Great Yergin Piece -- Washington Post Op-Ed ,
 Sue Mara
Enron Corp.
Tel: (415) 782-7802
Fax:(415) 782-7854
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	"Daniel Douglass" <Douglass@ArterHadden.com>
	03/16/2001 10:43 AM
		 
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		 Subject: Fwd: CA Power Crisis -- Washington Post Op-Ed

A great op-ed piece from Daniel Yergin.
 
Dan
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Subject:	CA Power Crisis -- Washington Post Op-Ed


 -----Original Message----- 
From:   Kari Paakaula  
Sent:   Friday, March 16, 2001 10:11 AM 
To:     NAEP Team 
Subject:        Washington Post Op-Ed 
California in the Dark 
By Lawrence Makovich and Daniel Yergin
Friday, March 16, 2001; Page A21 
The common diagnosis of California's electric power debacle is wrong. The 
state is not suffering from deregulation. Rather, it is afflicted by a 
strange mutant ailment -- partial deregulation and now partial reregulation 
-- that has produced a flawed market. California designed a market that 
disconnected customers from prices and, at the same time, made it neither 
profitable nor possible to build a new power plant. The result is a serious 
power shortage.
Instead of fixing these flaws, the current policies from Sacramento are 
moving California down the road to an expensive public power setup and higher 
prices for consumers and businesses. And the shortage is going to get worse 
this summer. Under typical weather conditions, the state could face as much 
as a 10 percent shortfall in electric power during summer peak demand, which 
will mean severe emergency conditions and periods of blackouts. The effect is 
likely to be a big shock not only to the economy of California and to the 
rest of the interconnected West but also to the bruised national economy.
Unlike other states that have successfully deregulated over the past few 
years, California has made three crucial mistakes since the mid-1990s, when 
restructuring of the power industry began.
The first is the political unwillingness to allow consumers to see real price 
signals. The so-called "wholesale price" -- what utilities pay to generating 
companies -- has been decontrolled, but the price consumers pay to the 
utilities has not. Consumer prices are remain at 1996 levels, and Gov. Gray 
Davis has promised to hold to his pledge of no rate increase. Although the 
price of natural gas, which is used to make a large and rapidly growing share 
of electricity in California, has increased dramatically, consumers would not 
know that from their bills. Nor would they know that rain and snowfall 
levels, on which California critically depends for hydropower, are at low 
levels. As a result, the utilities have been in the perverse position of 
selling power to their customers at much lower rates than they are buying 
power from generators. That is why the utilities are now $13 billion in the 
hole and teetering on bankruptcy. 
Instead of letting customers see higher prices that reflect the realities of 
supply and demand -- and then act accordingly -- the state is going to use 
their tax money to advertise conservation. But 25 years of experience 
demonstrates that promoting conservation without price signals is not very 
successful. Instead of paying through their bills, Californians will be 
paying through their taxes for various measures that will enable politicians 
to say that they prevented electric power rates from going up.
As California drains electricity from its neighbors, residents of those 
states are seeing their power bills go up by 30 percent or more. We calculate 
that if rates in California rose by just 20 percent, a third of the shortage 
could disappear in a matter of months. But instead, the state has embarked on 
a course of passing higher costs along to consumers in neighboring states and 
leaving the major bill to be paid by Californians themselves in decades to 
come.
The second mistake in California is a failure to charge customers for 
"capacity." Electricity, unlike other commodities, cannot be stored. If there 
is a shortage of telephone equipment, the result is a busy signal -- 
frustrating but survivable. But when it comes to electric power, the 
equivalent of a busy signal is a blackout, and that is unacceptable. Thus, a 
well-functioning power system needs to pay generators to maintain adequate 
capacity. That includes a reserve of capacity about 15 percent above expected 
demand to cope with the unexpected -- whether it's a heat wave, a sudden 
surge in economic growth or breakdowns in aging power plants. In contrast to 
other states, California's scheme did not provide any incentive for 
generating companies to add new capacity and maintain that kind of reserve.
The third mistake is the creation of monumental obstacles to siting and 
granting permits to new facilities. California is one of the most difficult 
places on earth to build a new power plant. The environmental permit process, 
in contrast to other states, is complex, cumbersome and deeply discouraging 
to would-be investors. Companies will spend three or four years to get 
approval after approval -- and then find their proposal shot down by yet 
another local group.
As a result of all this, no major new plants have been built in the state in 
the past 10 years. Meanwhile, the California economy grew 29 percent over the 
past five years. In the same time, its electricity consumption increased by 
24 percent. The result was inevitable -- a shortage. 
California is on the verge of making three more mistakes in dealing with the 
power crisis. First, the state is signing badly designed long-term contracts 
for electricity in the midst of a shortage. California cannot simply finance 
the crisis forever into the future. This summer is likely to generate 
billions of dollars in additional uncollected wholesale power charges, which 
now appear likely to be on the state's books, to be paid over an untold 
number of years. 
The second mistake is the plan for a state takeover of the transmission wires 
to provide a multibillion-dollar cash infusion into the state's three biggest 
utilities in order to temporarily hold bankruptcy at bay. The prospect of the 
state -- now the largest power purchaser in the market -- controlling the 
physical infrastructure necessary for market interactions will have a 
chilling effect on power investment. As a result, the state could well end up 
having to assume the role of building new power plants in the future. 
Third, a market breakdown this summer would add enormously to the pressure 
for price caps on wholesale power. But even "temporary" price caps, because 
of uncertainty over their duration and effect, would slow rather than 
encourage new investment. Unfortunately, the state's current plans and 
proposals divert attention from ways of fixing the problem and have 
California on the path to an expensive and expansive public power authority.
The priority need is, first, to move very quickly to increase supply and 
reduce demand, and to do so now, while the coming big shock is still a few 
months away. Second, the flaws in the market should be fixed, taking 
advantage of the positive lessons of deregulation from other parts of the 
country. But that won't happen without political will -- and a surge of 
realism.
Lawrence Makovich, senior director of Cambridge Energy Research Associates, 
and Daniel Yergin, chairman, are co-authors of "Beyond California's Power 
Crisis: Impact, Solutions, and Lessons."
, 2001 The Washington Post Company
alan.comnes@enron.com, angela.schwarz@enron.com, beverly.aden@enron.com, 