Turn Out the Lights, The Party’s Over

June 2001

 By Donald P. Hodel

THE ONLY SURPRISE in this past winter’s power crisis in California is that it took so long to arrive. Knowledgeable observers have been shaking their heads for years over the incredible short-sightedness of California’s politicians, who -beholden to the green extreme have rejected every effort to do something about the inevitable power crunch. It arrived with a vengeance.

No Green Light. In the 1980s, I had firsthand experience working with California’ s political leaders to find a reasonable way to develop energy resources on and offshore. Nothing worked. Every single project was opposed as if it alone would bring the end of the earth.

These same political leaders seemed satisfied that anything California needed in the way of new power supplies could come from renewables, alternatives and conservation. These were false hopes, even then. Some leaders were smart enough to know that their positions were not reasonable, but they were unwilling to challenge their insistent and vocal green constituency.

Attempts to allow drilling for large oil reserves off the coast of California were fought tooth and nail. People who claimed the title “environmentalist” would not tolerate additional drilling platforms off their coastline.

Then-U.S. Rep. Bill Dannemeyer, with a prescience scoffed at by the green left, the liberal press and liberal politicians, said, “I would rather explain to my kids why they have to see a drilling platform the size of a ship on the horizon than to have to explain to them why they have to go fight in the Middle East to protect our energy supply.”

This remark generated shouts of hostility and ridicule, but it was, of course, not acknowledged in the early 1990s when Americans were engaged in Operation Desert Storm. Our casualties were relatively light, but the costs in dollars and subsequent health problems for our veterans of that struggle have been terribly high. No one ever saw fit to revisit Dannemeyer’s comment or to highlight guilt that should have been attributed to the green extreme for making it impossible to find and use domestic energy resources.

What Really Happened. Last winter, California started to experience rotating “green outs” (the official designations are “brownouts” or “rotating blackouts”). Liberal politicians once again were quick to try to divert attention from their role in all this by attacking “deregulation.” Wrong. They never tried genuine deregulation. This crisis is the result of a mistaken form of deregulation for which they were largely responsible.

California had a strong and large electric power system. It was, and is, connected to the other states in the western United States in what is called the “Western Systems Coordinating Council.” Over the past decade, California’s energy and peak demands have risen in the neighborhood of 20 percent, but nothing has been done to add significant new power generation. When California decided to lead the way to deregulation in the interest of lower rates, it made three major errors:

1 .It did not allow utilities to enter into long-term contracts for energy supplies (gas or electricity). This meant that utilities, when buying natural gas or electricity, were at the mercy of the day-to-day marketplace when prices for gas rose because of shortages.

2. Although the utilities were exposed to the volatility of that marketplace and would have to pay whatever the spot market price was during a period of shortage, they were not allowed to pass those costs on to consumers. This is why the utilities, in an effort to keep the lights on this past winter, had to pay up to eight times more for power than they could sell it for and quickly became insolvent. Since a very high percentage of the cost of electricity from gas-fired power plants is the price of gas (some say 90 percent), the losses were massive. The old joke is: “We’ll lose a little on every sale and make it up on volume.” Well, in this case it was, “We’ll lose a whole lot on every sale and go broke.”

3. And most serious, while California “deregulated” the electric business in California and stimulated growth by its regulated low prices, it did not deregulate the business of building new power plants. As “deregulation” was occurring, many companies in and outside of California saw that there would be a need for new power plants. They came to California to build them and ran into the mentality of the 1980s -namely, total opposition to the building of anything. They got nowhere.

In the power-plant business, one finds all sorts of attitudes opposing new plants: NIMBY (“not in my backyard”), LULU (“locally undesirable land use”) and BANANA (“build absolutely nothing anywhere near anything”).

During this period essentially, all efforts have been aimed at building natural gas-fired power plants. There are several impelling reasons: (1) natural gas has been relatively less expensive than other fuels; (2) contracts to supply it have been readily available; (3) natural gas is considered to be more environmentally benign, thereby potentially reducing opposition to the plant; (4) physically, the plants can be built quite rapidly (perhaps 12 months from construction start to operation for peaking, or “simple cycle” units, and around 30 months for “combined cycle” plants); and (5) the conventional alternatives, coal and nuclear, are not viable in today’s political climate.

Nuclear power is under such attack that utilities all over the United States are struggling, sometimes unsuccessfully, simply to keep them open and operating in the face of enormous opposition. In that atmosphere one would have to be extremely optimistic, masochistic or rich even to think about trying to build a nuclear plant. Coal plants could meet the current air quality standards and should be built, but there are problems and a solution, which are described later in this article.

Strangely, even after the crisis arrived, and the governor, in fall 2000, said he wanted to speed up the production of new power plants, nothing seemed to happen. No speed-up occurred, or so it has seemed to some plant sponsors attempting to get an additional 16 power plants approved and under construction. The earliest of these should begin producing additional electricity by late 2001 or early 2002. Clearly too little, too late.

Furthermore, the governor ought to be embarrassed by his failure to act sooner in requesting an EPA exemption on emission limits for existing power plants that were available but could not operate because they had reached their emission limits. It took the governor weeks to request this exemption, which was favored by even some of the leading less extreme environmental leaders. Some speculate the governor hesitated for fear of being criticized by environmentalists, and in so doing probably cost the state government about $200 million extra. This emission exemption alone added about 4,000 megawatts of generation, which would have been enough to alleviate most of the brownouts that occurred over the winter.

More Brownouts Ahead. Summer, almost upon us, will see more brownouts unless several things happen: Emission limits continue to be exceeded in times of crisis, hydropower supplies are abundant, and purchases of power from adjacent states continue to expand.

The plan for exemption from emission limits is quite reasonable. Excess emissions will have to be “paid back” when the crisis is abated by operating the plants below allowable emission limits. This “banking” of credits may have to continue for at least the next 18 to 24 months while new power plants are being built. Hopefully, this year’s excellent snow pack in the Sierra Nevada Mountains will melt slowly, optimizing the production of hydropower and filling hydroelectric reservoirs.

It should be noted that not all the power problems are due to lack of generation. Some come from lack of transmission. Southern California may have an excess of power, but it can’t get to the north where it is needed because transmission lines to carry the power are inadequate.

Unfortunately, the same head-in-the-sand approach to energy has been extended to the needs for new transmission capacity. Work is now under way on projects that may help, but what Californians really need to do is take a comprehensive look at optimal transmission requirements and then make a commitment to build them as quickly and cheaply as possible in a manner that is consistent with legitimate environmental standards.

The governor’s sudden decision in January to obtain authority from the legislature for the state to buy power and to sell it to the utilities at a reduced price shows the hazards of apparently working without a plan and trying to be all things to all people. The two major utilities fell more than $11 billion short of covering their costs in just a year.

The state will incur that same general level of expense over revenues if its subsidies the consumers. How long will it take even a rich state like California to go bankrupt at that rate?

Some believe that the governor’s real intention and that of the environmentalists is to put California smack-dab in the middle of the power business. It can be safely guaranteed that the long-term consequences of such an act will be a less dynamic and less efficient power system than the one they would have if they simply corrected the errors made in deregulating.

Not Just California’s Problem. One way or the other, it is reasonable to expect that California will slowly claw its way out of the power-shortage business sometime in the next two years through a combination of good ideas (more power plants, emission exemptions in time of crisis, more transmission, increased conservation, fu1l-cost pricing to consumers) and bad ideas (efforts to governmentalize the system, state subsidies of power costs, state interference in the management of utilities).

One thing is clear, though. The federal government did not cause this problem and it should not try to solve it, for it would assuredly do an even worse job than California has done.

A question that naturally comes to mind is: How are other parts of the country doing? Well, unfortunately, in some places -particularly the Northeast -conditions look appallingly like Ca1ifornia. Opposition to every sort of new power plant or transmission

requirement and “deregulation” California-style seem to be in vogue. Thus, unless ways are found to allow and expedite new power plants, more states will become Act 2 in the national drama titled “Green outs: An Experience Coming Soon to a Location Near You.”

Every state and region ought to be looking seriously at how it compares to California. Then, if the state is determined to be at risk, steps should be taken immediately to encourage the building of power plants and transmission lines. Perhaps states will be able to overcome the resistance of the green left because of all the publicity given to what has happened in the West. If so, they may be able to avoid duplicating what happened there. If not, we’ll see replays in various parts of the country soon, depending on temperature extremes. The fact is that electric demand cannot be allowed to grow and grow without doing something about building new generation. Thanks to the high-tech era we’re in, an adequate and reliable supply of electrical energy at an affordable price has never been more important to our economy.

Staying on Top. Nationally, what we need to come to grips with sooner rather than later is simple: We shouldn’t put all our eggs in the single basket of natura1 gas-fired power plants. An unlimited supply of readily available and cheap natural gas doesn’t exist. In fact, the rapidly rising price of natural gas has caused much of the current economic problem in California.

The United States is one of the world’s richest coal countries. Billions have been spent perfecting “clean-coal technology.” Today, it is possible to build a coal-fired power plant that will meet the EPA standards for clean air emissions. But almost no plants are being built. Why? Largely because investors in power plants have to reckon with the possibility that while a plant is being permitted and built, perhaps a six- to eight-year process, the good ol’ EPA just might change the standards as they have done before.

With hundreds of millions of dollars invested, a power plant might not be allowed to run, or it might have to run “derated,” meaning it would run at a smaller output, jeopardizing the economics and possibly ensuring the plant will never return the investors’ money. Not many investors would consider taking such a risk.

However, at least one fairly simple fix for this problem exists. Congress and the state legislatures in those states where coal plants might be built need to pass legislation allowing the appropriate agency the EPA, the Department of Energy at the federal level and the equivalent agencies at the state level- to enter into a contract with the builders of coal plants. That contract must provide that if the rules change, and those changes reduce the value of the plant, the government will reimburse the builder for the difference. More importantly, such a provision would allow America once again to start using one of its most abundant and cheap domestic resources to supply the energy requirements of this nation. America is not short of energy. It has been short of the will to find it and use it.

Donald P. Hodel is a former Secretary of Energy and former Secretary of the Interior under President Reagan.