Schwarzenegger's Energy Advisors Outline Plans

After California's massive energy crisis two years ago, the new Governor's advisors push for a return to energy deregulation

Those who think deregulation caused California's 2001 energy crisis might be surprised by what Jim Sweeney has to say.

"The problem was not too little regulation, but too much," said the professor of management science and engineering at a Dec. 2 Stanford University forum on California's energy future.

Sweeney, a senior fellow at the Hoover Institute, is not alone at the conservative think tank in advocating the benefits of free-markets. However he is one of the few who has Gov. Schwarzenegger's ear when it comes to energy.

Sweeney helped write the new governor's energy plan, which includes provisions to streamline bureaucracies, encourage private investment and perhaps most controversially, to make it easier for utilities to pass along changes in wholesale electricity prices to consumers.

University of California at Berkeley economist Severin Borenstein, who also advised Schwarzenegger, said this last point is important.

Real time pricing, where customers see up-to-the-minute changes in the cost of electricity and adjust their use accordingly, is "the gold standard of electricity pricing," Borenstein said at the event.

According to Energy NewsData, a news service that reports on the power and utility industries, the entire western U.S. experienced inadequate supply and high wholesale prices in 2001. Yet Sweeney said it was only in California, where Gov. Davis and the Public Utilities Commission insisted on protecting consumers from price increases, that such severe financial effects were felt.

The effects continue to be felt today. The PUC is set to vote Dec. 18 on a controversial proposal on Pacific Gas & Electric's emergence from bankruptcy. And Sweeney said that Southern California Edison remains "barely creditworthy."

He said the long-term energy contracts entered into by Davis, which he believes overcharge the state, and repayments to the bonds issued to buy electricity during 2001 are the reason that energy bills remain relatively high in California.

According to the U.S. Energy Information Administration, Californians pay 12.1 cents per kilowatt-hour for electricity for their homes and apartments. The U.S. average is 8.5 cents per kilowatt hour.

Sweeney and Borenstein said that removing price controls will help keep utilities financially viable and encourage consumers to conserve energy. Utilities should be able to use long-term contracts with energy suppliers to protect themselves from price fluctuations, they said. Regulations in place in the summer of 2001 prevented utilities from establishing these contracts.

Other elements of Schwarzenegger's energy plan including a provision "to assure adequate and diverse fuel for power generation" were discussed at the Stanford event.

According to the California Energy Commission, the state generated more than 75 percent of its electricity in 2002. However most of this electricity is generated by burning natural gas. Since more than 80 percent of California's natural gas is imported, the state will remain vulnerable to market forces outside of its control, Sweeney said.

One of the sources Schwarzenegger hopes to explore -- solar power -- shows that his plan bears the fingerprints of those outside of conservative think tanks, too. In his Sep. 5 "Action Plan for California's Environment" policy brief, Schwarzenegger announced a goal that 50 percent of new homes contain solar photovoltaic cells by 2005.

"We are excited to work with the new administration," said Jan McFarland, executive director of the California Solar Energy Industries Association in a phone interview. "We hope new builders will order photovoltaics at the same time that they order nails."

Dublin's Santa Rita Jail, which has the fourth largest photovoltaic system in the world, might provide a glimpse of California's energy future under Schwarzenegger. According to Alameda County, the 1.14 megawatt system produces enough electricity to supply 30 percent of the jail's daytime needs, the equivalent of powering more than 1,000 homes. The county also says the system displaces more than three million pounds per year of harmful emissions that cause smog, acid rain and global warming.

Ralph Cavanagh is an example of Schwarzenegger's enigmatic approach to energy. Cavanagh's liberal environmental credentials are beyond dispute. He is a senior attorney of the Natural Resources Defense Council who has worked extensively on environmental and energy issues throughout his career. He also served on Schwarzenegger's advisory team.

Cavanagh, another presenter at the Dec. 2 event, said regulating energy efficiency is as important as building new sources of generation. He used the example of refrigerators to illustrate his point.

Refrigerators have grown steadily in size since they were introduced in the late 1940s. The appliance's energy use increased along with its size through the late 1970s, but since then both energy use and price have decreased, Cavanagh said. Today's refrigerators are roughly twice the size and use half the energy of their 1940s era predecessors.

Cavanagh said that regulations introduced by California and the federal government, along with market competition, provide the explanation and that this example could apply well beyond appliances.

And Cavanagh, the most voluble and energetic presenter of the day, seems to have made himself heard in Sacramento. In addition to free market solutions, Schwarzenegger's energy plan contains a provision "to support cost effective conservation and efficiency."

California's energy future is clouded by confusion surrounding the larger U.S. system for generating and distributing electricity.

Bill Brier, a vice president of the Edison Electric Institute, which represents investor-owned utilities, said that in the wake of the East Coast Blackout in August polls showed a national willingness to invest in the energy infrastructure.

But a host of problems, including complex regulations, lack of enforceable standards for reliability and competing political interests make it difficult for such work to begin. The controversial multibillion dollar federal energy bill, which attempts to address changes throughout the power system, remains stalled in the U.S. Senate.

Individual states have sole jurisdiction over where to build new transmission lines. And because these states often struggle to balance conflicting regulatory requirements, approvals for new projects can be costly and subject to delays, Brier said.

The conflict between PG&E and Pleasanton over a new high voltage power line underneath residential streets, which lasted more than four years before construction finally began last fall, is one example of these delays.

Brier's organization has lobbied to add a provision to the energy bill that would allow the federal government to step in and issue permits for construction when a proposed power line might help to shore up intrastate transmission of electricity.

Frank Wolak, Stanford economics professor and chairman of the committee that oversees California's power grid, agreed that significant investments need to be made in the national transmission network.

"The dramatic slowdown in transmission investment over the past 25 years helps explain why the East Coast blackout of August 14, 2003 occurred," wrote Wolak in "The Benefits of an Electron Superhighway" policy brief published by the Stanford Institute for Economic Policy Research.

Wolak drew a comparison with the construction of the Eisenhower Interstate Highway System. Though the network of roads would cost more than $330 billion to build today, most agree that the investment has long since paid for itself in increased trade.

"By the same logic, the cost of upgrading the U.S. transmission network should be more than paid for by the economic benefits to consumers produced by more competitive wholesale electricity markets," Wolak wrote.

The economists are not alone in throwing out big numbers. Brent Barker, director of communications at Palo Alto-based Electric Power Research Institute and an engineer by training, said that information processing technology should be added to the power grid as well.

"Today's electro-mechanical switching system is slow and inefficient," he said. "If a train system were subject to the same relative speed it would take a week to open a switch on a track."

In addition to improving efficiency, building some of the Internet's famed reliability and redundancy into the power grid would make widespread cascading blackouts -- caused by weather, human error, or even terrorist attacks -- less likely.

Barker estimated that it would take at least $100 billion and 10 years to add a central nervous system to the nation's existing energy system. And though a smart, national power grid is likely several decades in the future, Barker said some progress is already being made.

He pointed the list of participants in a new EPRI-sponsored consortium to explore ways to upgrade the nation's 50 year old power grid. Alongside such familiar players as the U.S. Department of Energy, the Bonneville Power Administration and Consolidated Edison of New York is Silicon Valley giant Cisco Systems, a company that has made its fortune building computer networks.

The economists, environmentalists and engineers in the room did appear to agree on one thing: Work to overhaul the energy system in California should begin immediately.

On a cool rainy Palo Alto day, summer heat and rolling blackouts seemed a distant threat. But Sweeney said that all state and private projections agree that if no improvements to the system are made severe shortages will hit the state by the end of the decade, and perhaps sooner if the summers are unusually warm.

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