This Is How to Drag Supply and Demand Back Into Balance

The surge in California’s power prices is the result of a number of factors, the combination and impact of which were not foreseen by anyone. Among these factors are a drop in imports from the Northwest United States, where a drought has cut production in hydroelectric dams; high prices for natural gas, the fuel used in many power plants; a dramatic increase in demand; unusually hot regional weather patterns; and a shortage of power plants in California.

So what will bring supply and demand back into balance at fair prices?

First, recognize that the core of today’s problem is that there just isn’t enough power in the Western United States to meet today’s demands at reasonable prices. Any “fix” that does not address this basic problem will fail. Taking California’s utilities into bankruptcy, public takeover of utilities and/or transmission facilities and re-regulation of generation all have been floated as possible solutions. None does anything to address the fundamental shortage of power.

Second, get consumers to reduce daily consumption by at least 10% until additional new generation capacity is built and on-line. A rate structure that provides substantial economic penalties for power use exceeding 90% of consumption in the previous 12 months would have everyone turning off unneeded lights, TVs and computers. This simple measure would take tremendous pressure off the demand for power and bring an almost immediate reduction in the prices utilities must now pay to generators. The Legislature can and should pass legislation directing the California Public Utilities Commission to design and implement such rates no later than 30 days from the date of enactment.

Conservation is a tough message for politicians to deliver, but Californians have demonstrated a willingness to conserve precious resources when called upon to do so. Electricity is now a precious resource. There’s no reason to think that Californians would not heed the call again.

Third, give the utilities the ability to buy power under long-term contracts and the incentive to do so by ensuring that they will not face after-the-fact penalties for “imprudence” when rates come down in the future.

Fourth, consumers must begin to see real-time pricing; i.e, the utilities should use the actual cost of each kilowatt in setting prices. A reasonable rate stabilization plan--based on price predictability and stability--must be implemented for the customers of Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. The plan should be created to protect those consumers who are not able to accommodate the smooth transition to real-time pricing, such as those on fixed incomes or those who have sensitive medical needs for energy use.

Ultimately, Californians should pay the full price of the electricity that they use. However, today’s broken market requires a transition plan to effectively move consumers to an efficient, effective open market for electricity.

Last, but most important, build enough generation and transmission capacity as soon as possible. This is the toughest task. It requires legislative leadership and gubernatorial courage.

Some California politicians and regulators believe that over the next few years enough new generation capacity will be built to eliminate California’s power shortages, regardless of what the state does about the current crisis. Nothing could be further from the truth.

No new major power plants have been brought on-line in the past decade, a period when power demand has grown at unprecedented rates. Much existing infrastructure is old, inefficient and frequently shut down for repairs. New generating capacity is extremely expensive and, in today’s political climate, very risky. If California fails to take dramatic measures to add new capacity as fast as possible, today’s crisis will continue and deepen. Electric bills will become even more outrageous. Industry will shut down or move to other states. Our economy will plunge into recession.

For our part, SDG&E; has under-collected more than $400 million to date, and that total is growing every day. Southern California Edison and PG&E; have reported a combined, mounting debt of nearly $12 billion, pushing them to the brink of bankruptcy. For the sake of California’s fragile economy, state regulators and legislators must act quickly to find an equitable financial solution--such as securitization of existing utility liabilities (bonds)--that preserves the solvency of the companies so that they can keep the lights on.

The time has come to tackle the electricity crisis head on. The Legislature’s highest priority should be legislation giving the governor authority to declare an “energy emergency” for as long as is required to reestablish a balance between long-term electricity supply and demand. Gov. Gray Davis should be granted emergency powers to accelerate the state’s extensive regulatory review processes, shorten review periods and establish tight deadlines for approval of power plant and transmission-siting proposals. This temporary authority should empower the governor to waive existing requirements for stationary emission credits upon a finding that no credits are available in time to construct needed power plants. The temporary authority would also allow the governor to approve short-term generation expedients, notwithstanding existing regulations, when he finds these projects are necessary to keep the lights on.

Gov. Davis did not create this problem, but he has the power to put the train back on the tracks. Emergency authority gives him the tools to ensure success. Federal regulators need to do their part, too, by capping wholesale prices in the interim period until new supplies can be developed. But they have been unwilling to do so. In the absence of their action, Davis’ leadership is critical.

As we sift through the conflicting claims and counterclaims about what to do next, the most important thing is to focus on the following:

What will reduce demand for power? What will increase power supplies?

Unless the basic laws of supply and demand are repealed, those two questions must be answered. Everything else is just a sideshow.