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California Institutes Rate Hikes for Energy Utilities

Aired January 4, 2001 - 4:09 p.m. ET


JOIE CHEN, CNN ANCHOR: There is a new development today in the California power crisis. The state's Public Utilities Commission has voted to impose a rate hike on millions of utility customers. The surcharge will remain in effect for 90 days.

And this is what it means: an average rate increase of about 9 percent for homes and up to 15 percent for businesses. It's part of a move to help two huge utility companies avoid bankruptcy. And here are some facts about California's embattled utility industry. Five new power plants are under construction in the state. They are expected to help ease the power crisis. California's two biggest utilities, Southern California Edison and Pacific Gas and Electric, asked for the surcharge.

They have paid $9 billion more for electricity than they could legally charge their customers. California has to go beyond its borders for energy. The state imports about 20 percent of its electricity. The power crisis in California could have ripple effects all across the country. Three experts join us this hour to talk more about the California situation, as well as what is ahead for the country as a whole.

Joining us from San Francisco is Steven Stoft, with the University of California Energy Institute -- from Chicago: Phil Flynn, who is an energy futures analyst with Alaron, which is a brokerage house that focuses on energy -- and from Washington with us this hour: Marvin Fertel with the Nuclear Energy Institute.

Gentlemen, we thank you all for being with us.

Mr. Stoft, I would like to talk to you first about what is happening in California, and why it's happening. I mean, deregulation, we thought, was supposed to help us all out as consumers.

STEVEN STOFT, U.C. ENERGY INSTITUTE: Well, that is right, it was. It was supposed to lower prices. And, in fact, it did for the first two years. They were actually quite low until this past spring. In May, they began shooting up and soon hit the price cap of $750, which is about 10 times normal.

And since then, they have been bouncing up and down. But December has been the most expensive month yet. This is due to flaws in the structure of the California market. These prices are not what a competitive market would produce. And they are unjust and unfair to rate-payers.

CHEN: What (OFF-MIKE) in some sense -- that this is, in some sense, a manufactured crisis and not a true crisis, then -- some suspicion about that?

STOFT: Well in one way, that is true. The design was not very well thought out. And, in that sense, you could say it was manufactured, though no one intended this consequence. The other aspect of it that is manufactured is, that in recent months, the problem has not been so much the flaw -- which could quite easily be fixed by reregulating the market.

In fact, the federal regulators could do that in a day if they wanted to. But there's been a stalemate between the federal regulators and the state regulators. And they've been tossing the blame back and forth. And neither side has chosen to fix the problem. The state would actually find it very difficult because they're trumped by the federal regulators.

CHEN: Mr. Flynn, I want to move onto you and talk a little bit about oil and oil futures, I guess, is what your expertise is in, and how you see this is fitting into what is going on in California today.

PHIL FLYNN, ALARON: Well, I think that the problem with California is, it's not -- it was never truly deregulated. Price caps have a problem, because, when you hit that price cap, that creates the type of situation that we're seeing right now. If you had true deregulation, you wouldn't have these price caps.

And what we learned from the oil crises back in the 1970s, when we put caps on prices, it created gas lines. So, in a microcosm, that is kind of like what you are seeing in California right now.

CHEN: Mr. Fertel, I guess part of what is happening here -- and people are talking about the lack of planning or the lack of establishment of additional plants early on to head off such crises. A possible solution could be nuclear -- at least at some level.

MARVIN FERTEL, NUCLEAR ENERGY INSTITUTE: We would certainly agree with that. If you look at our nation today, nuclear is our second-largest source of electricity. And it's also our largest source from an environmental standpoint of not emitting electricity. And one of the problems California has had is they have to shut down power plants because of Clean Air Act requirements. So yes...

CHEN: If they had added in nuclear plants, how much difference could it have made? How much dependency on other sources would it have alleviated?

FERTEL: Well, we think if you look at California right now, the mix of nuclear and coal in California is about 19 percent of their electricity supply in 1999, compared to 70 percent across the whole nation. And base-load capacity by nuclear -- particularly -- and coal provides a real good base for avoiding the kinds of problems that they are seeing in California. They are short supply.

CHEN: Mr. Stoft, do you see that as a solution?

STOFT: Well, that is quite a long-term solution. And the crisis here needs to be fixed in a matter of weeks. Otherwise, they are going to have bankrupt utilities. We're likely to have blackouts. So, while that may be quite a good idea, it's years down the road. I would also like to comment on price caps. The price caps in effect here now have already allowed prices to go to $1,500 per megawatt hour. The normal price of electricity is about $100, given the high prices we see for gas now.

These price caps simply are not causing the prices to go high. The problem is shortages where demand -- in other words, consumers -- cannot respond to prices, which is a flaw in the market -- and market power, which means artificial shortages created in order to raise prices. But the price caps themselves simply do not push the prices up.

FLYNN: Well, they do push prices up if the consumers don't conserve. I know for a fact that if consumers started getting much higher bills, they would be turning off their lights. They would be conserving. They would be forced to conserve.

STOFT: That is absolutely true. If consumers did face the high prices, that would help. But the price caps simply do not do that. You could put price caps on or take them off. It has nothing do with whether or not the consumers see the high prices.

FLYNN: Well, the consumers so far in California have not been conserving. From what we understand, the electricity usage is negligible, and that we have not seen the lights gone off. And the Californians have not met the crisis by conserving.

STOFT: That is absolutely true. That is one of the key flaws in the market. And it needs to be worked on. But the price caps have nothing to do


FERTEL: None of the markets are really seeing the true prices anywhere.

FLYNN: I think the other problem that you have, too, is there are some very strict environmental regulations in California. Nobody wants a coal plant in their backyard. Nobody wants a nuclear power plant. And there is not the infrastructure to bring in natural gas. In fact, some of these new power plants we're talking about building in California, I don't think they have the ability to burn anything other than natural gas. So, you know, in this type of situation, it's not really going to help the problem, is it?

CHEN: Right. Right, exactly, Mr. Stoft. What Mr. Flynn is saying is that there has been this sort of not-in-my-backyard psychology. Do you see the current crisis actually changing the psychology of the people of California, that their may be greater acceptance? I understand what you are saying about a short-term, a long-term solution, but... STOFT: That's right. I think the attitude is changing, and it will be easier to site power plants in California. And that's needed. Those changes will take years. But the power plants that are now -- have been sited and are in the process of construction will come on, some as soon as six months, some in a year-and-a-half. And that will help out. But the utilities will be bankrupt. And we'll have blackouts long before that. So, while I agree that is part of the solution, it's not the immediate crisis.

FERTEL: The challenge for the nation is to make sure that over the long term, too, we have adequate electricity supply, because it's so critical to both the economy and quality of life. And we basically need a diversity of supply. You need nuclear. You need coal. You need gas. You need hydro. You need renewables. You need conservation. And it requires real planning. And it requires real diligence. And I think, from California, maybe we'll learn how to do it.

CHEN: Mr. Fertel, do you see a change in that psychology, in the thinking, particularly in the acceptance of nuclear plants?

FERTEL: Well, we are seeing right now a very serious interest in the industry at new nuclear plants. Our nation has 103 nuclear plants that are operating. They can renew their licenses for another 20 years. And almost all of them are in the process of proceeding into that direction. As our environmental requirements get tighter, you are going to need non-emitting sources, whether it's nuclear or it's renewables or it's hydro. You are going to need to them or you won't be able to develop in our country where the cities are.

So, yes, we think we are going to see that. But I agree, it's not going to be overnight. But we need start today if we are going to do it right over the next decade.

CHEN: What do you gentlemen think is the outlook for the California crunch, in particular, as well as the heating-oil situation in the Northeast? What do you think is going to happen over the coming weeks?

Let's start with you, Mr. Stoft.

FLYNN: Well -- I am sorry.

STOFT: Well...

FLYNN: I am sorry. Go ahead.

STOFT: I believe the situation will, in fact, get worse. I think the deadlock between the federal and the state regulators is very serious. One of the leading federal regulators has said that the lights will go out in California. And I think that that's very likely to happen, given the attitude of the federal regulators.

CHEN: Mr. Flynn?

FLYNN: I am afraid that we are headed towards a Savings and Loan type bail-out of the California energy companies. And it's going to come down probably to the federal taxpayer to clean up the mess. I think that this should be a wake-up call to the rest of the nation that we need balance when it comes to energy supplies, or we're going to see this California crisis played out over and over again. And I think it's a very serious situation.

California's economy is very important for the entire nation. And if California goes down because of this electricity crisis, it could, you know, have ripple effects across the country.

CHEN: But do you sort of see a regionalization of thinking about energy: Look, this is not a problem for my state, Georgia. This is a problem over there in California. I don't have to think about this right now?

FLYNN: Oh, absolutely. But believe me, as I know in Chicago, when those heating bills started to come in and prices went up, believe it or not, my wife had me turn down the thermostat. So, believe me, I think that consumers will get the message when prices are high. Consumers have been spoiled. You know, they think electricity comes out of trees. You know, they don't think about what it takes to bring that to their switch when they turn on the light.

We have been spoiled with higher prices. And because of that, we have not developed the ability to produce it. And now, all a sudden, when demand goes up and supplies haven't been building, now consumers are going to start to realize that energy is not for free.

CHEN: Mr. Fertel, I just want to talk to you before we go to the break about what your outlook is for California.

FERTEL: I think -- I think that everything that has been said has probably got some truth in it. I certainly hope the lights don't go out. I think that companies will do everything they can to keep the lights on. You just can't keep on hemorrhaging money all the time and do that. So I think it's a real challenge. Hopefully, we'll see some responsible behavior, by not only federal regulators, but by the state government, too.

CHEN: All right, gentlemen, we are going to ask you all to stand by for us as we go through a break. We're going to talk more about the energy problems facing California after that break. And we're going to look at some reasons for to you understand that this really has something to do with you, even if you're not in California.


CHEN: Now, let's bring back our guests to talk more about the California power crisis and what may be ahead for all of us.

Joining us from San Francisco is Steven Stoft of the University of California Energy Institute; from Chicago, Phil Flynn, an energy futures analyst; and from Washington, Marvin Fertel, with the Nuclear Energy Institute.

Mr. Flynn, I'd like to begin with you. I thought this report from Greg LaMotte was particularly telling. It really drives the point home to all of us -- how much of our lives are linked to the economy in California and to the energy situation in California. After all, old economy knew, everybody needs power.

FLYNN: Absolutely; and here in Chicago we're already feeling it, too, because Chicago is 90 percent heated and run on natural gas, here in Chicago. That price of natural gas has gone up dramatically and that is affecting our heating bills, but it's also affecting our businesses.

Fertilizer makers, for example, for farmers; their prices have gone up dramatically -- so much to where farmers won't be able to afford to buy fertilizer for corn. What that means for the grain market: You're going to see, probably, more soybeans planted and less corn. So -- in a roundabout of effect, when the price of these raw materials for energy go up, it affects everything from top to bottom.

CHEN: Mr. Stoft, have you seen, over the last, say, decade, as the economy in California has changed -- a change in energy use? And then, conversely, would you expect that, as the energy situation in California might depress certain parts of the economy, there will be shifts back in a different direction because of the energy problem?

STOFT: Well, I'm sure there have been shifts in energy use, but I think that that's really very small compared with the problem that's at hand. And if the high prices do continue, you certainly will see large shifts in response to that. Hopefully, the 500 percent profits being earned by the generators that are selling the power -- they're not regulated, they're private generators and they should be making what they can.

But hopefully, we're going to stop letting them make that much money and bring these prices back down, and you won't see such dramatic shifts. There's no reason that the state should have to undergo any kind of restructuring of its economy due to electricity. The problem is that this market is broken; we have to shut down the market, fix it and then, if we think we have it fixed, maybe try it again.

CHEN: Mr. Fertel, do you see other regions of the country being able to draw, for example, a gain from California's misfortunes or difficulties in being able to draw industries away for themselves because they are able to provide power that California isn't?

FERTEL: Well, I'm sure that's going to happen to some degree, but you always see that with high-cost states losing industry. I think one of the reasons California initially moved aggressively on deregulation was they felt they did have some higher costs and they were trying to lower them to keep the industry and force them all there.

Again, I think part of the real solution here is to learn from the California experience. There are, you know, 20-some odd other states that deregulated or are in the process. They can learn from it. Pennsylvania is about on the same line as California, and it's working much better. So it can be done; it can be done better than they did in California.

CHEN: I want to look just for a moment, before we have to go, quickly, to the future and the future administration -- the president- elect's administration.

Gentlemen, how do you see that administration viewing the energy problem, not only in California but what is ahead for all of us?

Mr. Stoft, let's start on your side.

STOFT: I view the problem rather narrowly, because I'm particularly concerned with the market in California. And on that count, what I'm most concerned with is the head of the Federal Regulatory Agency, who currently is most opposed to letting California determine its own solution to this problem. And I would hope that the new administration would, in fact, respect the rights of states, especially when they're in a crisis situation, to control their own regulation or deregulation.

CHEN: Mr. Flynn?

FLYNN: I really think that the new administration is going to start to solve these problems that, basically, have been created over the last eight to 10 years. We've had no energy policy in this country.

The deregulation in California was because it was handled very poorly; they wanted it both ways. They wanted to have deregulation, but they wanted to regulate it that they -- they didn't have the infrastructure that they needed to get the natural gas in, but yet they didn't want the environmental problems. So they wanted it both ways, and what we found out is they can't have it both ways. We need more balance.

CHEN: Mr. Fertel, on the future.

FERTEL: Yes, I think both the administration and what we see in the Congress right now is there's a tremendous focus on energy. And it's because of the situation nationwide, not just California, with high oil prices, heating oil prices, and gas shortages, and the electricity crisis in California.

So we see movement towards a much more sensible energy policy, maybe an energy policy as opposed to none. And we think, for nuclear, that's very good because we think any responsible energy policy will have a diversity of fuel supply, will recognize the non-emitting characteristics of nuclear from environmental standpoint, and actually the low cost and stability of nuclear electricity.

So we think it's going to be good from a nuclear standpoint. We think it's also going to be good, overall, for the nation.

CHEN: Gentlemen; last word there from Marvin Fertel as well as Phil Flynn and Steven Stoft. We thank you all for being with us today.



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