CAPITOL WEEK #524

February 23, 2001

Energy Crisis
Energy Summit #2

((Gray Davis, Governor of California))

This is a balanced business transaction providing value both to ratepayers and to the utilities.

The Governor pitches his plan, but there is no shortage of criticism.

It certainly is a huge expenditure on the part of the state.

…and by rescuing state utilities, will consumers be left holding the bags?

…Saving the utilities to keep the power flowing, it’s far from a done deal. On this special edition of California Capitolweek.

((Jack))

Thank you for joining us.

The coming days are crucial in the future of California’s energy market.

((Melissa))

As state lawmakers debate the Governor’s plan to rescue the utilities and resolve the energy crisis competing stake holders, including utilities, generators and consumer advocates are trying to sway plan in there favor.

((Jack))

We have brought together these major players as what is our second energy summit in two months. In a moment you will here what each side has at stake in what could the most important piece in the energy puzzle.

((Melissa))

But first lets take a look at the Governor’s plan on the table right now; the centerpiece of Davis’s proposals would be state acquisition for billions of dollars of 32,000 miles of utility-owned transmission lines. That would allow the cash strap firms to issue long term bonds to pay off their debt.

Soundbite

((Governor Gray Davis, Governor of California))

It provides real value to rate payers while allowing utilities to go back in business to keep the lights on.

End Soundbite

((Jack))

Here are the other elements of Governor’s proposals. Davis wants utilities to dismiss all pending lawsuits that would lead to higher rates for power; agree to continue to selling electricity at cost to the state; and set aside land for conservation in some water shed areas; finally, he’s asking some of the utilities parent companies to return the 3 to 4 billion dollars the utilities funneled to them last year to help settle their debt, a debt they say is 13 billion dollars, there is no shortage of criticism in the legislature

Soundbites

((Bill Campbell, Assembly GOP Leader))

This is a bailout. What they are talking about doing is using limited state resources and buying very old assets. So, let’s be clear that this is just another form of bailout.

((John Burton, Senate President Pro Tempore))

The only reason that we are considering this is if the utilities are in a position where they gotta do something to get some money and one of the ways you do it is to rob a bank or sell an asset that you own.

End Soundbites

((Melissa))

Well, the Governor insists that there will not be a rate increase within the consisting rate structure. Consumer rate advocates call the plan a bail out in disguise because consumers will still feel the pinch down the road, first in the form of surcharges on their power bills to pay for bonds issued by utilities. Second, future work on transmission lines that will be passed along either in form of higher rates or higher taxes. And there is still a question of who will for the 10 million dollars in bonds that the state is issuing to purchase electricity on the behalf of the utilities and that could come in the form of a tax increase.

((Jack))
Joining us now, Michael Shames, executive director of UCAN, Utility Consumer Action Network based in San Diego.

Jan-Smutny Jones, executive director of The Independent Energy Producing Association which represents generators.

((Melissa))

Also, republican Anthony Pescetti, vice chair of the assembly, utilities, and commerce committee and democrat Bob Wright, chair of the utility and commerce committee.

((Jack))

Rob, I guess the first question to you is we’ve watched a complex process go through the legislature over the past couple of months, very difficult, real hard work and there is a plan now.

How close to coming together is that plan or could the slightest change on the political or energy horizon make the whole house of cards fall apart?

((Rod Wright, Assemblyman (D) Los Angeles))

Actually, this is almost like talking earlier about medical treatment. This is almost like medical treatment where the medicine is on the table and nobody wants to take it. It really isn’t very complicated. At the end of the day we have to figure out what a commodity cost and you have to pay for it and you can call it whatever you wish. But if you are not prepared to pay for what ever it cost than what you’re going to do, your going to disguise it and disguise castor oil however you will, it’s still castor oil. You can put in it whatever you want, you can cut it, you can do all of that. Buying wires and all that stuff is really is just something to appease political whims. It’s not necessary to close a deal. In all of the other majority references, I think they were unnecessary, I mean, if we believe that the utilities acted improperly than we should let them go bankrupt. Frankly I don’t believe that’s true so, now we’re creating a fiction to plant what really should be done in the first place.

((Jack))

How long, Mr. Pescetti, before we take the medicine. Are we talking weeks, months or will it never happen?

((Anthony Pescetti, Assemblyman (R) Rancho Cordova))

You know I think it’s a couple of parts. It could happen relatively quick if the negotiations the Governor is participating in with the utilities. If they are able to come up with an agreement. The vehicles are in the legislature and prepared to move forward. So, its something that could within a couple of days or a within a couple of weeks.

((Melissa))

Jan, a lot of the generators are looking at the bottom line they want to get paid. Is this a plan that they are going to sign off on. We should mention that PG&E declined our invitation to sit in on this panel, but the utilities still have not at this point signed off on this deal yet.

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

I think the purchase of the transmission system leaves the candidate in an awkward position. Obviously, this problem needs to be fixed, and fixed quickly because there has been power delivered sometime ago that has been paid for, particularly in small generators to qualifying facilities that are continuing to supply power to a great disadvantage. On the other hand, we are very suspect of the idea the state owning and operating the transmission system. This is historically something that they have not been involved in. We’re somewhat suspect in terms of how good a job they can do.

((Jack))

Michael, are we seeing a catch-22 situation here. Basically, the generators need to get paid. I mean they haven’t been paid for a while. There about 13 billion dollars of outstanding bills out there, they want to get paid. The utilities can’t pay them until they can be financially sound enough to be able to float some of their own credit in order to pay the bills. Is it a catch-22 situation? And we are waiting for somebody to boink somewhere?

((Michael Shames, Utility Consumer’s Action Network))

Yes, that’s true. We are right now watching, or not watching really, negotiations going on between the Governor, the utilities, and the generators and he has been designated, he the Governor has been designated to do the negotiations. So we actually don’t know, truly what is being talked about. We don’t know the terms of that plan will be. We just know the Governor wants to try to reconcile these things by having everybody share some of the responsibility. The generators cannot be paid the full amount that they claimed they’re owed. The utilities will not be restored to full vital economic health. And I expect that the ratepayers are not going to see the rate reduction that they have been promised. Everybody is going to pay.

((Melissa))

All right, we’ve talked about peoples’ concern or discomfort maybe with the state taking over the transmission lines, but is in fact Assemblyman Pescetti, is there another alternative? We haven’t heard much about any other plans on the table.

((Anthony Pescetti, Assemblyman (R) Rancho Cordova))

I think there’s several things that we need to look at before we start can start talking about alternatives and Mr. Wright started with the committee is to look at the true financial conditions of the two utilities. We’ve heard numbers of amount of debt that existed. We heard that there was a transfer of revenue between the utility and the parent company. I think the first step we have to look at is truly how much money are wetalking about in under collection. Is it 6 billion dollars, is it 1 billion, is it 12 billion dollars? You can pick a number. And I think once that’s done, then I think we can come up with a solution to resolve it. There havebeen several suggestions that have been brought everywhere from taking over generations from purchasing transmission. The concern that I have with the transmission and based on my experience with a local municipal utility is that there is a lot of infrastructure that needs improving. We’ve got a path-15 that has created a major problem that is very expensive to renovate. You’re buying lines and you’re buying about 60% of the grid capacity in the state of California. There is still 40% that is owned by other than the 3 utilities. So, there’s a lot of areas that we have to look at before we can come up with viable suggestions.

((Melissa))

Assemblyman Wright, let’s let you respond to that.

((Rod Wright, Assemblyman [D] Los Angeles))

Well, again, I think the difficulty here is we’ve always engaged in these discussions that don’t address what we’re trying to do. The objective is to supply enough power to the citizens of California, and to the extent that we discussed the political ramifications prior to the objective, then you always get confused. Again, if the utilities were bad in their management, for example, then they should go bankrupt, and we shouldn’t have a discussion of a bailout or a buy out or anything. We should simply let them go. Frankly, that’s not true. Even the discussion about moving money from the parent company. Most of the money that the utilities took out paid QF contracts and was restoration of debt that the utilities made to purchase assets, so to say that they should have used that money to pay for an undercollected utility cost is insane. What I think the utilities are at fault for is in July, when the undercollections first started, they should have stopped purchasing power, so what we would have had is a discussion at that time while they still had credit. They were operating under the old utility paradigm that they would pay it and they would be restored. Unfortunately, they were incorrect because the PUC was operating politically and not as responsible regulators. They should have stopped in July and forced this issue before they extended themselves into such debt. That’s what I think is their principal responsibility and I think what, ultimately, will get them shareholder lawsuits for abrogating their fiduciary responsibility to manage the company—

((Jack))

To the stockholders?

((Rod Wright, Assemblyman [D] Los Angeles))

Yes. They should have stopped, they should have said in July that the point that the PUC first indicated that it was not going to pay the undercollection, then they weren’t going to buy power, and, frankly, to finish the point, the state of California has not done better than the utilities at purchasing power. As a matter of fact, we’re now close to two billion dollars at purchasing power at an average of around twenty-five to thirty cents that we’re only collecting seven cents for, so if we continue on our present path, we will assume the same bankruptcy posture that they did because we’re again trying to play the fiction that we’re not going to raise rates.

((Jack))

Meanwhile, Jan, speaking on behalf of the people who have made the power and who have not been paid for it, how much time do we have left before something serious happens?

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

I think this is the real problem. Regardless of how the issue gets settled out, we’re running out of time. The Legislature did enact one act about a month ago, and since then, the other two or three prongs that need to be there haven’t moved through the Legislature. Meanwhile, there’s a whole bunch of other bills dealing with all kinds of issues that can wait, but how we go about paying for power that has been produced and delivered, and how create some headroom for the utilities to get solvent again haven’t been dealt with, and we are out of time.

((Jack))

Is it going to take something like the Governor saying, “Okay, we’ll seize the power lines,” or to take some sort of action like that in order to move things?

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

I don’t know. I think we have to be very careful about how this looks in the longer term. California has been very successful in attracting a significant amount of investment capital to build new power plants. We’ve got nine of them licensed, six under construction. Talking about seizing assets—

((Jack))

Scares people away.

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

Exactly. If you go to Indonesia, you can get political risk insurance to build power plants. You can’t get political risk insurance to build power plants in California. At least not yet, but that may be coming too, so I think we need to be careful with some of that rhetoric because I think it can actually backfire.

((Melissa))

Michael, where does this leave consumers? We are facing extreme deadlines to get this resolved. How do we make sure that they’re protected in terms of these higher and higher bills? That’s what many consumers say that they’re worried about, and that’s what they’re starting to see.

((Michael Shames, Utilities Consumers’ Action Network))

Yeah, I know, and we read in the papers, and we see a lot of talk about potential rate increases. I think the consumers are more interested in some stability. They’re interested in some predictability that the rates will not go through the roof, that we will not have outages, and that there is gained control over the energy system. I think most consumers look and realize that this is out of control, and we don’t like that. One of the beauties of the transmission purchase is it really gives the state a platform on which to regain control over this state’s energy policy, and that’s why it’s a very important—not only symbolic, but a very real asset that we should be working towards.

((Jack))

You don’t agree?

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

Well, I in part agree with Michael and in part disagree. The part I do agree with him on is I believe this issue of stability both for ratepayers and for generators and, I think, for everybody else in America is absolutely essential right now because the level of regulatory and political instability that we’re experiencing right now is not sustainable on any level. I think, however, the concept of California sort of seizing control over its energy destiny is, frankly, overstated. I would say that ninety-five percent of this problem is caused because the state of California, through the Public Utilities Commission, either prevented or did not inset the utilities to go forward in terms of forward, long-term contracting last summer, last spring when, in fact, this power was available, and so it is politically seductive to sort of blame an obscure federal agency, the Federal Energy Regulatory Commission, for this problem, but the fact of the matter is this is a self-inflicted head wound.

((Jack))

And that brings us back to Rod’s original point. The medicine is on the table. How long is it going to be before we finally get to the point where we start taking it?

((Rod Wright, Assemblyman [D] Los Angeles))

And Michael said, oddly enough, what is a resolution that I introduced the first day of the session, that stability is more important than price, that it sounds almost contradictory—

((Jack))

It makes me think of the gas lines in the seventies when that was basically regulated so there were shortages and we all had to wait in line for gasoline. When that became deregulated and the price began to rise, the lines went away. Are you saying the same thing applies here?

((Rod Wright, Assemblyman [D] Los Angeles))

No. The gas lines in the seventies occurred because the OPEC countries reduced supply to the United States, and we were so dependent on foreign crude that we did not have enough manufacture. The problem here becomes, I think, of we were so focused in making promises relative to the rate that we forgot that the most important issue on the table is reliability. Reliability far exceeds price in the mind of anyone who’s reasonable, and one of the things—again, in California even as we begin to pick customer classes against one another, and people say, “The big people did it,” or whatever, if you bankrupt the large industrial concerns of California, then you’ll have a whole lot of consumers at home with no job. They can watch TV all day with cheap power, but they won’t have a job, so you want to make sure that you don’t say, “Well, the big guy pays for it” or “The little guy pays for it.” Reliability becomes the first concern, and then what you do is you want to make sure that as a management function you get the best price that you can.

((Melissa))

Reliability though—you know, the Governor said that with the existing price structure, rates could go up as much as twenty percent. What is the price tag when you define reliability?

((Rod Wright, Assemblyman [D] Los Angeles))

No, no, no. What you have to do, and as long as you get into the game of saying, “I’m going to deal with price first,” you’ve just fallen into the trap that other people do. The power will cost what it costs. Even if we were in the previously regulated environment, the price of natural gas has quadrupled at the border in California. There would have been a substantial rate increase for electricity since sixty percent of the natural gas that comes into California makes electricity. If people are looking at their gas bill right now, that would have let them know that the power of electricity was going to go up anyway.

((Jack))

Does that make sense?

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

You know, Rod’s partially right. I agree with him that reliability is very important, but I think that price is important. We have seen people’s natural gas prices quadruple, and when you get those people who are retired or seniors on a fixed income and they’re bill goes from thirty dollars to a hundred and thirty dollars, they can’t pay for it. When the large industrial user’s gas bill is budgeted at a couple million dollars, and it’s double that, that impacts, not only all of us as individuals, but it also impacts the industry, so I don’t think you can say that reliability alone is the issue. I think you have to say reliability is a major issue, but so is price, and they do conflict, and that’s a problem.

((Rod Wright, Assmeblyman [D] Los Angeles))

We’re not in disagreement. I’m not suggesting that price is something that you don’t take into account, but what I would suggest to you is that if you went to someone and you said, “Are you going to purchase it irrespective of the price?” At some point, you’ve got to make that cut. Government’s job in this case is that we get the best price, and keeping in mind that reliability is a function, so I’m not suggesting that you’re not concerned about price. I’m just saying that it becomes your number two consideration. Your first consideration is having enough.

((Jack))

So the message going out from this group of people is, “Consumers, both residential and commercial, prepare for some sort of a price increase. That’s inevitable.”

((Michael Shames, Utilities Consumers’ Action Network))

No, the Legislature has a very serious challenge here. The public has to be confident that the Legislature has not left the public holding the bag. The public feels as though they have to be treated fairly. If you hit them with a rate increase, and everybody else—you know, the generators get paid, the federal government gets its due, the utilities are restored to health, they will feel that this was an inequitable deal, and they will revolt, so the real challenge for this Legislature is to assure the public that they have gotten the best, lowest price and the best possible fix that’s out there, and if they don’t do that, then there’s going to be trouble.

((Jack))

As Michael said earlier, in order for that to happen, everyone has to accept a certain amount of pain. How much pain are the generators willing to accept?

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

I would say, right now, the generators are keeping the lights on without getting paid and forbearing quite a bit, meaning that—

((Michael Shames, Utilities Consumers’ Action Network))

By court order.

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

Well, by court order, but quite candidly, Michael, I’ve got quite a few small power generators, renewables and co-generators, that haven’t been paid since November in Southern California and, in fact, can’t afford to be in business anymore.

((Jack))

And those are operations located right here in California?

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

They’re located in California, and much has been made of these “out-of-state” generators, but I don’t represent the Canadian government nor the Bonneville Power Administration nor the Los Angeles Department of Water and Power—who’s plants are located in Utah—all of whom have done very well in this market. Our generators in California, you know, continue to generate power and do anticipate getting paid, and I think one of the big issues that we have going forward is, if you sell power here and are not getting paid, what does that mean in the future?

((Jack))

Anthony, let’s look at this in another direction. There is a plan out there now that involves taking over, bonding to pay for the power down the road. Is there another alternative somewhere? Is there somewhere that we should go, that we’re missing?

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

You know, I wish I had the magic crystal ball that could give us the quick answer. We’ve got a couple of issue that we need to look at. One that we alluded to very briefly is the whole natural gas scenario. Consumers are seeing the higher price for the natural gas, so we’ve got to find a way to get those prices more within line and reliable, whether it’s exploration or it’s more storage capacity or a larger ability to move natural gas through the pipelines into the state. As Assemblyman Wright mentioned, that is not being reflected in the high price of electricity because natural gas has gone up, and still, the electricity rates are still capped. You have to look at the issue and say, “Okay, do we agree that the utilities are financially in a situation where they need help.” I don’t think that anybody disagrees that that is not the case, and I don’t think any of us want to see the utilities go bankrupt. The issue is how much is that liability and what amount?

((Jack))

Okay, so the framework works. It’s just a question of how far you push the framework?

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

That’s correct. Well, to a degree that’s correct. I’m not one that supports the takeover of the transmission or the grid. Largely, because you’re taking over sixty percent of the situation and you’ve got some hidden costs. Taking over the grid is going to have a direct impact on some of the cities and counties that normally have gotten property taxes from that, which has been impacted, so I don’t see that as a viable option. Taking over the generation isn’t a viable option. We’ve got to make sure that we’ve got more supply in place. We’ve got to encourage—

((Jack))

All right, so what you’re saying is we’ve got to do what we’re doing, follow that path, but tweak the numbers. Is that it?

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

I think that’s a start.

((Melissa))

Michael, you’re response to that.

((Michael Shames, Utilities Consumers’ Action Network))

I don’t really see an alternative. One thing that we’ve agreed upon is that we must do something soon. We don’t have the luxury of more hearings, getting the numbers from the PUC. That takes too long. Something has to be done. A plan is on the table. Tweaking is one thing, but taking the transmission, which is a central core of this plan, off the table is essentially rewriting this entire plan. We need to do something quickly.

((Jack))

But who’s going to pay for those?

((Michael Shames, Utilities Consumers’ Action Network))

It’s been worked out.

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

The ratepayers—

((Michael Shames, Utilities Consumers’ Action Network))

They are not. They’re renting it right now. I’d rather rent to own, but we’re renting right now. We’re paying the same amount as we would be if we were to buy the transmission.

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

So we’re going to do a rate increase?

((Michael Shames, Utilities Consumers’ Action Network))

No, there’s no rate increase on transmission. No rate increase there.

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

So, who’s going to pay for path 15 upgrades?

((Michael Shames, Utilities Consumers’ Action Network))

We would have paid for that anyhow. Even if we didn’t buy—

((Anthony Pescetti, Assemblyman [R] Rancho Cordova))

I don’t agree, Mike.

((Michael Shames, Utilities Consumers’ Action Network))

Oh, of course. The utilities would require it.

((Rod Wright, Assemblyman [D] Los Angeles))

See, Jack, I would say a different thing. The reason that the wires came into discussion had nothing to do with the business and economic realities. It was political. So, separating the wires from the other thing was purely political. It’s a stupid idea to buy them because, as Anthony said, you’ve only got sixty percent and you’ve got the other issues, but the thing to do is to lay down what is the real cost, and then as you begin to examine what the real cost is, then you can begin to say, “how can I improve the cost?” We’ve started on by saying, “how do I resolve the political issue first?” The wires are political. I mean, if you talk to most of the people who are on the investment side, they’ll say, “We don’t need the wires to do the deal.” Let’s understand first what it costs to purchase and deliver power? That becomes the central question that we keep avoiding because we’ve focused on “bailout” or “rate increase” or the other things. The power at the end of the day will cost what it costs. As a practical matter, 1-X already resulted in a rate increase because the current bond is not in the rate stream, so to suggest that we’re not doing a rate increase is, again, participating in a fiction. There’s already been a rate increase. There was a rate increase in December that’s going to be permanent, and there’s a rate increase to finance the bond that’s in 1-X that will be a rate increase to finance the purchase of the wire. All of that will go on top of the existing rate structure, so let’s not fool people into saying that you’re not getting a rate increase. At the end of the day, it will cost what it costs. Let’s adjust to see what it will cost to deliver power and then we can start backing into what we can do to mitigate the cost. We’ve just gotten the plan backwards. We’ve focused on the assets first.

((Jack))

I see Jan nodding. Basically, if you look at it that way, isn’t that what should have happened a long time ago?

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

Yes, I think the question is, “How much is actually owed, and how are you going to recover that? I think that there is going to be a rate adjustment in there somehow, and that’s happened in other states. That’s happened in Oregon, that’s happened in Idaho, that’s happened in Nevada. All states that are generally lower cost states than California, and a lot of that is reflecting a higher cost of power which is a result of a surplus that’s gone away and higher gas costs, and I am in agreement with both these gentlemen that in essence what we’re talking about in terms of buying the wires is to provide political cover for what is, in essence, a way to fix the problem.

((Melissa))

We’ve talked about time. One thing we all agree on is that time is crucial in finding a solution. How close are we, Assemblyman Wright, to getting there?

((Rod Wright, Assemblyman [D] Los Angeles))

Well, a critical day is going to be the close of business tomorrow because the generators—

((Jack))

And, just so people know, we are taping this program on Thursday.

((Rod Wright, Assemblyman [D] Los Angeles))

Oh, I’m sorry. On Friday, if the generators don’t get paid, then I think all bets are off because if the Department of Water Resources, which currently is not credit worthy in the standard that most business is transacted in the United States. If they fail on paying for the power that they’ve purchased at that point there is no court in the world that would require, even on an emergency basis, that they continue to sell. At that point, the state would go on a cash only basis, or the price of power would go up substantially, so at some point—tomorrow, at the close of business Friday, if we don’t pay the bill that we’ve accrued over the last thirty-five or forty days, then I think that you’re going to see an entirely different system whereupon you will see blackouts because people simply won’t do business.

((Jack))

On that wonderful, optimistic note, we have run out of time. Thank you. Thank you all very much.

We would like your feedback on Governor’s Davis’s plan to save the state utilities . . . do you think the state should be responsible to help the utilities with their debt?

((Melissa))

Here’s where to send your comments and where to find out more on the complex issues surrounding the state energy crisis

That is our program for this week . . . next week, everyone’s talking about rising electricity rates, but what about the soaring cost of natural gas?

Until then, I’m Melissa Crowley.

((Jack))

And I’m Jack Kavanagh, thank you for joining us. See you next time.