Electric Supply Adequacy: How Will California's Needs Be Met?

Informational Hearing

State Capitol, Room 112
January 28, 2003
1:30 p.m.

I. Opening Comments

• Senator Debra Bowen, Chairwoman
  Senate Energy, Utilities & Communications Committee

II. Witnesses

• Steve Larson, Executive Director
  California Energy Commission
   
• Barbara Hale, Director of Strategic Planning (PPT)
  California Public Utilities Commission (PDF)
   
• S. David Freeman, Chairman
  California Consumer Power and Conservation Financing Authority

Electric Supply Adequacy & California’s Market Structure

January 28, 2003

Background

History

California restructured its electric market in 1996, changing the way power was delivered to homes and businesses across the state. "Traditional service," where the utility was the sole provider of electricity and was vertically integrated as the owner of powerplants, transmission lines, and distribution facilities, was replaced by a system where customers could choose their electricity supplier and utilities were encouraged to sell their powerplants.

By all accounts, California’s experiment with electric industry restructuring has been a failure. Not only did promised rate reductions not emerge, but power rates actually went up significantly. For example, Pacific Gas & Electric’s residential, commercial, and industrial customers pay electric rates which are 52%, 87%, and 70% higher, respectively, than similar customers pay in Arizona. This rate disparity can also be seen in comparisons with the rates paid in Nevada, Oregon, and in the territories of California’s major municipal utilities. Rate increases stemming from the restructured electric market are costing California ratepayers over $3 billion a year in higher electric bills. While future reductions are possible, California electricity customers will be paying for the cost of the energy bonds and the long-term contracts negotiated by the Department of Water Resources (DWR) for at least the next ten years.

The wholesale market for electricity is controlled by the Federal Energy Regulatory Commission (FERC). As the state’s utilities sold off their powerplants, they and their customers were subject to the FERC-regulated wholesale market for electricity. FERC has proven to be a reluctant regulator, one that’s been far less inclined to step in to protect ratepayers than the California Public Utilities Commission (CPUC) when markets prove themselves to be dysfunctional, as was the case in 2000 and 2001. Though empowered to provide California relief from the onerous and expensive long-term contracts entered into by DWR at the height of the electricity crisis, the FERC has shown little inclination to do so. California believes ratepayers were overcharged by $8.9 billion during 2000-01, but in December 2002, a FERC administrative law judge ruled that ratepayers were only entitled to $1.8 billion in refunds.

Just over two years ago, California was beset by rolling blackouts and daily warnings of Stage 1 and Stage 2 power shortages. Fortunately, the forecasts of summer blackouts proved wrong, thanks in part to the extraordinary conservation efforts made by Californians in 2001.

During the energy crisis, California streamlined the permitting process for powerplant construction and the number of applications to build new plants soared due in part to the high prices that generators were able to sell their power for.

However, as the market stabilized and the price of power fell, so too did the number of companies that wanted to build powerplants in California and across the nation. In March 2001, the California Energy Commission (CEC) had identified 3,100 megawatts (MW) of new capacity that could come on line in the summer of 2002 and 6,300 MW in the summer of 2003. A more recent survey by the CEC shows that construction of at least 3,700 MW (nearly 40%) of that capacity has been put on hold by companies that, for a variety of reasons, have decided they don’t want to go forward with projects.

New CEC Forecast

The CEC is finalizing an updated forecast of how California will be able to meet its future demand for electricity. The CEC forecast projects an adequate supply of electricity through 2006, but that supply is expected to tighten in 2007 and beyond. This updated forecast is somewhat more optimistic than the CEC’s February 2002 forecast, which warned that by 2005, California will likely face tight supplies resulting in price volatility, reliability concerns, and consumer dissatisfaction.

While the new forecast is certainly more hopeful, it relies on some assumptions that, if not realized, could lead to an energy shortfall much sooner than 2007. Embedded in the CEC’s 2003 forecast are 2,700 MW of imports acquired from spot markets, almost 5,000 MW from powerplants under construction, and a 50% annual decline in voluntary conservation efforts.

Furthermore, while the CEC’s overall forecast looks better than it has in years, certain regions of the state, such as the San Francisco peninsula, still face supply risks due to transmission bottlenecks and inadequate in-region generation.

Conservation and Energy Efficiency

Conservation and energy efficiency have been key parts of California’s energy policy since the 1970’s and they took on added urgency in 2001. In addition to $700 million in general fund money appropriated in 2001 from SB 5x (Sher), Chapter 7, Statutes of 2001-02 First Extraordinary Session, electricity users pay $200 million a year as a part of their monthly bills to fund energy conservation and efficiency measures.

Despite these efforts, significant opportunities to do more are still available. The Energy Foundation, a non-profit effort by foundations interested in renewable energy (e.g. Rockefeller Foundation, Pew Charitable Trust, Hewlett Foundation), believes continuing energy efficiency efforts at current levels will reduce peak demand by 1,800 MW (the equivalent of 3 or 4 large powerplants), while doubling the funding would reduce demand by 3,500 MW.

CPA Reserve Rulemaking

This month, the California Consumer Power and Conservation Financing Authority (CPA) issued a final decision establishing a target level of reserve electric capacity for electric utilities. That decision recommends that utilities have a reserve capacity of 17% above their peak monthly load and it’s a decision that’s been endorsed by the CPUC, CEC and the California Independent System Operator. As part of its decision, the CPA noted that it’s required by law to invest in new supply or demand-reducing projects if the capacity to meet the 17% reserve capacity target is unavailable. Given that operating reserves in 2001 were often around 5%, it appears the CPA has much to do.

Creating A New California Energy Policy

California’s energy policy is, without question, in a transition, but what it’s going to transition into remains to be seen. There’s widespread agreement that the 1996 effort to deregulate electric markets didn’t come close to working out as projected, but there’s absolutely no agreement or consensus on what the state’s new energy policy should be.

While California has not eliminated de-regulation of the state’s electricity market, the Legislature has passed a number of bills to try and put parts of the genie back into the bottle:

• AB 6x (Dutra, Pescetti, Bowen), Chapter 2, Statutes of 2001-02 First Extraordinary Session, prohibited the sale of any public utility-owned power plants until January 1, 2006, and required the CPUC to ensure that generation assets remain dedicated to service for the benefit of California ratepayers.
   
• AB 1x (Keeley, Migden), Chapter 4, Statutes of 2001-02 First Extraordinary Session, suspended a customer’s ability to select a new energy provider (better known as "direct access").
   
• SB 6x (Burton, Bowen), Chapter 10, Statutes of 2001-02 First Extraordinary Session, created the CPA to help build or acquire new electric generation capacity and to fund demand-reduction projects.
   
• AB 57 (Wright), Chapter 835, Statutes of 2002, smoothed the way for utilities to enter into energy supply contracts with a minimum of CPUC review.
   
• SB 1389 (Bowen), Chapter 568, Statutes of 2002, re-established an electric supply and demand forecasting function at the CEC.
   
• SB 39xx (Burton, Speier), Chapter 19, Statutes of 2001-02 Second Extraordinary Session, gave the CPUC more authority to police powerplants.

Collectively, these efforts are the building blocks to regain control over electric rates, but they fall short of establishing a broad policy or vision of what California’s electric market structure should look like over the long term. Despite the universally held view that electric deregulation in California is a failure, there are no consensus answers to the fundamental questions about what should take its place. Given the current relative calm in the energy markets, with the lights on and the prices stable (albeit high), the impetus to create a formal energy policy has waned, making consensus more difficult to achieve. However, there's little doubt Californians will be well served for years to come if this respite is used to establish a clear and durable energy policy.