California Captolweek January 26, 2001

Energy Summit

((Melissa))

Thank you for joining us. We have gathered the major stakeholders in our energy crisis for an energy summit.

((Jack))

For the next half-hour, we’ll try to find common ground between suppliers, lawmakers, as well as consumer and conservation groups.

Here’s what we’re trying to find out: What's the best way to stop the rolling blackouts? What's the best way to stop the bleeding. Taxpayers are now footing the bill . . . .and the financial risk . . .of paying for expensive electricity, priced beyond the reach of utilities. Another question . . what's the best way to drive down the cost of power? Finally . . . how long will this last? Will it be over by this summer?

((Melissa))

Questions everyone is hoping we can find an answer to, and there are many different proposals being floated to address those questions.

Let’s take a look at a few of those proposals.

First, regaining control of the market.

It’s being carried out right now with the state buying power and re-selling it to utilities.

Other ideas are taking control of hydro-electric plants and creating a state power authority.

How about the private sector, relaxing environmental regulations and providing incentives for construction of power plants.

All sides agree that energy efficiency and renewable energy should play a role.

And of course, there’s always the option of more price increases, which ratepayers hope to avoid..

(Jack)

We should mention that P-G and E declined our invitation to participate in this program today.

Instead, they did send this statement, outlining their ideas for a solution, which are:

"Restore utilities financial health." . . .and "The ability to buy long-term power at affordable prices."

((Jack))

Let’s get into the first question, and we’ll begin with you, Senator Fred Keeley. How do we stop the blackouts in California?

((Fred Keeley, Speaker Pro Tempore [D]))

Well, I think what we need to do is restore confidence in the marketplace, and what I mean by that is that what we have today, as opposed to what we might have this summer. What we have today is a problem of money in the system. There is power to be supplied into California, and what we realize is that every time someone puts money on the table, the blackouts are ended and power is restored.

((Jack))

So it’s a question of money?

((Fred Keeley, Speaker Pro Tempore [D]))

Right now, today, that’s what’s going on. The way we restore that confidence and the way that we end the blackouts is to do the following. We need to have the state at this point step in on a temporary basis and be the purchaser of power on the wholesale market. That is what’s killing the situation today and causing the blackouts to occur. The state has a proposal for doing that. It’s in the legislation right now. The state would hold an auction for low-cost, long-term power and sell it directly to consumers within the existing rates consumers pay.

((Melissa))

Senator Keeley, you touched on money, and I want to talk about the wholesalers’ perspective because you guys have been called the so-called bad guys in this, Gary and Jan. In terms of money, is the money that the state is hoping to pay to buy energy realistic at this point, or ultimately, are consumers going to have to pay more?

((Gary Ackerman, Western Power Trading Forum))

Well, let me take the first shot at it. It’s enough to get us through the rest of the month, and certainly power suppliers outside the state understand that, recognize it, and think that’s a good thing. To go beyond that very much, you start to get into the realm of where are the long term contracts going to take us? That’s what auctions are for, to provide us with at least some transparent window into what the auction process might provide in terms of long-term prices, and those would obviously be much lower than the short-term or “spot” prices that we see today.

((Melissa))

All right, Jan, the Governor is hoping for 5.5 for the particular price that he’d like to pay. Is that realistic from a wholesaler’s perspective?

((Jack))

That’s cents per kilowatt hour.

((Jan Smutny-Jones, CA Independent Energy Producers))

Yeah, that’s five and a half cents per kilowatt hour, and the Governor has indicated that he has received some unsolicited offers at that amount, so I assume that there’s some power out there. Whether there’s a sufficient quantity of it at that price remains to be seen.

((Melissa))

As a wholesaler, would you sell power at that price?

((Jan Smutny-Jones, CA Independent Energy Producers))

I’m not a wholesaler, but my understanding is that many wholesalers, with the current price of gas, could not sell power at that price.

((Jack))

Could they sell it at eight cents a kilowatt-hour?

((Jan Smutny-Jones, CA Independent Energy Producers))

My understanding is that there are a number of people who can, in fact, sell at eight cents or below.

((Jack))

Okay.

((Jan Smutny-Jones, CA Independent Energy Producers))

And so I think what’s important is—and I think Mr. Keeley referred to an auction here—we’re not going to know how much power is available at what price until you actually get an auction out there and see what shows up. Everything else is speculation.

((Jack))

Okay, let me throw this over to Lenny Goldberg because you represent ratepayers. Eight cents per kilowatt-hour is more than is being paid by PG&E and Southern California Edison payers right now. I think it's 7.4 cents?

((Lenny Goldberg, The Utilities Reform Network))

It 7.24 for Edison and 6.7—

((Jack))

So that means an increase in rates?

((Lenny Goldberg, The Utilities Reform Network))

Well, it doesn’t. If the generators right now or in the next couple of days put on the table a portfolio with reasonable offers, we will have stopped the financial bleeding, and let me explain that. The utilities have maintained generation that costs about three-and-a-half cents.

((Jack))

Hydro?

((Lenny Goldberg, The Utilities Reform Network))

Hydro, nuclear, coal, some fossil. At Mr. Keeley’s good graces in the last couple days, very expensive power contracts that were at fifteen cents were brought down to 7.8 cents, and you blend that rate with some reasonable offers, and we’ve argued that the major power users—we should not stand in line buying power for the, but irrespective of that, if you blend the rate between current retained generation, and the great improvements in the contacts that we’ve just seen, an reasonable offers coming form the generators, we will be able to stop the bleeding going forward.

((Jack))

Anthony Pescetti, you are a member of the assemble now, but prior to that, you were a member of the Sacramento Municipal Utilities District, so you’ve been through this before. Lenny just mentioned blended power, and what is—is it reasonable?

(Anthony Pescett, Vice Chair, Utilities & Commerce))

It is reasonable, and I think you’re talking about mainly is three different aspects that make up the rate. One is the internal generation. As Lenny mentioned, the hydro and the nuclear. The second is called qualifying facilities. That’s the renewables. It’s wind; it’s geothermal; it could be bio-mass. It makes up the second component. The third is what you would end up purchasing either on the spot market or long-term.

((Jack))

And all of this comes at certain prices, right?

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce))

That’s correct. What I hear Lenny saying is if you all them all together, the intent is that they average out at a better rate. The problem is, you still have the uncollected debt or revenue that the utilities are claiming exists to them.

((Jack))

All right, not to oversimplify, but it looks like we have a solution and that’s money, and it looks like there are ways to do that, but the other problem, the elephant in the room so to speak is the twelve billion dollars that the utilities have incurred buying power that they couldn’t transfer onto ratepayers over the last—

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce))

Well, I think it goes beyond that. I think it goes beyond to a supply issue. It goes on to how many more power plants can we build within the state, whether they’re peaker power plants or full-bore generation. We haven’t had one built here in ten plus years. That’s really what we need to focus on. How do we get more supply constructed in the state of California so that there’s less reliance on the purchase market and more here in the state.

((Melissa))

As we look at some of the other states that went through deregulation, one of the key things is that they had more existing power in Texas where this has worked better. Jon, California has been criticized for the strict regulations for building new power plants. From an environmental perspective, do you think that’s something that groups like yours will take a look at?

((Jon Rainwater, CA League of Conservation Voters))

Well, first of all, we think the reason that power plants haven’t been built at that time is not because of environmental regulations. We had extremely underestimated the demand. We had some of the utilities arguing against building plants. The cost of power was much lower. There were a whole slew of economic reasons. It wasn’t environmental laws. We can build more power plants, and we are. We’ve got nine that were just approved for sixty-three-hundred megawatts, but what we ought to have right now is the vision, if we’re going to build dozens of new power plants, to make them the cleanest in the world. This is a tremendous opportunity to build a new generation of power plants that are the cleanest with the most renewable resources that we possibly can use, and build them to the current environmental standards. In fact, we should incentivize improving environmental standards and efficiency for these plants.

((Jack))

Jan, does it make a difference where you build a power plant? For example, the president of Duke Power Corporation was on the other day saying, “Hey, we can get a new power plant up and running in fifteen months from the time we decide to build it and get the permits,” but he wasn’t talking about California. Is it unique in California?

((Jan Smutny-Jones, CA Independent Energy Producers))

Well, it takes about a year to get through the signing process in California, and what we’re finding is—and he’s quite right. There are nine plants that have been licensed. Five are currently under construction. There are another ten or fifteen in the works. I think if California’s policymakers say that it is state policy that we will build eight or ten thousand megawatts in the next four years, that would send a very clear message to the market that—

((Jack))

Where are you going to build them though? Nobody wants a power plant in their backyard.

((Jan Smutny-Jones, CA Independent Energy Producers))

Well, there is a significant problem with the so-called “nimby” problem. We ran into that down in San Jose where Cisco, which is building a business park, doesn’t want a power generator, which actually looks like an office building, in the same neighborhood. That is a problem. I think, obviously, we’re going to have to overcome that. I think we have to recognize that these new generators that are coming online are very efficient. Environmentally, they’re far superior to what’s there now.

((Asm. Fred Keeley, Speaker Pro Tempore [D]))

Let me add two things on that, though. One, you can also re-power existing power plants. Let me give you an example. In Moss Landing in Monterrey County, Duke Energy owns a five hundred megawatt power plant that they just got licensed to re-power up to a thousand megawatts. This will actually be emitting less pollutants into the air when it is finished at a thousand megawatts than the current plant at five hundred. That accomplishes two things. One, it’s more efficient. Secondly, what it is is you’ve already handled the siting issues. The plant already exists there, the company is used to it, and it’s going to be a better plant. The second issue is that you don’t have to build power plants to add capacity. To use the Cisco example: what Cisco could do, if the state created the right framework for it to happen, is have distributed generation. They’re going to put a new facility in there with twenty-thousand new employees. Have them put in, or have another business invest or put in a small power operation to meet their needs. That is much easier to do in terms of the siting and much more efficient.

((Jack))

Can we come back to this one issue of the “elephant in the room” issue that hasn’t really been dealt with yet, and that is the twelve billion dollars in losses that these utility companies have suffered. People forget that a billion dollars is a thousand million, so what we’re really looking at is twelve-thousand-million dollars in losses, and,

Gary, let me ask you, how does your industry come to grips with that, and should that trigger, say, a bankruptcy of PG&E, then their very valuable hydro-generating capacity would go to auction, and I assume some of your members would want to pick it up at a bargain price.

((Gary Ackerman, Western Power Trading Forum))

Well, some would, but to answer the question, “how would they view that?” You must keep in mind that many of the out of state entities that have been selling power in California are quite concerned and nervous. I mean, just by the regular payment schedule, they haven’t been paid for their November and December deliveries, and that’s a considerable number of billions that you could include in there, and that’s causing a great deal of nervousness, and the next answer, or the next part of my answer, sort of relates to what we were talking about in the siting of new power plants. We have to stop thinking of this problem as a California only issue. This is one where you take down your borders, you look at your neighbors, and you say, “How are we going to help each other through this?” Electricity is a West-wide, regional issue. What is happening here in California is not that different, with some exceptions, than what’s happening in the rest of the West. They’re not having rolling blackouts in the rest of the West, so that’s something we’ve coined. We need to understand that power plants are being cited in Arizona at a considerable number. The state of Washington is easing its citing rules. We need to cooperate and benefit from cooperation from our neighbors because this problem isn’t going to be solved just by California alone.

((Melissa))

As we look at power generation, which is definitely an issue that we need to address long term to satisfy our power needs. Short-term though, power plants take years to get online and provide us with power. How are we going to stop the bleeding immediately?

((Jon Rainwater, CA League of Conservation Voters))

Well, let’s talk about conservation as both a long-term and a short-term solution. Conservation reduces price immediately. It reduces price for the consumer who is using less electricity, and we’re not talking about just wearing a sweater or turning off the lights. We’re talking about new appliances, more efficient ways of doing things we’re doing now. That’s the best short-term and long-term solution, and it has to be made the centerpiece of the state’s approach to –

((Lenny Goldberg, The Utilities Reform Network))

Well, at this time of the year, and in the middle of the night, we are paying outrageous and exorbitant prices for electricity, which has nothing to do with the amount of power that’s available out there and the demand that they’re using. We have a completely dysfunctional market that is very screwed up in its rules. The Federal Energy Regulatory Commission abdicated their responsibilities, and the state has got to, through the independent system operator or through the purchasing and operating of the transmission system, get some control over this market. That’s not to say that conservation isn’t extremely important. Ordinary ratepayers should be given benefits if they serve, and we need new power plants as we head for summer, but it is a really screwed up market.

((Jack))

Let’s back up one step. I mean, there was sort of a stipulation here that power can be generated here at roughly eight or nine cents per kilowatt hour—

((Jan Smutny-Jones, CA Independent Energy Producers))

That’s long-term.

((Jack))

That’s for long-term power, and yet, in some places on the “spot” market, it sells for seventy-five cents per kilowatt-hour.

((Jan Smutny-Jones, CA Independent Energy Producers))

Part of the problem with this belief that the federal government is going to solve this problem or is even responsible for this problem is a misconception. It’s a self-inflicted head wound. What California did is it became completely dependent on what are called “spot market” purchases, meaning that the way our market works in California is we buy power—

((Jack))

Yeah, but why from eight cents to seventy-five cents. That almost seems extraordinary.

((Gary Ackerman, Western Power Trading Forum))

Yeah, well I think it’s important to understand that buying electricity—and I think everyone here and listening can appreciate the fact that buying electricity isn’t as simple as it sounds because the terms under which you take it—“Do I want it just for now? Do I want it for the next five years?”—is a world of difference to someone who would produce that power and deliver it to a customer, and what you see on the “spot” market right now is about fifty cents. That’s what the offers are looking like, but when you get it on a long-term basis, there’s a completely different structure to the deal, and so the supplier says, "Okay, I’m going to secure long-term fuel contracts behind that, and I’m going to lock in some sort of spread between what it costs to sell it and what it costs to produce it, and that’s my business, but if you want to just buy it for tomorrow, that’s a different discussion.

((Lenny Goldberg, The Utilities Reform Network))

But at the same levels of demand from year to year, prices are going up five and ten times, and everyone was in the same amount being bought in the spot market.

((Jack))

Because markets are inherently driven by greed and fear.

((Lenny Goldberg, The Utilities Reform Network))

Well, the point is that if we can get some long-term contracts, we can stop the bleeding, but I want to get back to one of your earlier points. We question—we certainly question that twelve-billion number that’s been put forward by the utilities, and I’m sorry that they didn’t come here today, but they are also selling their generation. We have asked the Public Utilities Commission for a very good accounting of—you know, they squirreled away our assets. They took our money for a number of years—

((Jack))

And that accounting is due in the next couple days, is it not?

((Lenny Goldberg, The Utilities Reform Network))

I don’t know if it’s in that next couple of days, but it should be coming in shortly, and those numbers, from our perspective, are going to look very different from what the utilities have said.

((Melissa))

Assemblyman Keeley, we want to get back to you right now because there’s such pressure in the Legislature right now to solve this beast because obviously it doesn’t look like right now the federal government is going to impose any caps. What can we expect in the short-term from the legislature to help give some relief.

((Asm. Fred Keeley, Speaker Pro Tempore [D]))

I think what you can expect and should expect are a couple of different things. One is, Speaker Hertzberg has put forth a very good proposal that does, I think, two things. One, it stops the bleeding right away, and that is to have the state step in and, through the long-term contract strategy that’s been talked about here, have an auction, get long term contracts at low prices, sell directly to consumers within the existing rates, so that there’s no rate increase at all, and we diminish that high cost of power that is one third of all power being delivered. Secondly, the speaker has a very comprehensive proposal that would give confidence to generators that they are going to be dealing with a very credit worthy entity when they sell. That’s a very big reason why the prices are so high. If you think you might not get paid, you might still sell to somebody, but you’re going to raise the price a lot in the event that you don’t get paid. It’s a risk worth taking, so we’ve got to take the risk out of that and get those down. Next, what he’s going to do is he wants to make sure that we have a path to credit worthiness for these investor owned utilities. It is not in anybody’s interest, as far as I’m concerned, for these folks to go bankrupt. We don’t bail them out. That is not part of the deal, but a business relationship with these folks where we go in and buy the long-term contracts within the existing rates to protect consumers, reduce the risk in the entire system, and at the same time, move forward over time with the kinds of things that are being talked about here. Add additional supply, reduce demand, that’s the solution to get through this.

((Jack))

Let’s ask Mr. Pescetti. The speaker also has a plan that would transfer the ownership of PG&E’s hydroelectric facilities to the state in exchange for help in dealing with that twelve billion dollar loss by both Southern California Edison and PG&E. What do you think of that?

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce [R]))

Well, I don’t think it’s a good idea. I have a lot of respect for Mr. Keeley, but this is a project we’ve seen in the past. I don’t support it. I don’t think it solves the problem. I don’t think it gets to the core which is—

((Jack))

Because it’s seizing assets?

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce [R]))

Well, not only is it seizing assets, but we have to look at—

((Asm. Fred Keeley, Speaker Pro Tempore [D]))

Wait a minute. I really have to straighten that out because that is not at all what the speaker is proposing. There is no seizing of assets. The implication of seizing assets is that you’re taking them and not paying for them. This would be part of a business relationship where what we are doing from the state’s point of view is getting in and protecting the entire system, consumers and everyone else, from that wholesale market that is dysfunctional. We engage in long-term contracts at affordable prices. If we’re going to do that in a business relationship. It’s fair for the state to get something of value for that for consumers. Whether it’s the hydro assets or the transmission system or warrants in these companies, it is a bailout if we don’t get that. It is a business relationship if we do.

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce [R]))

You know, I guess the issue is, if the state purchases the assets or takes this business relationship, what does that do to the bottom line, which is the results we need which is more supply. Conservation is very important. You know, when I was on the Sacramento Municipal Utilities District board, otherwise know as SMUD, we were very aggressive on energy efficiency, rooftop solar panels, and other mechanisms to try to help on conservation which are quick, clean results that everybody benefits from, but to purchase or obtain the hydro facilities doesn’t deal with more supply into the system.

((Melissa))

What about the state’s credit risk as well? Do you think—

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce [R]))

That’s a factor. You know, that’s one of the concerns that I’ve had is the state’s ability to continue to run. We haven’t had a lot of rain; we’re running at fourty-eight percent—

((Jack))

There’s another aspect though. If one of those utilities were to go bankrupt, then those hydro facilities could be bought up by Pescetti power, for example, which would be one more—

((Asm. Fred Keeley, Speaker Pro Tempore [D]))

That’s what we’re afraid of.

((Jack))

Which would be one more entity though which would be located, perhaps, out of the state of California. Isn’t there a risk involved in that?

((Asm. Anthony Pescetti, Vice Chair, Utilities & Commerce [R]))

You know, I think that there is a risk. We’ve gone to a point—you know, Lenny has made some points about the Public Utilities Commission. There were applications in for long-term contracts back in August at five cents a kilowatt hour. They were never executed. The Public Utilities Commission ordered the utilities to start selling off or divesting their assets, which has happened. We brought in legislation last week that froze the utilities from selling their assets. Those are all risks. The bottom line is that we got to get to the solution that we need a supply in this state that doesn’t exist. We continue to buy power at the spot market which is at the highest price ever.

((Melissa))

And there are some time pressures as well because the state authorized the Governor to spend four hundred million to buy power. That’s rapidly running out.

((Jack))

At twenty million dollars a day

((Melissa))

How long is this going to last?

((Lenny Goldberg, The Utilities Reform Network))

Well, you know, we can end this really quickly if the generators come in with reasonable contracts. There will be no more bleeding. We can stop the bleeding tomorrow if there are good offers on the table that makes sure that the blended rate keeps the rates at this level, and we believe that when we’re looking at the numbers and the amount of power that we need to purchase that that is very doable, so when Mr. Pescetti talks about “long-term supply,” but right now is the time of crisis and time for the generators, who have done very well in this deal, to step up to the plate, make some good offers, and we are home free.

((Jack))

Jon, in the last few seconds that we have, do you think that the conservation message has been received out there or is there still a way to go?

((Jon Rainwater, CA League of Conservation Voters))

Not in terms of what it can do in terms of addressing supply. It’s not about just turning off the lights. The LA Times pointed out that energy efficiency is the largest domestic energy source. If you include oil imports, it’s second. We need to make this front and center. It’s the cheapest, it’s the quickest, it’s the cleanest source of energy. It has to be the centerpiece along with new generation like renewable resources—

((Jack))

But do people understand that?

((Jon Rainwater, CA League of Conservation Voters))

I think they’re starting to, but I think we need to make sure that it’s absolutely the center of what we do in this state.

((Melissa))

Gary and Jan, from representing the wholesalers, are we moving closer to an agreement between what the governor wants and what the legislature is proposing? Are we working closer to a solution than when this first began?

((Jan Smutny-Jones, CA Independent Energy Producers))

I think so. I have to say that I’ve seen quite a bit of leadership in the legislature recently. Mr. Keeley and Mr. Pescetti have been working overtime on this, and the legislative leadership has been trying to close the gap. I think the Governor has taken some steps that are headed in the right direction, and, you know, my hope is that we’re closing this gap.

((Melissa))

Gary?

((Gary Ackerman, Western Power Trading Forum))

I think what I need is some—actually, what I really need is a video of Mr. Keeley saying what he said here today and show that to out of state producers to let them know that there are people who understand the situation. They’re realistic about—

((Jack))

We can provide that video for you.

((Gary Ackerman, Western Power Trading Forum))

I thought you might for a small fee, and, uh—

((Jack))

For eighty-five cents a kilowatt hour we can do that for you.

((Gary Ackerman, Western Power Trading Forum))

Yeah, we can do the exchange. We can throw some California real estate in the deal, but the point is there is a lack. There is a confidence gap. We’ve been called “pirates,” “gougers,” “price manipulators.” Hey, let’s stop that. You want to solve the problem? Hey, let’s get down to brass tacks and solve the problem.

((Jack))

Ten seconds, Fred.

((Asm. Fred Keeley, Speaker Pro Tempore[D]))

Well, I agree. I want to leave off where I started, and it’s exactly what Gary was talking about. This is about confidence, and I think the speaker’s proposal, both immediately to stop the bleeding and long-term to stabilize the situation, is essentially about restoring confidence. Confidence with regard to consumers. Confidence with regard to investors, suppliers, the investor-owned utilities, so that they realize there is leadership. There is a plan. It is workable. It is a business plan, and it will help stabilize the situation.

((Jack))

On that note, thank you all for coming in, sharing your hopes, your desires, and your frustrations, and it looks like we made some progress, and this could in fact be solvable. Melissa?

((Melissa))

We would like your feedback on the solutions you heard today.

Which idea do you think is best? State control over the energy market, building more power plants, conservation, rate increases, or a combination of the above?

((Jack))

You can send your comments by logging on to capitolweek dot o-r-g.

You can also find out more on our energy crisis by clicking on “at issue energy.”

((Melissa))

Easy and at your fingertips. It really breaks it down. It’s really complex, and, unfortunately, we never have time to answer everyone’s questions, but that’s a great place to start.

You know, Jack, as we look at this, California is getting a name, not for the California dream but for the problems that are existing with energy deregulation, so it seems that everyone does agree that the sooner we can look at long-term contracts or a small rate increase, the better to find some sort of solution.

((Jack))

What was interesting is this seems a lot closer tonight, after watching everyone participate, to some sort of solution. Maybe not tonight, but we’re getting closer, and that was a good thing. It’s not as much of a crisis after this program ends as it seemed to have been before the program for this week.

That is our program for this week. We thank you very much for joining us.