly accepted all the utilities’ controversial claims of massive losses and promised to make them good. “This is a sneak attack,” fumed a Davis adviser.
So stunned was the Davis team that it took seven hours for the governor’s office to get out a mostly vanilla, 125-word statement calling PG&E’s action “dishonorable.” Right after the PG&E bombshell hit, Davis advisers wondered how the state could move in quickly to take control of PG&E assets. But it was too late for that. Although the governor has broad police powers to commandeer power facilities under the state of emergency, federal bankruptcy law precluded any such action.
The PG&E bankruptcy increased the pressure on Davis to strike a deal lest Edison go bankrupt, too. He announced a deal with Edison months ago, but it never really came together.
Some of Davis’s own advisers had argued against the Edison bailout. Indeed, Davis’s chief negotiator with the utilities, former Edison president Michael Peevey—criticized sharply by some for his coziness with the utilities—was moved aside in favor of Davis’ legal counsel, Barry Goode, after giving the utility what it wanted. The deal languished until PG&E moved.
It’s clear why one Wall Street source called the Davis-Edison deal, “A home run for Edison!” So rushed was the negotiation that the state agreed to a deal in which the fee for which Edison would manage and maintain the transmission lines has yet to be determined. Davis accepted all of Edison’s claims of losses, which are hotly disputed. According to Public Utilities Commission sources, the state bargained for things the PUC can get without negotiation and made the deal so sweet it has been shunned by many in the Legislature since its arrival.
“This is a regulatory jailbreak,” said Center for Energy Efficiency and Renewable Technologies director V. John White. It was simply too egregious and naked a giveaway to the utility to sell publicly in its original form.
After weeks of searching, Davis ended up with termed-out Senator Richard Polanco, D-Los Angeles, who recently dropped out of an L.A. City Council race, as designated author of the proposal. Amid this disarray, Edison is engaging in private talks with critics of the bailout, even as the company has launched a $3 million advertising campaign to try to drum up support.
While the Davis bailout is dead in its present form, other bailout and even takeover ideas are floating around. Some in the Capitol, aided by a New York investment-banking firm, talk of a state buyout of the entire utility, whose stock price is depressed. Others, including John Burton, seem unfazed by the prospect of an Edison bankruptcy, noting that PG&E’s bankruptcy has had little of its feared impact thus far. A group in the more conservative state Assembly wants to revive the bailout deal, eliminating some of its sweetheart provisions, turning the purchase of the utility’s transmission lines into a mere option to buy, and reducing the price.
A consensus is emerging among legislators and administration officials to lower the amount of any bailout or buyout—meaning power generators would receive less than they are owed by Edison. This may not be acceptable to either Edison or the generators, which leads to the question of what the Southern cartel of out-of-state power generators has been charging and how much more they intend to charge. But with so many ideas still floating around after many months of discussion, there is still no solution.
The governor’s emergency power-buying was to have stabilized the situation until prices came back down to the 5.5 cents per kilowatt-hour the governor claimed he had deals for in January. (No such deals existed, of course, and wholesale prices have been five to 10 times that.) So far, as a representative of the Southern power company cartel notes, Davis has done little to discourage their behavior. He has opened up the state’s general fund to them by taking over power-buying for the utilities in January. What was to have been a stopgap $400 million state expenditure has turned into $7.7 billion and counting. Rhetoric notwithstanding, Davis has accepted their claims about what they are owed by accepting the utilities’ level of debt, and, until very recently, attempted to move the state and the consumers into a position to pay it. And he has spent the better part of a year looking to Washington—to a commission that was clearly skewed toward the cartel’s interests long before allies Bush and Cheney hit town—to end the price-gouging.
Once short-term spending from the general fund had stabilized supply and prices, long-term contracts were to have knocked the price down dramatically, enabling proceeds from a record bond sale to fund the state’s shortfall in power supply for several years.
But the administration’s vaunted long-term power contracts have led to unexpected results, what Sierra Club advocate and Power Exchange board member Rich Ferguson calls a “curious strategy.” The most immediate threats to the state, this year and next, are largely uncovered, leaving the state vulnerable on the spot market. But future years, when prices are expected to moderate, are fully covered, leaving the state with little flexibility and, as V. John White points out, limited opportunity to further develop renewable energy resources.
While the long-term contracts, like all the state’s power-buying, remain shrouded in secrecy, they cover less than half of the state’s power shortfall in the short term. These ballyhooed deals are going to cost at least $2 billion more than previously claimed, and probably a lot more.
Indeed, sources at the Department of Water Resources, the state agency thrust into the power-buying business when generators refused to sell to the reeling private utilities, acknowledged that half the announced deals were still being negotiated as the wholesale market moved up. “This is the worst time to get into forward contracts,” says Senator Steve Peace, D-San Diego.
And California’s biggest-in-U.S.-history municipal bond sale, needed to pay for those long-term contracts, is in big trouble. The bond sale is hamstrung by the utilities’ objection to passing through money from consumer rate payments. They want to keep most of the money. Without an assured revenue stream, revenue bonds can’t be sold.
The secrecy and surrealism of Davis’ program gave Republicans the excuse to hold up a deal for short-term private financing to return nearly $6 billion already spent from the state’s general fund and held up the record-setting $13.4 billion revenue bond sale to pay for past and future power purchases by the state. Without infusion back into the general fund, core state programs are at risk.
Getting new electric power generation on-line fast and keeping existing sources of supply have also been central to the Davis plan. This has become even more critical as California’s hydropower, and that from the Pacific Northwest, has dried up with the changing climate. Seattle has had less rainfall than Los Angeles. But things are falling short here, too.
Davis has placed great emphasis on 5000 megawatts of power from small portable “peaker” plants to save the day on summer peak loads, which are 50 percent higher than winter. But the orders got in very late. At least one company has dragged its heels as a tactic to force payment to power generators. So the state is now two-thirds short of the governor’s goal of new emergency generating capacity for summer.
Alternative power generators have been very unhappy. Many have stopped generating power, many are trying to get out of their deals with utilities, and many are generating less than they could. These firms produce electricity using cogeneration, wind, solar, biomass, and geothermal sources. Through their contracts with the utilities, they are one of the three legs keeping the utility customers’ rickety stool upright, the other two being the utilities’ retained generation (the plants they haven’t sold) and the power purchased on the open market from the Southern power cartel. Unfortunately, the only one of the three that is under control is the utilities’ remaining plants, one of which, San Onofre nuclear Unit 3, was off-line for the first five months of the year.
The alternative generators are owed $1.8 billion, most of it by Edison, which simply stiffed them from November until April. Many of them are small firms. They have stood by while the state rushed in to relieve the utilities of their task of buying power on the open market and to bail out the utilities for their past losses. Under Davis’ plan, the utilities would get all the money they claim in losses, billions of which are in hot dispute by consumer advocates.
But the state hasn’t put together such assistance to the alternative generators. The Davis plan would force the utilities to pay them from here on out, but it would do nothing to make up for their losses, incurred while they continued supplying power to utilities that had stopped paying for it. And, adding injury to injury, the price that Davis would pay cogenerators who rely on natural gas is too low. It is pegged to a price for natural gas that does not exist in California.
Edison’s debt to the alternative generators was not even addressed in the lengthy bailout deal it crafted with the Davis administration. His newly appointed emissary, former L.A. Assemblyman Richard Katz, who was not available for comment, reportedly told the alternative generators that they would have to get on board the Edison bailout, which did not endear him to the alternative generators, many of whom loathe the big utility and hope it goes bankrupt.
One area that is doing better is conservation. Californians are the second most efficient users of electricity in the nation, a legacy of polices begun during Jerry Brown’s governorship and Jimmy Carter’s presidency. Encouraged by Davis, Californians cut power use by 9 percent during a temperate spring. Whether that continues in a hot summer is a very different question. Fatefully, Davis ignored advice in 1999 to make energy conservation a major focus of his governorship. And new conservation programs this year are off to a very late start.
Until new power plants come on-line, the puzzle of our electricity crisis has only two pieces: how much we consume and how much we pay. What’s needed? A dramatic call to conserve, possibly power-rationing to bring down the level of consumption, action to bring the alternative generators fully on-line, and, assuming that generators don’t decide on their own to drop their prices, direct state intervention against gouging power generators to bring down costs.
Most experts doubt that the numbers in Davis’ plan add up. Now a high-ranking source says that the governor intends higher cuts in consumption than the 7 percent to 10 percent he has talked about publicly to make his plan work.
The Davis plan is based on several remarkably optimistic assumptions about this summer: namely, that spot market prices for electric power will go down, even though futures prices have not, and that alternative power generators currently off-line because the utilities haven’t paid them will go back in service without getting more money. In truth, it’s going to be a struggle to keep even more from going off-line.
Since the rate hikes are regarded as an insufficient prod to conserve as they exempt so many consumers, and new policies to reward saving are off to a late start, planned blackouts have emerged as an increasingly likely strategy for the summer. These would be designed to cut power consumption up to one-sixth during peak demand. The most likely way it would work is for blocks of customers identified by utility bill codes to receive significant advance warning of a coming outage, rather than the seemingly spontaneous rolling blackouts many have experienced. Senate Energy Committee Chairwoman Debra Bowen, D-Marina Del Rey, and Assembly Speaker Bob Hertzberg support the idea, as do many Republicans. In the continuing absence of action by federal regulators or the governor, they see it as a way to control costs and allow businesses to plan for power outages.
The new Field Poll indicates that most Californians continue to view this as a phony crisis, manufactured by energy companies to manipulate prices. If people don’t believe, they are less likely to conserve. Which leads to the notion of planned blackouts rather than rolling blackouts. California would, along with Oregon and Washington, form a buyer’s cartel, which would declare that it will not buy power beyond a certain price, choosing planned blackouts over paying ransom to the generators. The idea, first proposed months ago by Los Angeles Times columnist Pete King, was then codified into a proposal by UC Irvine economist Peter Navarro and the United Consumer Action Network.
But this is akin to rationing, so Davis is, after his fashion, letting others get out front. The Independent System Operator, manager of the state power grid, now controlled by Davis appointees, is easing into it with 24-hour blackout “forecasts.”
Not unlike a driver who hits the accelerator and the brakes simultaneously, Davis is moving toward using both dirty fuels (in the form of diesel generators and the possible burning of fuel oil to produce electricity) to keep the lights on at all costs and planned blackouts to drive down power consumption and the skyrocketing cost to the state Treasury.
Meanwhile, as the politics of scarcity move forward, so do the politics of supply. The new power generation Davis forecast for the summer is falling short, so new energy construction “czar” Dick Sklar, a former U.S. ambassador to the Balkans rebuilding effort (who was not available for comment), has reportedly convinced the governor to let diesel generators run to keep the lights on during stage 3 power alerts. This could lead to major air pollution and public health impacts. Customers with the largest diesel generators would be paid a whopping 35 cents per kilowatt-hour for their output, with no review from the PUC.
There’s little relief in sight on the sky-high cost of electric power unless the governor does something. Treasurer Phil Angelides has a plan that he has put together with his financial advisers for the state. After seizure, the state would then operate private power plants at much lower prices while still providing generators with a 30 percent return. That would require the use of the governor’s emergency powers. “It’s time to go on offense,” says Angelides.
But, though Davis says he’s not ruling it out, top advisers oppose state action. They claim that action by the governor could lead not only to a shutdown of existing plants, but somehow halt construction of 14 new ones. The firms charged with gouging have little to do with the state’s burst of new power plants—one firm is repowering an existing plant and adding on to another. Given the yearlong failure of Davis’ recourse to Washington, what plan do the governor’s advisers have to stop the Big Gouge? None. They seem paralyzed by what might happen rather than motivated by what is happening.
Angelides says his financial advisers tell him that plants can be operated by the state at less than half the price generators have been charging and still provide a healthy return to the companies. But Davis advisers may be more focused on the symbolism of such a seizure move in the midst of a re-election campaign in which they hope to raise $50 million from the business community.
One thing that has been accomplished is that Davis has moved decisively to remedy the shortfall on his team of spin controllers and Edison alumni. He has replaced his recently departed communications director, former San Jose Mercury News political editor Phil Trounstine—who told the Contra Costa Times that he would not continue advising Davis as a friend but would be “moving on with my life”—with two Clinton/Gore damage control experts, Mark Fabiani and Chris Lehane. The two men, who have been working for Edison promoting the bailout deal, will each be paid $15,000 a month, which is more than Davis makes. Davis also hired former Gore deputy chief of staff Nancy McFadden to replace another top staffer who left recently, staff director John Stevens, who reportedly told friends that he was disappointed working with the governor.
With 60 percent of the money from the biggest municipal bond issue in U.S. history slated to reimburse the state’s general fund for money already shelled out for power, and the sale of those bonds facing a rocky road, it’s not a time for yet another of the Davis team’s pronouncements that all is about to be well. California might yet muddle through, but only just, and at tremendous cost to the state.
And with a billion of those public dollars going to pay for replacement power for Edison’s troubled San Onofre nuclear plant, we’re reminded that California can’t continue to rely on the old ways of producing power. Wind and other renewable energy sources that could do much more are being ignored in the mad dash to keep the lights on, as evidenced both by the long-term power contracts the state has managed to close and by the lack of urgency in finding ways to pay the hundreds of alternative power generators who kept on producing power even as they were stiffed by the utilities.
In the end, we’ll have to look to the newly enacted state power authority, conceived by Angelides and Burton, as the focal point for farsighted energy policy. But with Davis preferring to use an ad hoc and largely secret apparatus, the power authority is months away from starting up.
Energy politics in California is going to have to become both participatory and anticipatory. Participatory because the state is now waist deep in the energy business, anticipatory because we are seeing the cost of keeping our heads in the sand.