Schwarzenegger Plan Blends Energy Ideas

Gov.-elect Arnold Schwarzenegger, who saw his predecessor undone by California’s electricity debacle, is engaged in his own high-wire act, offering an energy plan designed for both ends of the political spectrum.

Schwarzenegger’s preliminary proposal takes a Republican-style reliance on free markets, which became decidedly unpopular in the energy crisis of 2000-2001, and mixes in such traditionally liberal favorites as aggressive conservation and increased use of green energy.

Within two years, for example, he wants half of all new homes built in California to be equipped with solar cells.

This blend of ideas is perhaps not surprising for a centrist Republican accustomed to peacefully coexisting with the fiercely Democratic Kennedy clan. Still, as campaign rhetoric morphs into governance plans, energy experts warn that the Schwarzenegger vision may be a tough sell to a Legislature dominated by Democrats and independent commissions packed with appointees of Gov. Gray Davis.

“Parts of this plan are very encouraging, but some of this stuff is so bold that I’m skeptical he will be able to do it all,” said Severin Borenstein, director of the University of California Energy Institute in Berkeley.

But Richard Bilas, a former member of the California Public Utilities Commission during the state’s shift to competitive markets, said the Schwarzenegger election was evidence that the political climate was shifting.

“This is a plan in my view that makes a little bit of sense to everybody, which is something that might appeal politically,” Bilas said.

Schwarzenegger got significant campaign mileage out of California’s energy woes, complaining about the state’s high electricity rates and predicting that shortages could return in a few years because energy companies have stopped building power plants in California. Schwarzenegger blamed the construction slowdown on uncertainty about the direction of the state’s energy policies.

Although wholesale prices have plunged since the crisis and retail electricity rates are beginning to decline, few would dispute that an energy hangover lingers. The state, which backed away from deregulation during the meltdown, is stuck in a strange limbo between a traditional system of regulated monopoly utilities and wide-open competition to generate electricity and sell it to customers.

“We have this hybrid situation occurring in California and it poses some challenges in moving in either direction,” said David Clement, Western energy operations director for Cambridge Energy Research Associates.

*

Wholesale Revival

To address the state’s energy problems, Schwarzenegger wants to revive a wholesale power market for the state to replace the primary electricity market, called the California Power Exchange, which went out of business during the energy crisis. Schwarzenegger’s multi-faceted policy was intended to bring power companies back to California to build plants and invest in the electricity transmission grid, according to campaign literature and advisors to the incoming governor.

California’s utility system “is in a holding pattern right now and nobody knows what direction we’re going in,” said Joe Rodota, Schwarzenegger’s policy director.

“I would describe this as an aggressive and creative plan to stimulate private investment and a shift toward providing certainty in the market,” Rodota said. “He is very adamant that he wants to develop a structure that would provide some competition and would encourage private investment, but would be resistant to gaming.”

The new governor’s proposals include:

* Allowing businesses to buy electricity from sellers other than the traditional utility, an option granted during deregulation that was later abandoned. Many businesses would pay rates that reflect real-time market prices, which would allow them to cut energy costs when prices were low and would encourage conservation when prices were high.

* Requiring utilities to lock in reserve power through contracts and pass those costs along to customers, such as residential users, who are willing to pay higher prices in exchange for reliability. This is similar to the way natural gas markets work: “Core” customers are assured utility service while “non-core” customers must contract for their energy.

* Allowing users to pay less if they agreed that their power could be interrupted when supplies were tight, as measured by prices. Unlike existing utility programs, power curtailments would be mandatory and would be done remotely by the utility.

* Setting an aggressive target for diversifying the state’s electricity supplies away from power plants fueled by natural gas and toward power generated by such renewable sources as the sun, wind and water. Schwarzenegger wants 33% of the state’s total power to be generated by renewable sources by 2020 -- a more ambitious target than that set by Davis and the state Legislature.

* Exploring ways to lower the cost of long-term electricity contracts signed by the Davis administration during the worst of the crisis.

* Eliminating energy bureaucracy.

The Schwarzenegger proposals, while still early in their formulation, have generated enthusiasm from some in the industry.

“It’s a pretty forward-looking energy policy to encourage additional private-sector investment in our electricity infrastructure,” said Jan Smutny-Jones, executive director of the Independent Energy Producers Assn., a Sacramento trade group of generators.

Doug Kline, spokesman for San Diego-based Sempra Energy, which owns Southern California Gas and San Diego Gas & Electric, said company executives “agree that California’s wholesale electricity market needs to be repaired so it is workable again, mirroring other successful electricity markets in the country.”

The company also was heartened by Schwarzenegger’s view that investment in liquefied natural gas projects, like one Sempra proposed in Baja California, should be encouraged, he said.

*

Opposition Pockets

But staunch opposition already has surfaced among those who have struggled to clear the debris from a deregulation plan championed by Republican Gov. Pete Wilson’s administration as a way to lower energy costs through increased competition.

“Some of the things, I agree with,” said Loretta Lynch, a member of the California Public Utilities Commission, who was president of the agency during the energy crisis.

“But some of it sounds just straight out of the Wilson playbook and that has me concerned,” Lynch said. “I would refer Gov.-elect Schwarzenegger to San Diego in the summer of 2000 and how many businesses went under or had to severely cut back because they were hit with 300% price increases.”

Lynch said she was disturbed that the plan does not express support for the state’s quest to get the Federal Energy Regulatory Commission to order as much as $9 billion in refunds from power sellers for alleged electricity overcharges. There was also little discussion of how the market would be policed to prevent future manipulation, she said.

The Schwarzenegger administration won’t have to worry about some of its proposals because they already are being implemented. For example, the recommendation to combine markets operated by the California Independent System Operator and the now-defunct California Power Exchange has been proposed by Cal-ISO to federal regulators, who have not made a decision.

*

Legislative Hurdles

Still, some parts of the agenda could face a difficult time in the Legislature and in the PUC, whose five members were appointed by Davis. Their terms don’t begin to expire until early 2005.

“I want to send them a whole bunch of Tylenol because they’re going to have major headaches especially when dealing with energy issues,” said Michael Shames, executive director of the San Diego-based Utility Consumers’ Action Network.

Schwarzenegger advisor Rodota said the new administration hopes its energy proposals will be given a fresh look.

“We’re going to present a very thoughtful, balanced strategy,” Rodota said. “I think it’s not a question of going back to anything, it’s moving forward and learning from the mistakes of the past and benefiting from the successes of other places.”