Other States Can Offer Energy Policy Lessons
California’s energy crisis can be solved in a couple of years--prices stabilized, power supplies increased and businesses and residents assured of economical electricity--if the state adopts simple measures that other states already employ in reform of their electric systems.
Even in the short term, there are good ideas for dealing with the sudden debts of Southern California Edison and Pacific Gas & Electric without unduly burdening customers or financial markets.
Under no circumstances should Edison and PG&E; be allowed to go bankrupt. The effect on the state’s economy would be “draconian,” says veteran utility attorney David Pigott of Costa Mesa. Supplier and customer contracts with the utilities would be put under review by the bankruptcy court, creating widespread uncertainties for business.
The plan now being considered for the utilities is a good one: amortizing their $11-billion shortfall over 10 years through a bond backed by the state. If the electric companies need the temporary backing of the state’s credit to buy power or fuel, they should have it on an emergency basis.
But another, long-term solution to California’s problem that is being suggested--that the state use taxpayer money to buy old power plants back--is as flawed as California’s original moves in energy deregulation.
Deregulation is not rocket science. Ohio, Texas and Pennsylvania, among other states, are deregulating their monopoly utility systems carefully and successfully. California could take lessons from them.
California must begin by scrapping the system in which utilities purchase power at spot rates set daily and even hourly. The state should require utilities to purchase power on long-term contracts, which protect electricity buyers from spikes in prices.
Fortunately, reform in that direction seems to be in the works. The California Public Utilities Commission now allows utilities to enter long-term contracts. The near-bankrupt utilities can’t negotiate many contracts at present, but with state backing they could.
Contracts should be of varying duration, some for one year, others for two, four, six years and so on, to prevent the state’s system from being stuck with costly supplies if power prices decline.
Ohio and Texas both require their companies to buy power on long-term contracts. Texas allows such contracts to be adjusted for fluctuations in fuel prices.
New Sources of Power Essential
California should make extraordinary efforts to get new generating plants built in the state or contract to buy power from plants built in other states. It was a major mistake for California to have started the transition to a deregulated market in 1996 without ensuring that it had new supplies of electricity coming online.
Ohio, which embarked just last week on a three-year transition in its electricity markets, first streamlined its plant-siting procedures last year. It issued approvals for two large generating plants plus several smaller ones to be built by companies new to the state. So it will add tremendous amounts of generating capacity before its market is fully deregulated in 2003.
Texas started deregulation in 1995 by encouraging out-of-state companies to come in and build power plants. It has added 22 plants in the last five years, while Texas-based companies such as Houston’s Reliant Energy--a supplier to California--have gone outside the state to seek new business.
“You have to increase generation if you want electricity,”’ says Patrick Wood, head of the Texas Public Utilities Commission.
California needs to encourage conservation by allowing electricity customers to really see the wholesale prices being charged in the Western states. Electricity shortages in the West are a fact, not a conspiracy, due in part to low hydroelectric flow in Washington and in part to the fact that no large generating plants have been built in California in a decade.
“Customers should feel the brunt of the prices so they can make conservation decisions, but then the state could use its $2-billion budget surplus to finance rebates and tax credits to customers so as not to burden small businesses and residents,” says Mark Bernstein, formerly an energy advisor in the Clinton White House who is now a research analyst in the science and technology division of Rand Corp., the Santa Monica think tank.
Unfortunately, politicians in Sacramento right now are advocating using that $2 billion in taxpayer money to buy the power plants that the state forced Edison and PG&E; (and San Diego Gas & Electric) to sell three years ago. Not one unit of additional electricity will be generated for the state’s economy by such a move.
Setting up a grandly named State Power Authority would, however, add to the politicians’ power. And it would undoubtedly discourage out-of-state companies from coming in to compete in California, thereby protecting the same utilities whose policies over the last decade have done as much as foolish state regulation has to bring about the present crisis.
California needs to open up its electrical system, not close it further. It should encourage innovation by fostering the use of small generators by individual companies. Edison and PG&E; have always made it difficult for business customers to hook small generators into their larger systems, thus discouraging innovation.
But the successful municipal utility, the Los Angeles Dept. of Water & Power--which was exempt from California’s flawed deregulation--encourages customers to install such generators, which are produced by such California companies as Capstone Turbine of Chatsworth, AC Propulsion of San Dimas and the Torrance factory of Honeywell Inc. (formerly Allied-Signal).
The Texas PUC specifically orders that “barriers to customer use of small-scale power generation be removed” in its deregulation decrees.
Deregulation is not a conspiracy. Although the concept has become a big issue lately, deregulation dates to the 1970s, when the oil crisis forced Americans to think about ways to conserve electricity. Business and individuals responded. Machinery became more efficient, waste heat from office building lighting was recycled as electricity. Homeowners turned thermostats up in summer and down in winter.
Also, government required utilities to accept cogenerated power from factories and encouraged experiments with solar, wind and biomass generators.
Such moves made energy use more efficient. But efficiency reduced the need for ever larger power plants. And the introduction of alternative producers changed forever the old model of the regulated utility. At the same time, growing reliance on computer systems in every facet of the economy increased demand for electricity.
New approaches had to be found. So federal and state governments launched deregulation.
But now in despair at the collapse of their flawed system, many California political and business leaders are saying that electricity is a unique commodity that cannot be subject to competition, that only a state authority, on the model of the old Soviet Union or China, can run an electric system.
Clearly that’s wrong. Ohio, Texas and other states are proving that if you work intelligently you can reform electric systems. The mystery is why California can’t do what other states can.
*
James Flanigan can be reached at jim.flanigan@latimes.com. Recent columns can be found online at https://www.latimes.com/flanigan.
