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 week.

"...[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 "absurd."

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 world."

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 aggressive action.

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 issue.

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 there."

"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 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 increases.

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 year.

Susan Parker

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