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Keeping the Power On

Other states may soon face the same energy problems as California. Margaret Warner talks with experts from the National Electric Power Supply Association, the Utility Consumers Action Network, and Cambridge Energy Research Associates about the Golden State's response to the crisis.

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  • MARGARET WARNER:

    To assess California's response to its energy crunch and the likelihood of similar problems breaking out in other states, we turn to: Lynne Church, president of the Electric Power Supply Association, a national trade group of major energy producers and marketers, companies like Enron and Duke Energy; Michael Shames, executive director of Utility Consumers Action Network, a California- based consumer group; and Larry Makovich, senior director for North American Electric Power at Cambridge Energy Research Associates, an international energy consulting firm. Welcome to you all. Lynne Church, starting with you, Governor Davis after yesterday's auction said, this is just a first step. But he said to Elizabeth he feels very optimistic that they're on the path to solving the problem. How do you see it? Do you think they're on their way?

  • LYNNE CHURCH:

    Yes. I think it's a very good first step because the problem has been that under the California system all of the power that the utilities have used have been bought essentially on the spot market, which is the most volatile market and where the prices tend to be the highest. By entering into long-term contracts for a period of years, they will stabilize the rates, the rates will come down, so I think, yes, it's a very, very good first step.

  • MARGARET WARNER:

    Michael Shames, how do you see it?

  • MICHAEL SHAMES:

    A good first, but incomplete step. Unfortunately, the governor only touched on one of the three critical elements of long-term contracts. Price is important, but we also need to deal with the duration of the contracts as well as the amount of megawatts that would be sold. We need to make sure there is enough power being sold to California and that the contracts aren't for ten or fifteen years that will literally mortgage California's future in the energy industry.

  • MARGARET WARNER:

    So Larry Makovich, do you agree, obviously this is just a first step – what is the longer-term both picture and in steps that California will take to really get a handle on this?

  • LARRY MAKOVICH:

    Well, as the Governor pointed out, California, when it set up its power market, it set it up in a very flawed way. In fact, when they set the market up, they had a slight surplus of electric generating capacity. And because the power market is so complex, it's easy to make mistakes when you set it up. And in California, instead of paying for the two things they needed to pay for; one was the utilization of power plants and the second thing was the construction of power plants, they set up a market that only paid to utilize power plants. As a result, if you look back into the years of '98 and '99, prices cleared in that market at $25 to $30 a megawatt hour – far too low to attract investment. If they'd had another mechanism like the contracts that they're involved in today, if they did that several years ago they would have been able to lock in additional supply and avert this whole crisis.

  • MARGARET WARNER:

    Is that the answer, Lynne Church, for California, ultimately building more power plants? Or is it, as the Governor kept emphasizing, also reducing demand?

  • LYNNE CHURCH:

    Well, it's really both. I mean, there is no doubt that the underlying problem here is a shortage of power in the state and it's crept up on everybody, but they haven't built a new plant in the state in almost ten years whereas demand has grown over 25%. So clearly, they need to build new power plants, but at the same time particularly in the short run, conservation is definitely going to be the key to keep the lights on, particularly with this coming summer.

  • MARGARET WARNER:

    Michael Shames, where do you come down on that point, whether inadequate supply or consumers having to get used to doing more with less?

  • MICHAEL SHAMES:

    Margaret, here's the really frustrating thing about what happened in California. There was enough supply. On paper, there are enough power plants to provide California and other western states. The difficulty is that in this very complex deregulated wholesale market, it appears as though it made more sense for many of the generators not to sell power, to withhold power rather than sell it, in order to jack up prices and make higher profits. So unfortunately, we're now stuck in a situation where there may have rampant manipulation of the market and we don't have the wherewithal right now to find out exactly what happened because those documents and transactions are being kept secret.

  • MARGARET WARNER:

    All right. Lynne Church, he's talking about your members of course.

  • LYNNE CHURCH:

    I know. I think that's absolutely false. First of all, these companies don't make any money unless they run plants. They don't have a rate base like a traditional utility. So it really doesn't any sense for them to close the plants. I think where the misperception may have come from is that most of the plants we're talking about are at least 30 years old, some are Korean War-era. They're not used to running seven days a week, 24 hours a day, for months at a time. So they break, as any old equipment will. They need to go down for maintenance. But it doesn't make any sense that these plants would be closed if they had no other reason.

  • MARGARET WARNER:

    All right. Larry Makovich, I want to broaden this to the national picture, and go to what Alan Greenspan said today. He said that what's happening in California as well as the national gas crunch we're in are not aberrations, he said, but part of a problem, a significant problem, that the country is going to have to address. Do we have a national problem in terms of our energy infrastructure?

  • LARRY MAKOVICH:

    Well, certainly I think there is a problem that we haven't had a very coherent energy policy for quite some time. We are restructuring the power business right now and there really is not a plan. We're running a fairly grand experiment here, and California was an experiment that blew up. Now people will learn from this, but there are just basic misconnections in the power sector and the gas sector. The power sector has developed far beyond the supply capability of the gas sector. And of course natural gas prices have also gone up dramatically.

  • MARGARET WARNER:

    Wait. You're losing me for a minute. You're losing me for a minute. Are you saying there is not enough supply or that somehow we don't have the infrastructure to get it to the users? What are you saying?

  • LARRY MAKOVICH:

    Well, it's both. We have relied almost entirely on natural gas-fired generators providing new supply in the United States. We have not had the drilling activity, the pipeline expansion, the storage investment in natural gas to keep up with this growth in the power sector. And as a result, all these new gas-fired power plants are coming on. They're putting a lot of pressure on the gas markets and prices are going up.

  • MARGARET WARNER:

    Michael Shames, how do you see the national picture?

  • MICHAEL SHAMES:

    Well, I see a number of other states in peril of succumbing to the same problems California has succumbed to. Montana is one — New York another. I think the states are now recognizing that deregulation is far more complex than they had envisioned and that they're going to need to go slowly and they're going to need to make sure that they have safety nets in place in the event there is a blowup like the one in California.

  • MARGARET WARNER:

    I know your expertise is California. If you look at the country, some of the states are in some process of deregulation. Why do you think some states, California having the worst problem and but others aren't?

  • MICHAEL SHAMES:

    Well, some haven't been tested, some have additional surplus of power, so they're not seeing the squeeze that California experienced. But there are other states that are finding that there are severe complications. And even Pennsylvania, the state that has held out to be the model, has a utility in it, GPU, that has had to complain that it's going broke and that it has to raise rates. So I think all states are realizing that deregulation is very complex and that just when they think they have control of it, they find out something sneaks up behind them and bites them. So I would urge caution for any state, California certainly is the furthest along than most of them.

  • MARGARET WARNER:

    So, Lynne Church, is he right? If you're a viewer sitting in New York or New England, do you have reason to worry about this summer, for instance?

  • LYNNE CHURCH:

    No, I don't think so — because California really is unique, both in terms of the supply shortage and the process, the program that they had in place. Other states are doing it differently and it's working very well. Pennsylvania is one. There, they focused on really giving consumers choice — like long distance telephone service where you have a number of companies that are trying to get a customer's business and therefore, they'll negotiate on rates and on stable contracts. It's worked very well. And, yes, one utility, which did not enter into long-term contracts for its supply has been caught in a bit of a vice, just like California utilities. But generally, Pennsylvania has worked very well. New plants are being built. Other states like Texas and Ohio are just now opening up or about to, and they're using a model like Pennsylvania.

  • MARGARET WARNER:

    What's your view on the matter I was just discussing early with Larry Makovich about whether we really have a shortage of energy, or we just have some infrastructure problems, or we're in a transition phase that's going to work itself out?

  • LYNNE CHURCH:

    I think nationally we have both. Definitely there are parts of the country– the West, New England, Florida– that are getting closer to getting to that edge of where they're going to not have enough power supply. It's been said most of the new plants are burning natural gas. Our natural gas infrastructure in terms of pipeline and drilling is out of date. We need more. And secondly, we need more transmission lines. It's very hard to build a transmission line in this country, or a new power plant.

  • MARGARET WARNER:

    So, Larry Makovich, what you would say are the areas of the country… the states that have the most to worry about?

  • LARRY MAKOVICH:

    Well, I think it is pretty clear some places have done it well. Texas, for example, and New England, when they set their markets up, they made it very different from California and they have attracted more investment so they actually have a surplus building of generating capacity. Where we're worried from our research at Sierra is in places like Downstate New York and New York City and Long Island. Our predictions are that if we have a normal summer, normal summer weather and the economy holds up, we think New York Downstate will be in a supply crisis this summer.

  • MARGARET WARNER:

    Anywhere else?

  • LARRY MAKOVICH:

    Well, New York is the real pinch point. We think that California has a fundamental supply and demand in balance. This is not the time of year when the power system is normally stressed, and so we think as we go into next summer, California is going to be very tight and in shortage again.

  • MARGARET WARNER:

    Finally, to all of you, I'll start with Michael Shames. This is the issue Elizabeth ended with Governor Davis. Is there a role for the federal government here, or is the Bush administration right that states essentially have to solve this on their own?

  • LARRY MAKOVICH:

    From the perspective in California, the federal government really failed the state because we had counted on the federal government to handle its part of the bargain which was the wholesale market to make sure it was functioning properly. When it dysfunctioned as badly as it did, we all really had thought that the federal government would step in and say, "hold on. Time out, let's fix this market before we continue with this deregulation experiment." We were disappointed. One other point I think it is important to impress upon, the federal government, and that is renewable resources that are not reliant upon natural gas, are going to be critical. As all of your commentators have mentioned, we have a defective or inadequate infrastructure for natural gas delivery, and we need to look at other sources other than just fossil fuels so that we can build a deregulated energy market throughout the country that is not relying on just that one fuel.

  • MARGARET WARNER:

    Lynne Church, what would you say to the Bush administration?

  • LYNNE CHURCH:

    I think that the federal government has done all it can. Most of the real problems at this point that still need to be resolved are at the state end, as the Governor said, and they're moving forward, which is very, very good. But I think the federal government plays, at this point, just an advisory and a facilitating role.

  • MARGARET WARNER:

    Larry Makovich, where do you come in on the debate?

  • LARRY MAKOVICH:

    Well, I think the federal government does provide a critical thing here, which is when they approve the plans of the various states are putting into place to restructure their power markets, in the past, they have encouraged stakeholder governing boards to come up with the market rules. They have recently reversed that position and recommended that California get rid of this large committee structure and instead rely on experts to set these power markets up properly. And I think that if the federal government can encourage experts, government structures to set these markets up properly, we can get the complex job of setting up workable power markets to deliver on the promise of deregulation.

  • MARGARET WARNER:

    All right. Well, Miss Church, gentlemen, thank you all three.

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