Debate Over State’s Energy Supplies Heating Up Again

Temperatures soar to record highs. Power grid operators declare emergencies. And politicians argue over energy policy.

It must be springtime in California.

The two-part question on the table is basically the same as it’s been since the energy crisis of 2000-01:

Should the state return to the days when heavily regulated utilities generated and sold power at government-controlled rates? Or have the painful lessons learned since 2000 given California an opportunity to take another stab at energy deregulation -- this time without the rolling blackouts and skyrocketing electric bills?

At this point, the smart money is on Gov. Arnold Schwarzenegger, who has spent his first six months in office checking off campaign promises to slash car taxes, refinance a ballooning budget deficit and overhaul the state’s workers’ compensation system.

That winning streak bodes well for Schwarzenegger’s still-sketchy plan to give California what might be termed “deregulation light” -- a combination of free-market strategies and limited regulation that the governor says will provide the state with cheap and reliable power while making California “the job creation machine it once was.”

“Now, at least, there’s a willingness” to fix the system, said Philip Huyck, a Connecticut-based energy financing consultant. “The question is whether or not he gets it right.”

It won’t be easy. The governor’s plan hinges on creating more free-market competition in buying and selling electricity in California -- a prospect dreaded by consumer groups and gun-shy politicians. They complain that the governor’s program sounds suspiciously like the now-suspended 1996 utility deregulation scheme that contributed to the recall of Democratic Gov. Gray Davis, put PG&E; Corp.’s Pacific Gas & Electric Co. into bankruptcy proceedings and stuck California with the third-highest electricity costs of any state.

“We had 40% rate increases, rolling blackouts, billions of dollars in customer bailouts of two utilities and spent tens of billions of dollars on [electricity] contracts to get us through the crisis,” said Bob Finkelstein, executive director of the Utility Reform Network in San Francisco. “There’s nothing in our previous experience in deregulating the market that makes it attractive for consumers.”

Business remains excited about some aspects of deregulation, especially proposals to allow large power customers -- such as large manufacturers and big-box retail stores -- to bypass utilities and buy power directly from independent electricity generators.

“We’re still pushing for what we were pushing for back then,” namely increased competition and lower energy prices, said Dorothy Rothrock, a vice president of the California Manufacturers and Technology Assn. in Sacramento.

Business leaders are worried by forecasts that the state could suffer outages this summer -- and face the prospect of another full-blown power crisis as soon as 2006.

There’s already been one supply-related blackout this year, and the operator of the state’s power transmission grid declared an emergency Tuesday when temperatures soared across the state. The spike in consumption prompted the chairman of the Federal Energy Regulatory Commission to worry out loud that a combination of high temperatures and low water-power supplies could cause havoc in the West Coast electricity network this summer.

This spring’s debate over California’s energy future began in earnest last month when Schwarzenegger jumped into the fray.

The governor is pursuing a two-front strategy.

To promote free-market competition in buying and selling electricity, he has asked the Public Utilities Commission to quickly issue rules to revive the state’s wholesale electricity market by allowing utilities to sign long-term, competitively bid contracts. That, the thinking goes, should protect ratepayers from price spikes and give Wall Street investors the confidence to lend billions of dollars for power plant construction.

In addition, Schwarzenegger has telegraphed to lawmakers that he supports efforts to let large consumers buy power on the free market.

Dealing with the Legislature may prove to be the bigger challenge. In the Assembly, a phalanx of lobbyists from Edison International utility Southern California Edison Co. is pushing a bill that Assembly Speaker Fabian Nunez (D-Los Angeles) says would bring “certainty into the market, not just for the big industrial customers but for the small and residential customers.”

The bill could become a vehicle for a comprehensive deal like the one the governor recently brokered on workers’ compensation insurance. But it’s opposed by both consumer advocates and most large business groups.

The measure, which passed its first committee hearing April 20 with bipartisan backing, would allow SCE and the state’s two other investor-owned utilities -- PG&E; and Sempra Energy utility San Diego Gas & Electric Co. -- to build their own power plants and recover construction and financing costs, plus a profit, through rates approved by the PUC. That would reverse a key element of the 1996 deregulation law, which required the utilities to sell off most of their nonnuclear and non-water generating facilities.

For SCE, the bill’s key provision would give utilities some assurance that the PUC, after approving construction of a power plant, wouldn’t fiddle with the electric rates that investors were counting on to finance the project.

“Once we get approval ... to build a facility, we don’t want a subsequent commission to change its mind” and undermine financing for an $800-million power plant, SCE President Bob Foster said.

Nunez’s bill, now before the Assembly Appropriations Committee, also requires utilities to develop energy strategies that include renewable sources such as wind and solar power, and to buy power from independent generating companies.

For consumer groups, the bill’s most controversial element is its limited nod to businesses’ demand for the right to shop around for electricity. The Nunez-SCE proposal would let a small number of big energy consumers (those with peak usage of more than 500 kilowatts -- enough to power about 400 homes) to buy their power from independent producers rather than the regulated utilities.

“We feel that large users of power should be able to cut their own deals and take on that market risk,” said A. Brad Wilkins, vice president of Tamco Steel, a Rancho Cucamonga mini-mill that spends $30 million a year on electricity, more than it budgets for salaries, taxes and benefits for all 320 employees.

But letting “the biggest corporations in the state cherry-pick the cheapest power ... forces small ratepayers and small businesses to pay for the most expensive power,” said Jamie Court of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Many businesses, such as the members of the Silicon Valley Manufacturing Group and independent power generators like San Jose-based Calpine Corp., say the Nunez bill doesn’t go far enough toward opening up the energy market to competition. They favor a competing proposal, AB 428, now stalled in the Senate.

The bill would make it easier for more companies to buy non-utility electricity but would prevent large users from “gaming” the market by jumping in and out of the power grid.

Schwarzenegger hasn’t endorsed either bill and insists that much of the revamping of the state’s power system can be done through the PUC, not the Legislature.

The governor’s mediating skills should help him find “a balance among the different constituencies,” said Huyck, the energy consultant.

He predicted that a Schwarzenegger-brokered deal could give some generation to utilities and some to the independents, bolster conservation and renewable energy production, and provide limited access to the free market for large consumers. Such a combination would probably be a product of both legislative action and PUC regulation.

In the end, the governor’s penchant for action and his sense of urgency should result in “contracts being signed and [power plants] getting built,” said V. John White, a veteran lobbyist with the Center for Energy Efficiency and Renewable Technologies.

“He has the ability to command attention and set agendas,” White said. “There’s always the threat that he’ll shake things up.”