Power Crisis in California
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JIM LEHRER: California’s energy crisis has gone national. On Tuesday, the new Bush administration guaranteed electricity and natural gas would continue to be available to California, but only for two weeks. Today, Federal Reserve Chairman Greenspan expressed his own concerns.
ALAN GREENSPAN: The problems that we’re now seeing in the energy area, specifically– obviously, natural gas– around the country, and very obviously, California’s electric power production, are not aberrations, but in my judgment, a significant problem that this country is going to have to address, and I think address rather quickly, and I think coherently and cogently. Obviously, if the energy structure of this country is inadequate, or in some way excessively costly, it will undermine economic growth in this country, and therefore, is a major issue which must be addressed.
JIM LEHRER: Spencer Michels reminds us how this all began.
SPENCER MICHELS: For almost a century, California’s utility companies owned the plants that generate power, plus the lines for long distance transmission and the distribution system to get it into homes. The theory was that it didn’t make sense to have more than one company run gas or electric lines down a street. So the utilities were allowed to be monopolies with no competition. In return, their rates were regulated by the state.
But for years, consumer groups and large industrial power users complained the rates were too high; the utilities were making too much money. They figured competition would lower the rates. And in 1996, the legislature and Governor Pete Wilson joined forces with privately owned utilities and large power consumers to begin to deregulate the market. Under the plan, the utilities sold off most of their power plants, mostly to out-of-state companies. And transmission of power was handed over to a semi-private corporation, the California Independent Service Operator — ISO.
Surprisingly, for nearly everyone, competition failed to develop. Only a few new power plants were built, as investors shied away from the uncertain regulatory and environmental climate in California. Meanwhile, demand for power kept rising, as the state and the economy grew. Still, practically no one saw a shortage coming.
In the new order, under deregulation, the California utilities had to buy power from the same plants they once owned, and from out-of-state plants. That new wholesale market was unregulated; the people who now owned the plants charged what they could get. But at the same time, the deregulation law would not let the utilities pass the costs along to their customers. The utilities, unable to raise rates enough, found themselves on the verge of bankruptcy. And some power producers wouldn’t sell to them, creating a shortage.
Now, the legislature, under pressure from Governor Gray Davis, is trying to unscramble the mess. Proposals being considered would have the state buy and operate hydroelectric plants that now belong to the utilities, while minimizing rate increases for customers; get even more involved in producing power, buying other plants, or operating a state power agency; use state money to buy electricity and sell it to the utilities.
The state has already spent more than $100 million to buy power. And the lawmakers may vote to issue state bonds to help the utilities pay off their debt with customers paying those bonds off through special charges. Whatever solutions emerge will probably be local. President Bush has made clear that Californians should not count on the federal government to get them out of the crisis.
ELIZABETH FARNSWORTH: As reported in the news summary, there was apparently some progress yesterday in the state of California’s efforts to solve its energy crisis. Governor Gray Davis said last night that a state-run auction designed to get lower-cost electricity by signing long-term contracts with power generators was successful. For more on that and other matters, the governor joins us now. Thanks for being with us.
GOV. GRAY DAVIS: You’re welcome, Elizabeth.
ELIZABETH FARNSWORTH: Bring us up to date please, Governor, first on yesterday’s auction. Is your administration negotiating now with long-term suppliers of power that might — in a way that might ease the crisis?
GOV. GRAY DAVIS: Yes, we are, Elizabeth. I have called in David Freeman who runs the Department of Water and Power in Los Angeles, used to run the Tennessee Valley Authority, and also Mike Peevey, a long-time electricity executive, to try and improve upon and consummate some of the better bids we got yesterday. Some of the generators said this wouldn’t work and the bids would be in the 9 to 10 cent range. I had hoped for 5 ½ cents. The average bid came at 6.9 cents. We think the discussions that Mr. Freeman and Mr. Peevey will conduct will improve upon those prices even further. So we’re very optimistic.
ELIZABETH FARNSWORTH: How long before they could come on line?
GOV. GRAY DAVIS: Well, as soon as we get the legislation, which I think will be any day now, we can look forward to signing contracts in the next week to ten days. Our goal is to take the roughly 30 percent of the power that is bought in a spot market for roughly 45 and 55 cent a day and reduce that to prices in the 5, to 5 1/2 and maybe 6 cent range. I think we’re well on our way to doing that.
ELIZABETH FARNSWORTH: Governor, we’ve had no rolling blackouts so far today, but, as you know, we’re in the stage three alert; it could happen any time. Just for the record, do you expect that to be the case for the near future?
GOV. GRAY DAVIS: I hope not. We’re working our tails off to prevent it from happening.
ELIZABETH FARNSWORTH: And what else are you doing? The wire just moved that said you’ve been in meetings – or at least lawmakers have been considering the plans of issuing bonds to cover the utilities’ multi billion dollar debt. Tell us about that.
GOV. GRAY DAVIS: Well, there’s really three parts to the problem: stabilizing rates and ensuring we have reliable sources of electricity. I put that under what we call stabilization, and conservation, and increasing supplies. Under stabilization, we have to return the utilities to be viable financial institutions. They know better than anyone else how to keep the lights on. But we have to do it in a way that consumers get something of value. They have to be able to recognize some appreciation, some benefit if the utility stocks go up once we find a way to revitalize them. So that’s the sort of thing that we’re working on; we’re very close to a public announcement on the subject, and hopefully it will be well received by consumers, utility executives, and Wall Street.
ELIZABETH FARNSWORTH: Is the state about to become the energy provider of last resort?
GOV. GRAY DAVIS: I wouldn’t put it that way. But clearly we have a role we had to play, because this deregulation scheme was inherently flawed. Five years ago they said we’re going to deregulate the wholesale markets, meaning the generators can charge us anything they want, and believe me, they did, and not deregulate the retail part of the market. That caused the utilities to find themselves in a terrible situation. And now they’re in a very bad financial situation. So we have to stabilize them, reinvigorate them, so they can get back in the business. For a considerable period of time the creditworthy purchaser will be the state of about 30 percent of the power and hopefully at a far lower rate than we will obtain on the spot market.
ELIZABETH FARNSWORTH: And, Governor, you know that critics of this plan have said the state is getting in way over its head; that this is so complex, the energy market, that the state shouldn’t be involved.
GOV. GRAY DAVIS: Well, there are other states that have a public presence. New York has had a public power authority since Franklin Delano Roosevelt was governor – the Tennessee Valley Authority. There are some states that do have a public power presence. Obviously, we want to mix, we have to step in because utilities are not creditworthy now. And I would envision we’ll be in the market for some period of time until we can improve supply and supply can start to match our demand. California and most of the West, Elizabeth, are importers of power, and deregulation doesn’t work very well in a situation like that because then whoever holds the power has tremendous leverage. So we need conservation to reduce demand and we need more plants built before deregulation has a chance to work.
ELIZABETH FARNSWORTH: One more thing; I want to get into the question of the leverage that they have, but one more question on what you can do. In your State of the State address earlier this month you said that if you had to, that you would take advantage of your ability to declare eminent domain. What did you mean by that and do you think you can avoid that?
GOV. GRAY DAVIS: I don’t want to have to take that step but if I have to to protect the businesses and consumers in California, I will do so. As you know, under deregulation, about 4,000 to 5,000 megawatts of power a day flows outs of California serving other markets in search of higher prices. I realize that’s part of the game, but that puts the citizens and businesses of this state in a very difficult situation. So right now I think everyone is on the same page — the generators, the utilities, the consumers, Republicans and Democrats are all working in a bipartisan fashion to solve our problems here in California. I’m grateful for President Bush. He basically gave us two more weeks of electricity and natural gas to get our house in order. And I think we’ll be able to do it within that time frame.
ELIZABETH FARNSWORTH: On that, on the two weeks, it’s up February 7; what else should the federal government do? What is the federal government’s responsibility in this, in your view?
GOV. GRAY DAVIS: This problem is primarily of California’s making, and we will solve the mistakes we made in 1995. Our neighbors to the west understand there is an inner relationship, our neighbors in the West understand that we’re all interdependent. I’m very grateful to Oregon and Washington. They have helped us out in our time of need. By the same token, we were able to get aviation fuel to the governors of Nevada and Arizona when they recently asked, so we’re trying to work together as a region. America has a stake in this because California, happily, at the moment, is the most prosperous state in the nation and is contributing enormously to whatever growth America is experiencing; it would be experiencing negative growth if it wasn’t for the input from California. So America has a stake in our solving this problem in an equitable and responsible way, and that’s what we are determined to do.
ELIZABETH FARNSWORTH: And if America has a stake, what should the Bush administration do? In your State of the State address you said, for example, that the Federal Energy Regulatory Commission had, “shirked its responsibilities to protect rate payers here in California from legalized robbery.”
GOV. GRAY DAVIS: Well, I -
ELIZABETH FARNSWORTH: So should there be a cap on wholesale prices that the federal government makes — puts on them?
GOV. GRAY DAVIS: I do believe the Federal Energy Regulatory Commission should do its job. The word “regulate” is in that title for a reason. They have refused to do anything to put downward pressure on wholesale prices. Some of these companies are acting totally within the law but they’re making 700 or 800 percent profit. I realize that is legal, but they have a stake to keeping the system alive.
To me deregulation is a means to the goal. The goal is a strong growing economy to give everyone a opportunity to reach their highest potential. When deregulation, albeit poorly constructed in this state, fails, we have to have the wisdom to say it’s not working and we’re going to try something different until we get enough supply on line that supply and demand come into balance, and that is what we’re trying to do here. So America under President Bush’s leadership can be helpful in hastening the speed with which we site new power plants, in working in ways we can expand our transmission capability both in the state and within the state. There are a lot of ways in which we can work with President Bush and Secretary Abraham, and I look forward to doing it.
ELIZABETH FARNSWORTH: So you’re not asking for the Federal Regulatory Commission to somehow get those wholesale prices down?
GOV. GRAY DAVIS: Yes, I am. Yes, I am. I am asking that they do something to temper wholesale prices. Now, President Bush has said he doesn’t believe in price caps; I would be happy to accept an alternative suggested by Republican Governor Levitt in a State of the State speech about a week ago calling for cost-plus pricing. I mean, whatever the cost to generate it there, they’re entitled to an additional increment that is 20, 30, 40 50 percent — and that would be a price for a temporary period of time. I think that would help all of the West. So there is a role that the Federal Regulatory Commission can play in that regard. I may add one other point -
ELIZABETH FARNSWORTH: Go ahead.
GOV. GRAY DAVIS: The Federal Regulatory Commission has twice concluded that rates are not reasonable and just in this state and that has always led to a refund of money from the power generators to the citizens of this state. And even though they have made that conclusion twice, they have done nothing to issue refunds. So I stand by my criticism of them of not regulating and not doing anything to temper wholesale prices. But I am grateful to President Bush and Secretary Abraham and I do believe the FERC in the future can be helpful by imposing, if not price caps, at least cost plus pricing, which allows generators to make a profit, but still reduces the wholesale price.
ELIZABETH FARNSWORTH: And Governor Davis, in the long run, even if some of these measures are taken, which you laid out, will prices for California consumers of electricity have to go up?
GOV. GRAY DAVIS: We’re working very hard to stabilize prices so that what people are paying today is what they’ll be paying for some period of time. And the theory is that in the short-term what they pay will be slightly less than the cost of electricity and the long term slightly more. On a bipartisan basis Republicans and Democrats in the legislature believe that consumers are willing to accept that bargain if they have stability in their lives.
ELIZABETH FARNSWORTH: And, Governor Davis, finally, you said in your State of the State address — you used somewhat stronger language — you said that the California deregulation scheme was a colossal and dangerous failure. Given that and given the fact that people listening to this, many of them are not in California and some are in states where various kinds of deregulation are being debated, what do you have to say to them? What should people out in the country learn from the California experience with all of this so far?
GOV. GRAY DAVIS: I have one message to states who are importers of power: If you have less power in your state than you need, I don’t think deregulation is going to work for you. It gives too much leverage to the people who hold power. I mean, we have a lot of people on fixed income, people that need respirators — people that can’t afford literally to have the electricity to go out. You don’t want the power to turn those lights off in the hands of someone over whom we have no control. Now, if you have a surplus of power, as I understand they have in some Northeastern states, well then deregulation could well work.
ELIZABETH FARNSWORTH: Governor Davis, thanks for being with us.
GOV. GRAY DAVIS: Thank you.