Bob Tippee on the power crisis and what it means for consumers

(CNN) -- The California Public Utilities Commission on Thursday, January 4, voted to approve a recommended emergency rate increase for financially strapped power companies that say they are struggling in a deregulated market. The rate increase would raise the average homeowner's monthly energy bill in California from $60 to $65.40.

Bob Tippee, editor of Oil & Gas Journal and OGJ Online, has written extensively in articles and books on issues involving the energy industry. Among his books are "The Natural Gas Industry: Evolution, Structure, and Economics, Second Edition" and "Where's the Shortage? A Nontechnical Guide to Petroleum Economics."

CNN Moderator: Welcome to our discussion, Bob Tippee. We are pleased to have you with us this morning.

Bob Tippee: Thank you for the opportunity to talk to the guests. I look forward to a lively discussion.

CNN Moderator: If an energy rate increase is approved in California, how much is it likely to be, and how will that affect residential and business consumers in that state?

Bob Tippee: I believe the average increase under discussion, the last I checked, was 15 percent at the retail level for the largest utilities, SoCal Edison and PG&E [Pacific Gas and Electric]. Now it will probably develop that businesses will pay a higher rate than residential consumers will, so I don't know how that 15 percent will shake out in the different sectors of the market. The utilities were asking for a greater rate increase at the retail level, about 30 percent ... but it would be fair to say that the utilities were asking for roughly twice what was likely to be approved.

Question from Tatianna: How does the rising price of electricity in California affect the rest of the U.S.?

Bob Tippee: It will affect mostly the politics of electricity and restructuring. The overall hope of electric market restructuring is that prices over time will decrease, because of the efficiencies that are pursued in restructuring. So, to the extent the assumption is correct about overall lower prices, a political reversal of that process nationwide will hurt consumers. But of course the question is, Was the assumption correct to begin with?

Question from MattJ: I always thought that deregulation meant that customers would have their choice of supplier, each of whom is free to set their prices at whatever they think the market will bear. Do you anticipate the other 25 states having similar problems of not enough suppliers willing to deliver energy?

Bob Tippee: That's a good question and a good description of the problem in California. I'm happy to say that the same problem has not occurred everywhere else there has been restructuring. For example, and this is always the happy example, Pennsylvania has had great success in offering consumer choice at the retail level and in attracting suppliers to offer that choice. That's a good measuring stick by which to assess the success or failure of a state's structuring effort -- the number of new power suppliers that come into the market, and the willingness of retail consumers to shop among those suppliers for the best deal on electric power.

CNN Moderator: Bob Tippee joins us via telephone from Houston, Texas. CNN is providing a typist for him.

Question from Robbie: I have one question. Why not drill in Alaska? If the Alaskans want to. Shouldn't they have control over their state?

Bob Tippee: Absolutely. I strongly support drilling in the Arctic National Wildlife Refuge coastal plain, which is what I'm sure the questioner is referring to.

Question from Ventro: Do you think the power crisis will spur investment in alternative power generation, like fuel cells?

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VIDEO CNN's Greg LaMotte hosted a live Webcast from a California power plant Thursday morning. Watch his tour and interview Play video (QuickTime, Real or Windows Media) CNN's Greg Lefevre reports Californians are facing stiff electric utility price hikes due to deregulation Play video (QuickTime, Real or Windows Media)

Bob Tippee: Well, expensive electricity certainly makes alternatives. However, I don't think anyone expects these prices in California to last indefinitely. So if you are an investor considering construction of a fuel cell manufacturing plant, you have to think about what the price of electricity will be over the long term. And realistically you have to say that price will be lower than what Californians are experiencing right now. Fuel cell technology, however, is certainly developing rapidly and holds a lot of promise for the future.

Question from Gas Crisis: How much profit will these companies make?

Bob Tippee: Part of this problem is you have to specify which companies. Nobody, I don't believe, is real pleased with the situation in California. The big utilities, PG&E and SoCal Edison, are losing money at the moment because they are buying power at the wholesale level at very high prices and are having to sell power at retail at very low prices. That's why they have gone to the California Public Utilities Commission seeking a rate hike. It's also why their financial condition has deteriorated to the point that their credit ratings have fallen, and some of their power suppliers are reluctant to do business with them except on the very short term. I don't think it's ... correct to consider this a time of great profitability for the utilities in California.

Question from Robbie: Why is California having problems and not Texas? Both are big states. What is Texas doing right that California is not?

Bob Tippee: For one thing, Texas started later, and hasn't really entered the deregulated era yet. Retail choice doesn't begin until next year. Some of the market mechanisms established in the Texas system for restructuring must be attractive, because I believe 11 companies have applied to build generating facilities and to participate in the Texas restructured market. For many reasons, perhaps just because California was so early with restructuring, that same degree of investor confidence has not been apparent in California. Now there have been proposals to build new generating facilities in California, but it takes a long time there to get construction permits, and obviously California needs that generating capacity right now.

Question from Borter: How much of the cost of natural gas is due to the transportation?

Bob Tippee: Good question. Let's generalize by saying, less than half, but it depends on how far you're carrying the gas and whether you're including in transportation, the cost of distribution at the local level. So if your endpoint is a burner tip in a household furnace, transportation by that latter definition probably accounts for more than half. But I am relying on an imperfect memory.

Question from Tatianna: Doesn't deregulation cause the cost of power to go up, instead of anticipated down, because of the advertising ...?

Bob Tippee: The question bears on promotion costs, which in a competitive market will certainly be part of the delivered cost of the energy. But when markets really work, the benefits from the consumer's point of view should overwhelm whatever increase might develop in that promotion cost component. So the answer to the question is, No, I don't think so.

CNN Moderator: Practically speaking, what can consumers do to reduce their energy use?

Bob Tippee: The economic answer is to respond rationally to price changes. And in 23 years of writing about the energy business, I have seen consumers respond rationally every time. So when the price of electric power increases, heat a little less in winter, cool a little less in summer, and turn the lights off when you leave the room. It sounds simplistic, but when all consumers behave that way, it has an enormous effect. It's for that reason that I say with some confidence that extraordinarily high prices of any type of energy never last when markets are free to work.

CNN Moderator: Do you have any final thoughts to share with us today?

Bob Tippee: I think the broad message from California is not that restructuring of energy or electricity markets is a bad thing, but that the restructuring has to be done in a way that lets markets work as they should. California was the pioneering large state in the area of electricity restructuring. And it is understandable that it didn't get the process absolutely right on the first try.

CNN Moderator: Thank you for joining us today, Bob Tippee.

Bob Tippee: Thank you.

Bob Tippee joined the chat room via telephone from Houston, Texas, and CNN.com provided a typist. The preceding is an edited transcript of the chat on Thursday, January 4, 2001.

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