This Is Not a Let-Them-Eat-Watts Situation
While a number of the electricity problems California is facing now are directly attributed to the failings of the state’s 1996 deregulation law--something that only the state can fix--the Bush administration’s Marie Antoinette “Let them eat cake” attitude toward the state’s crisis is shortsighted and dangerous.
This is not a single state issue. The federal government has a strong interest in righting what went wrong.
California has traditionally relied on imports of power from other states to meet peak demands for electricity. Similarly, it has, at times, sold excess power to other states in the West. For instance, during the summer months, mild weather conditions have allowed the Pacific Northwest to send surplus power to California to keep its air conditioners humming. California has returned the favor in the winter, when demand for electricity rises in the Pacific Northwest to heat homes. By sharing electric generating capacity, both California and the Northwest states have reduced costs and been more efficient.
Just as states benefit from regional exchanges of power, one state can suffer when another state experiences problems. So it is in the West. Electricity supplies throughout the region have tightened as the demand for power has grown with the economy and as below-normal precipitation levels have reduced the availability of hydropower. Limited power supplies have caused wholesale rates for electricity to skyrocket from as low as $30 per megawatt hour to as much $1,500 per megawatt hour. As everyone knows by now, that has put California’s two major utilities near the edge of bankruptcy because they, under deregulation, cannot charge customers what power actually is costing them. This is not the case in other states, where utilities have been able to increase what they charge customers by as much as 50% to pay for higher wholesale costs.
How could the federal government help California and the West? One place to start would be with the Federal Energy Regulatory Commission, or FERC, an independent regulatory agency that oversees wholesale electric transactions. FERC generally permits wholesale rates to be set by markets rather than regulation. This is a good approach when markets are sufficiently competitive, but the difficulties caused by California’s electricity restructuring law and the inadequate level of power supplies throughout the West have put such strict limits on the competitiveness of the region’s wholesale markets that we must challenge the propriety of FERC’s hands-off approach.
Last year, as secretary of Energy, I took the unusual step of filing comments in a FERC proceeding suggesting that the commission adopt a temporary region-wide price cap in the West that would be based on marginal costs for existing generating plants. This would help to stabilize wholesale electricity prices until new power plants are built. To encourage the development of additional generating capacity, my proposal would have exempted new power plants from the rate cap.
Unfortunately, while FERC did propose a number of important reforms, it refused to adopt a firm price cap. So the region’s electricity markets remain chaotic and wholesale prices continue to be abnormally high.
Despite calls from several Republican and Democratic governors in the West in favor of regionwide wholesale price caps, the Bush administration, through new Energy Secretary Spencer Abraham, has expressed steadfast opposition. And, given statements made by President Bush’s newly named FERC chairman, Curt Hebert, it appears unlikely that the commission will adopt a much needed “time out” on market prices until new power plants are added.
Western states must pressure FERC to reconsider its dogmatic opposition to wholesale rate caps. If caps aren’t in place when air conditioners drive up peak demand this summer, the region could be in for an unmitigated disaster.
FERC is not the only federal entity that could help alleviate the West’s electricity crisis. While states have a significant role in overseeing utilities, only Congress has the ability to make the needed changes to the Federal Power Act to improve interstate power markets, especially in the West.
Among other things, federal electricity legislation is needed to promote more efficient regional electricity transmission grids to allow power to flow to areas that need it the most; to enhance FERC’s ability to prevent utilities and generating companies from taking advantage of their ownership of key power plants and transmission facilities to limit the supply of power and cause prices to be abnormally high, as has been alleged in California; to adopt rules that utilities must follow to allow for reliable electric service; to create the federal rules to provide the certainty that is necessary to encourage investments in new power plants and transmission lines; and to increase federal funding for energy efficiency programs aimed at reducing electricity demand.
In 1998 and 1999, I participated in 11 regional summits across the country to stress the urgency for action on such legislation. Congress failed to act, and it is unclear whether a serious effort will be made to enact electricity legislation this year.
Although Gov. Gray Davis and the California Legislature are taking action to stop the bleeding and to help keep the lights on in the state in the short term, they still face very serious long-term problems, as does the entire West. President Bush and his administration must reconsider their hands-off policy. And they must stop using this issue to try to promote oil development in the Arctic National Wildlife Refuge, especially in light of the fact that oil fuels a minimal percentage of the region’s power plants. A more aggressive approach by the president, FERC and Congress is needed to avoid an impending energy disaster in the West.
