An early assessment from western energy observers adds up to a long list of issues for California’s Gov.-elect Arnold Schwarzenegger once the election is officially certified and an official transition date is set. Some of them may test the new governor’s professed preference for market-based and environmentally sensitive solutions.

It was still unclear at the end of last week who will be the new governor’s chief energy advisers, but some observers think he had access to some top advisors in the weeks of his recall campaign against the now rejected Gov. Gray Davis. Meanwhile, Davis continues to churn out appointments and sign legislation, some of which Schwarzenegger has already vowed to try to overturn.

Late last week a 65-member bipartisan transition team was put together by California U.S. Rep. David Drier, an ally of President Bush, but there appeared to be no energy industry representatives in the names revealed on the Schwarzenegger website. Early in his candidacy, Schwarzenegger counted billionaire energy company investor Warren Buffett among his “advisors,” but he has not surfaced publicly in recent weeks with the governor-elect.

Among a long transition team list that includes a lot of current and former elected state and local officials and former Gov. Pete Wilson, the only person with any solid energy ties is Jesse Knight, current CEO of the San Diego Chamber of Commerce, who was a free-market advocate and Wilson appointee on the California Public Utilities Commission (1991-96). Knight helped shape the debate that resulted in the state’s 1996 electricity industry restructuring law (AB 1890).

The American Wind Energy Association last week indicated that Schwarzenegger supports California’s strong push for a renewable energy portfolio standard (RPS), and for moving up the current target date by which utilities should receive 20% of their power from renewable resources to 2010 from 2017, which is what is mandated in current state law. (The 2010 target is already articulated in the state’s multiple agency-backed “energy action plan,” released last spring.)

The wind backers are riding growing momentum among the renewable energy sources, and that is particularly true in California which has the nation’s largest installed wind generating capacity (1,800 MW) and with an added 400 MW under development as the state transitions from one political leader to another in the next few weeks.

Diversity of electric generation portfolios is one of about a half-dozen major issues the new governor should begin addressing, according to the Oakland, CA-based western energy director for Cambridge Energy Research Associates (CERA), David Clement. “If you’re looking at long-term supplies and higher prices for natural gas (as is the current case), it certainly makes sense to be looking for other options for generation,” said Clement, during a wide-ranging interview with NGI on Wednesday.

Clement thinks the return of potential generation shortfalls, transmission bottlenecks, wholesale market price spikes, greater western-wide energy coordination and a reordering of the state’s 13-odd energy and energy-related agencies should all be addressed by Schwarzenegger and his energy advisers.

“I think generally his campaign platform on energy is one that leans more on market-based solutions and tries to put in place the characteristics and policy to allow markets to work,” Clement said. “He has contacted a variety of people in the industry, but I don’t think as far as I know that he has any long-term relationship with anybody.”

The major utilities, however, even before the new governor enters office are a bit pushed and pulled over their future role in power-buying and generally as a market player. On the one hand, they are being pushed back out there, but, according to Clement, they are not being given the authority to fully hedge against increased downside risk.

“The utilities are in a bit of a quandary because they have the procurement responsibility, but they are also pretty constrained when it comes to managing market risk,” he said. “They’re allowed to enter into long-term contracts of up to five years for up to 50% of their net-short position. Ideally if you were buying for a utility you would try to have a mix of short- and long-term contracts, with different expiration dates, that allowed you to manage the risks.

“That is something that might be looked into by a new governor like Schwarzenegger.”

Clement doesn’t see a lot of immediate changes in Wall Street’s attitudes toward the state because of the change of governors, although he expects the governor-elect to shake up the current energy bureaucracy and to try to create more of a favorable climate in the state for investment. But this climate will not instantly appear with the departure of Davis, he said.

“It may give a short-term boost to investors’ perceptions, but eventually any governor and the state’s ultimate economic climate will be judged on that governor’s performance,” Clement said. Given how badly investors have been burned in the past in California, he thinks investors will be “fairly cautious” even with Gov. Schwarzenegger in office. “There are a lot of distressed assets out there right now.”

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