Reliant's Stout Sees 2-3 Year Life to CA Problems

It will take two to three years before the energy situation in California is straightened out, and in the meantime, it is likely to get worse before it gets better, Reliant Energy Vice President John Stout said Friday.

And California isn't alone. There are problems in the Northeast this summer "that could, if we have the wrong weather conditions, result in almost the same sort of meltdown" that California has experienced. Politicians and regulators have created the problems, promising consumers low prices, and writing those low prices into regulatory formulas. The formulas, based on abundant hydroelectric power and cheap natural gas, no longer hold. In the PJM market a default rate, set to protect customers from predatory market rates, has become the lowest rate and is driving third party marketers out of business.

How fast the California market gets straightened out depends on the politicians, Stout, who has been in the thick of the California crisis since the beginning, told a GasMart/Power 2001 audience. Unfortunately, those politicians have painted themselves into a corner by claiming the problem lies with price-gouging power companies. "As soon as a politician starts saying 'it's not the market that's broke, it's the guys in the market that are causing the problem,' they spring a trap that's very, very difficult to get out of.

"Once they realize they actually do have a supply problem or a problem in market design, it's real hard to go back and say 'we're going to fix that and let these other guys off the hook' after they've been spending all this rhetoric blaming the generators or blaming FERC for the problem. That's why we won't see the politicians in California back off."

Taking the finger-pointing route delays a solution. What was a power crisis becomes a financial crisis, and then ultimately a political crisis. "The crisis has gotten so bad that the politicians quite literally are caged animals," Stout said. Even sending power producers to jail, as some California legislators have proposed, will not get them a single MW more of supply, or do anything to ease the situation. Even if the state seized the power plants, they would still have to pay for the fuel, and they wouldn't be able to produce power any cheaper.

Stout predicts that a number of political careers will be ruined by the time this is over. He also told NGI the federal government might be forced to step in, if there are continuous and prolonged blackouts this summer. He advised that the Federal Emergency Management Agency is in the process of setting up an office in California. If blackouts become prolonged, some of the worst consequences could stem from the fact that such crucial items as traffic lights and ATM machines would be out of service for long periods. Those losses would materially affect daily life. Since California is on the coast, breezes off the ocean temper the heat, so loss of air conditioning is not as bad as it would be, for instance in Houston, or in the skyscrapers of Chicago or New York.

As long as there is political and regulatory uncertainty, the investment necessary to solve the power supply problem will not be forthcoming. "When people like Reliant go to lenders and say 'I'd like to borrow a billion dollars to invest in California,' we have to wait a few seconds for the laughter to stop."

Besides additional supply, "demand is going to have to truly respond," but "ultimately, the market will succeed."

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