Taxpayers May Have to Pay Tab for CA Energy
Taxpayers nationwide could wind up footing the bill for billions
of dollars if California's utilities default on payments to
suppliers for the emergency power and natural gas that they've
received during the current crisis, warned Chairman Frank Murkowski
(R-AK) of the Senate Energy and Natural Resources Committee last
"...[T]his administration has basically passed onto the
taxpayers of the entire United States the contingent liability
associated with billions of dollars of power [and natural gas] that
have been ordered by this administration to give California time to
work out of this problem," he said last Wednesday during a
committee oversight hearing into the state's electricity crisis and
its potential effects on neighboring western states.
But Rep. Joe Barton (R-TX), chairman of the House Energy and
Power Subcommittee, "doesn't think it's the taxpayers'
responsibility," said a press aide. If defaults occur, Barton and
other lawmakers may consider legislation to protect taxpayers, she
noted. But "if it turns into a court situation, it would limit our
[Congress's] ability to do anything."
As the debate took place on Capitol Hill, Pacific Gas and
Electric (PG&E) last Thursday announced that it planned to make
only partial payments to power suppliers. It said it would pay on a
pro-rata basis just $161 million, or 15.4%, of the $1.048 billion
that it owed to various power generators, the California Power
Exchange and the California Independent System Operator.
The Department of Energy (DOE) at the direction of the White
House has been ordering generators since Dec. 14 to sell
electricity to the cash-strapped California utilities, with no
guarantee of payment. And it has mandated continued sales of gas to
PG&E since Jan. 19. The current orders for power and gas sales
expire on Wednesday (Feb. 7), and the Bush administration has said
it doesn't plan to extend them.
During this critical period, the administration has gone a "long
way by basically underwriting payment. If California can't pay it,
[the federal government will] be billed for two months," Murkowski
noted. This, in turn, could be passed through to taxpayers.
In addressing possible fixes for the market, Wall Street and
energy analysts, as well as power generators, urged lawmakers not
to levy price caps - whether hard or soft - on wholesale power
transactions in the West, saying this would only export
California's problems to adjacent states in the region. They also
opposed a return to cost-based rates. Instead, they believe the
focus should be on long-term contracts between utilities and
suppliers, higher retail rates, expedited siting/permitting of
power generation facilities, demand-side management activities and
upgrading the state's transmission network. In addition, they
frowned on any attempt at state ownership of the troubled
utilities. Sen. Don Nickles (R-OK) went as far as to call it
The near-bankrupt utilities, on the other hand, favored price
caps or a return to cost-based rates. Stephen Frank, president and
CEO of Southern California Edison, believes legislation introduced
by Sen. Dianne Feinstein (D-CA) advocating such measures would
provide "immediate relief" to the out-of-control market, which one
panelist said was unparalleled in the "history of the developed
The Wall Street and energy analysts also confirmed the market
turmoil is no longer just contained to California, but is rapidly
spreading to neighboring states. Tacoma Power in Washington state
has just raised its rates 50%, and Idaho may be forced to increase
its retail rates by as much as 24%, noted Murkowski.
Both Murkowski and several panelists agreed the worst is still
to come. "We are using capacity generation for next summer" to meet
current demand in California, warned Joe Bob Perkins, president and
COO for Reliant Energy Wholesale Group. He also noted that
generators are cutting into the emission credits they will need to
operate their plants during the summer.
Perkins predicted that blackouts in California this summer will
be far worse than those experienced this winter. As much as 5,000
MWs may have to be cut compared to 500 MWs this winter, and the
outages could last up to six hours per day as opposed to one or two
hours a day, he told the committee. While it's too late to bring
new power supplies on line to avoid a summer emergency, Perkins
proposed that a number of measures --- economic incentives to
entice industrial customers to participate in interruptible load
programs, conservation measures and the temporary relaxation of
environmental restrictions --- could help to free up about 10,100
MWs in the West.
Given the current hydroelectric situation in the Pacific
Northwest, "the brownouts of California now could very well be
[the] brownouts of Idaho," Washington and Oregon next summer,
predicted Sen. Larry Craig (R-ID).
Although the White House and Chairman Murkowski favor a state
rather than a federal solution to California's power market crisis,
several at the hearing believe the federal government should take
The solution in California will require a combination of
federal, state and regional policies to ease the way for
development of competitive power markets, said Peter Fox-Penner,
principal of The Brattle Group in Washington D.C.
He proposed that Congress or the Bush administration "take the
lead" in creating a "dialogue" between state governors, local
authorities, the environmental community and industry to improve
the energy infrastructure. Also, he said federal legislation is
necessary to address FERC oversight of the entire transmission
grid, PUHCA and PURPA, FERC authority to police market-power
abuses, and public-interest programs. Fox-Penner further called on
Congress to convene an independent panel to tackle the market-power
The federal government may be forced to make "some distasteful
decisions" to help keep California afloat because if its economy
nose-dives "we're all going to be pulled into it," said Sen. Ben
Nighthorse Campbell (R-CO). But, he noted, the nation shouldn't
continually aid the state if "the will to build new plants isn't
"I think they're still part of the union," remarked Sen. Conrad
Burns (R-MT), and thus deserve some help. Sen. Jeff Bingaman
(D-NM), the ranking Democrat on the committee, agreed that
California was "not an island unto itself," but that its problems
extend to the western region and the nation. "Clearly the federal
government has not done and is still not doing all that can be
done.to fix this real crisis."
Bingaman said the Bush administration's "only solution" to the
ongoing crisis in California appears to be opening the Arctic
National Wildlife Refuge (ANWR) to oil and gas drilling, but he
noted this "will not fix what's wrong" in the state's power
markets. Murkowski dismissed the accusation that the White House
was using the California power crisis to promote ANWR.
On the regulatory front, the Federal Energy Regulatory
Commission has a duty to regulate interstate transmission and
wholesale power sales, noted Sen. Barbara Boxer (D-CA). "For us
[Congress] to say they have no role doesn't even make any sense."
Steven Kline, vice president of federal governmental and
regulatory affairs for PG&E, said the federal government "needs
to do everything it can to encourage" the formation of regional
transmission organizations, develop renewable energy sources and
increase funding for low-income energy customers.
"To suggest the administration hasn't done much is a gross
inaccuracy of reality," countered Murkowski, who pointed to the
string of DOE emergency orders for power and gas sales to
California. He believes it's time for the state's retail customers
to start feeling the pain of higher rates that mirror the reality
of the wholesale power market. The state needs to recognize that
"electricity does not appear magically at the plug," the chairman
said. "It has to be produced. I think some in California's
environmental community forgot where it [power] came from."
Larry Makovich of the Cambridge Energy Research Associates
(CERA) agreed it was "unrealistic" to "isolate" retail customers
from the effects of higher power prices, as California has done.
Kit Konolige, managing director of Morgan Stanley Dean Witter,
thinks that unfreezing retail rates for utility customers would
have a positive effect on demand. When San Diego Gas and Electric
raised its prices last summer, he noted, "there was an immediate
corresponding decrease in demand" by customers.
"Sooner rather than later...the end customers have to begin
paying the freight," Konolige said. Even Sen. Feinstein, an ardent
defender of her state, admitted that retail rates must go up. She
noted that state legislation was pending that would do this. "I
think there will be at least some attempt to fix the brokenness in
the market at that end."
Sen. Byron Dorgan (D-ND) called California's attempt at
deregulation a "giant billboard for failure" because it "created a
construct that [tried] to protect the consumer" from rate
On the issue of price caps, CERA's Makovich called them a
"limited tool" for taming wholesale power prices, saying that if
they are used, it should be on a temporary basis and tied to market
reforms. Price caps should be a "last resort," noted Fox-Penner,
but he added they may be necessary next summer. He believes
long-term contracts are a much better option.
But Sen. Feinstein doesn't think long-term bilateral contracts
are the answer to the continuing crisis. "There [is] price gouging
in this market," she said, adding that FERC even said so, but did
nothing to correct it. Feinstein favors temporary price caps or
cost-based rates as a remedy.
Fred John of Sempra Energy also favored long-term contracts as
an alternative to price caps, but he said they must be the right
kind of contracts and reasonably priced. So far, "nobody in the
federal government [has been] willing to step up to the plate" to
tell suppliers that if they don't provide power at reasonable
prices, cost-based rates will be imposed on their sales, he noted.
Responding to critics of the state's plant siting and permitting
process, California Gov. Gray Davis informed Sens. Murkowski and
Bingaman last week that the state is rapidly siting over 20 new
power generation facilities, including nine that have been
permitted and five that are under construction. By the end of the
year, the state should have an additional 2,000 MWs on line, Davis
wrote in a Jan. 30 letter.
Davis estimated six new power plants should be in operation in
California prior to the end of 2002. To further help with supply,
he noted that the state is coordinating power plant maintenance
schedules through the state Independent System Operator (Cal-ISO),
and has passed legislation to prevent utilities from divesting
existing generation plants through 2004.
The state's hurdles to siting and permitting new facilities are
largely responsible for its current predicament, said CERA's
Makovich. He favors some type of time limit being imposed for
permitting and siting new plants in California. He estimated the
state should be approving 1,200 MWs of new generation capacity a