Everything You Always Wanted to Know About the Energy Crisis But Were Afraid to Ask.
By Dave Rosenberg Yolo County Supervisor, 4th District
On April Fool's Day in 1998, California began its Grand Experiment in Energy Deregulation, ushered into law by then-Governor Pete Wilson and the State Senate and Assembly. On that day, California started restructuring the electric service industry. Three significant changes occurred.
First, rates that California's three investor owned utilities ("IOU's") could charge to electric consumers were frozen at the 1996 level. This affected PG&E, Southern California Edison, and San Diego Gas and Electric. The rate freeze was to remain in effect until the date that the IOU's recover certain identified costs and obligations (in the vernacular, called "stranded costs") that they incurred before the restructuring or March 31, 2002, whichever comes first.
Second, the three IOU's were directed and encouraged to sell off most of their power plants. The result of this is that the IOU's must purchase a great deal of their electrical power from the wholesale market before they can turn around and provide the power to consumers.
Third, two new entities were created: the California Independent System Operator Company ("ISO") and the California Power Exchange ("PX"). The ISO was given the job of running the transmission system (the power highway, if you will) for California's three IOU's. The PX was given the job of administering short-term markets where energy is traded. All sales of electric energy through the ISO and the PX are under the exclusive jurisdiction of the Federal Energy Regulatory Commission ("FERC").
The theory behind this deregulation scheme was simple: Break up California's three IOU's, get the government out of the regulation business, and let the free market's supply and demand set the price of electric power. Actually, this is a fine idea in theory. And generally, the free market works very well for us. However, in practice, the electric deregulation plan was fundamentally flawed. Ultimately, it placed California's three IOU's, and their customers, in the hands of a few power generators, most of whom produce power outside of California and ship it to the state via transmission lines. These out-of-state generators of electricity have been charging California's IOU's rapidly escalating prices on the open market. The IOU's have no choice but to pay the high prices. But they can't pass those high prices on to consumers (at present) due to the rate freeze. That's why the IOU's are lobbying so hard to have the California Public Utilities Commission ("PUC") life the rate freeze and allow them to charge consumers higher rates.
That the power generators have been gaming and manipulating the system and reaping exorbitant profits is not in dispute. That they will continue to do so seems inevitable, as the only entity that can step in and stop the price gouging is the FERC that has so far refused to intercede. The FERC, apparently, is so wedded to a free market that it is willing to allow California's energy customers' bills to double, triple or worse in the coming years! Should we grin and bear it? Hardly. There are several things that can be done.
First, consumers of power have to be a lot smarter and a lot more careful in how we use energy. Remember the drought a few years ago? We all pulled together to reduce the consumption of water, including bricks in the toilet. That's the kind of spirit that individuals and businesses need to display in order to reduce the consumption of power. Serious conservation of electricity can have as great an impact as building a new power plant. Consumers should turn down thermostats in the winter and up in the summer, reduce the use of appliances between 4 and 7 p.m., and turn off all unnecessary lighting.
Second, California's three IOU's need to be more aggressive in going after the wholesalers that are engaged in unfair business practices. The IOU's must actively develop new power sources and must streamline their own operations to save money.
Third, local governments can play a significant role in the long-term. As new buildings come on line, they should be equipped with solar panels. Local government should actively encourage solar, wind, bio-mass, and fuel cell technologies. These provide a clean, decentralized alternative to big power plants. Local Municipal Utility Districts should be encouraged, not discouraged, by local governments. We need only look to the Sacramento Municipal Utility District ("SMUD") as a great example of the advantages of municipal power controlled by a locally elected board. What a great alternative to an IOU like PG&E which has a Board of Directors answerable only to investors, not the people. It's a shame that the City of Davis did not get behind the effort of citizens to form a Davis Municipal Utility District ("DMUD") which was positioned to partner with SMUD. Hopefully, the efforts to form a DMUD will fire up again!
Finally, the State of California is a key player in the solution to the energy problem. The Governor is poised to call a special session of the California Legislature to address this critical subject. Undoubtedly, a combination of restructuring of the failed system, encouragement of new energy generation (no new power plants have located in California for a decade), and conservation will be on the table.
As power supply catches up with power demand, and the number of power suppliers increases and diversifies, we will come out of this crisis. The long-range picture looks promising. In fact, ironically, as the price of energy increases, it makes solar, wind, bio-mass and fuel cell power more and more economical and competitive! We just have to pull together to get through the short term electrical pain caused by the great experiment of deregulation.