A Constructive Plan to Meet California’s Energy Needs

There is a natural tendency in a crisis situation to seek answers that will provide immediate relief.  California’s current energy crisis is no different: The day-to-day focus has been on new ways to keep the lights on and save struggling utilities from bankruptcy.  Unfortunately, piecemeal short-term solutions that can be good politics but bad policy can often lead to even bigger problems in the long run.  Here are several crucial elements that should be included in any plan to meet California’s long-term electricity needs.

1.	Increase supply, decrease demand.
It is obvious that more must be done to increase power generation the construction of new plants.  At the same time, a concerted effort must be made to decrease usage.  For example, it is much cheaper for the state to pay certain electricity users – such as large manufacturers – for reducing power usage than it is to take over the entire grid and operate a statewide electric system.

2.	Guarantee direct access.
Industrial customers can ensure stability in their electric rates by negotiating long-term contracts directly with a provider.  Guaranteeing direct access reduces the amount of energy the state needs to purchase and also helps the economy by reducing production costs that lead to layoffs or companies moving out of state.

3.	Expedite siting and remove disincentives.
California has some of the strictest, complex and most inflexible rules in the nation when it comes to siting power plants.  The result: it costs an average of $30 million just to get through the red tape necessary to start construction, and $500 billion to build a plant.  Siting a plant requires as long as six years in California, compared to less than a year in some states.  Regulations can be streamlined to expedite siting in a manner that still provides for community input and environmental protection.

4.	Address environmental restrictions that prevent construction of cleaner, more efficient power plants.
Enron had entered into a public-private partnership with the City of Roseville to build a new power plant.  The proposed plant would have included modern technology that enabled it to operate cleanly as it supplied power to thousands of homes in Roseville.  Unfortunately, there were no emission offset credits available in the county and the plant had to be scrapped.  Instead, power has to come from hydroelectric sources – which vary in output with the weather – and older, dirtier plants elsewhere in the state.

5.	Reasonable increases, not rate shock.
Unfortunately, almost everything costs more than it used to, and electricity is no different.  Manipulation of the retail cost has kept rates artificially low, and now consumers are hit with bills two or three times what they paid a month or two before.  Consumers realistically now have two choices: Continued staggering rate increases and volatility on a month-to-month basis or smaller, more acceptable rate increases over an extended period of time that they can plan for. 

Rate increases are always politically unpalatable, but California’s utilities must be returned to solvency to reduce costs to taxpayers in the long run.  Bankruptcy increases the likelihood that consumers and businesses will bear the significant financial risks of forcing California to act as an a wholesale electricity purchaser for an extended period of time.  Bankruptcy would also undermine investor confidence in California’s energy market and could affect the state’s credit rating, increasing the cost of billions of dollars in state financing. 

California can return investor-owned utilities to financial solvency by implementing a series of planned periodic rate increases over an extended period – such as five to ten years – that would allow households and businesses to plan accordingly.  To keep increases to a minimum, the utilities could absorb some portion of their existing debt in recognition of the risk they clearly understood existed under AB 1890; additionally, California can credit revenues utilities have received from selling electricity into the Power Exchange against debts they accrued due to the retail price cap.