Copyright 2000 Federal News Service, Inc.
Federal News Service
July 26, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 2209 words
HEADLINE:
PREPARED TESTIMONY OF WILLIAM KEESE CHAIRMAN CALIFORNIA ENERGY COMMISSION
BEFORE THE HOUSE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON INTERIOR AND RELATED AGENCIES
SUBJECT - THE
CONTEXT FOR AN ECONOMICALLY SOUND NATIONAL ENERGY STRATEGY: PRINCIPLES AND
CHALLENGES
BODY:
Mr. Chairman I appreciate
the opportunity to testify before the Subcommittee in my role as Chairman of the
California Energy Commission on energy policy. I serve as vice-chairman of the
National Association of State Energy Officials (NASEO), and I am also
representing them today. The views I express here and in my oral testimony are
my own and not necessarily the views of the Davis Administration or the State as
a whole.
In many ways we have a set of state and federal energy policies
today. However, they originate from the actions of the federal government and
individual states to meet their respective needs. In recent years, many of the
issues that separated states have become blurred and increasingly overlapping.
This calls out for a renewed effort by the federal government to develop
policies and strategies for action based more on commonality than on individual
state needs.
For example, since 1996 states have been restructuring the
electric industry, as has the federal government through orders 888, 889, and
2000 of the Federal Energy Regulatory Commission (FERC). Twenty-six states have
begun to move forward through legislative or administrative action.
Those changes have been wrenching. Early last year the Energy Commission
reported on the vulnerability of California's electricity system. We projected
an increasing inability to meet summer peak demand caused by the combination .of
"heat storms" and inadequate supplies of electricity. These predictions are now
a reality in California and we expect these electricity shortages to continue
through 2004.
The steadily increasing demand for electricity in
California has created severe reliability problems resulting in rolling
blackouts and significant economic impacts. The electricity shortages that
occurred in California on June 14 and 15 increased costs by $1
billion for energy and ancillary services. These dramatic short-term price
increases have resulted in electric bills in the San Diego area, for example,
that are at least double what were paid by consumers in the prior year. The
California Independent System Operator (Cal ISO) has since lowered price caps
somewhat to limit payments to generators during periods of peak electricity
demand.
To improve the system's reliability we will need to address
supply adequacy and security, as well as power quality.
We need more
generation capacity in California. For more than a decade no major power plant
was constructed in California. Now, the Energy Commission is reviewing 14
applications totaling 8,065 megawatts (MW). Four of the five new power plants
the Energy Commission has licensed in the past year are currently under
construction. This capacity, however, will not come online soon enough to meet
near-term summer peak demands.
We believe that in order for the
restructured electricity market to function competitively, mechanisms must be in
place that encourage demand responsiveness. California Power Exchange data
suggest that a three percent decrease in demand at peak hours can reduce market
clearing prices by 25 percent. This means it is more cost-effective to reduce
peak demand for electricity than to build power plants to meet peak demand.
The California Public Utilities Commission (CPUC) recently issued a
$68 million solicitation for immediate delivery of electricity
demand and energy use reductions. The results of this solicitation will be known
later this fall.
In the long run, however, it is my view that consumers
need to be able to respond to changes in electricity prices on an hourly basis.
The basic framework to provide incentives to end-users including interval
pricing and interval data recording (IDR) meters are critical elements of a
robust competitive market. In a recent decision, the CPUC determined that
customers with IDR meters will be charged hourly commodity energy prices.
Legislation is pending in California that would implement a broader pilot
program for these IDR meters. In addition, consumers need expanded education
about the implications of hourly commodity energy pricing and easy-to-use,
programmable appliance controllers to respond to price signals. No one expects
consumers or businesses to constantly monitor market prices and manually adjust
consumption.
Our current transmission system was not constructed to
handle an open wholesale market and it will take time to implement needed
upgrades. We are currently funding a $7.2 million contract with
the Consortium for Electric Reliability Solutions to determine what solutions
might exist to improve the reliability of the electric grid. DOE is providing
approximately $10 million in additional funding.
New
transmission lines, however, do not represent a quick fix as they take 5 to 7
years to construct. In California they may not necessarily be the appropriate
fix as there is sufficient transmission from out of state. System security
issues usually arise at the local level. Problems at the substation level during
periods of peak demand create choke points in California's grid system that
result in significant localized outages and rolling blackouts. We are taking
steps to augment the capability at specific points in our grid.
However,
the interrelated nature of electricity supply and transmission makes this a
western grid system problem, not just a California issue. The events of June 14
and 15, though local in nature, jeopardized the entire western grid system.
Congress can help by passing national reliability legislation. Electric
system reliability is a problem that must be addressed at a larger level than
state and provincial governments can provide. The creation of higher level
institutions to provide that oversight when necessary would need to recognize
appropriate state authority and provide a framework such that decisions
regarding reliability could be made at the lowest possible level adverse
consequences to other entities.
I believe legislation allowing for the
creation of state advisory bodies on an interconnection basis is important. We
have participated in the formation of the Western Interconnection Organization
which will have state and provincial representatives on its Board of Directors.
California's transportation system is no less vulnerable to price
volatility. California consumers, like those in many parts of the nation, have
been hit by sharp price increases for gasoline and diesel fuels. The underlying
reasons can be traced to skyrocketing demand, a very tenuous balance between
in-state refining capacity and demand, and unplanned supply disruptions.
California's on-road transportation system is nearly 100 percent
dependent on petroleum, Our demand for transportation fuels is growing. Every
year Californians use more than 14.6 billion gallons gasoline and nearly 3
billion gallons of diesel. By 2020, the Energy Commission forecasts that this
daily demand will grow to more than 20 billion gallons of gasoline and 3.4
billion gallons of diesel.
In contrast, refinery capacity has dropped
due to closures and the need for existing refineries to renovate their
facilities to provide new formulations of gasoline and diesel. Instate refining
capacity currently is only about 13.5 billion gallons per year of both gasoline
and diesel fuels. While this capacity is sufficient to meet winter demand,
California must import fuel supplies to meet summer demand.
The
Corporate Average Fuel Economy (CAFE) standard has been the
single most important catalyst for increasing transportation energy efficiency
over the last 25 years. Since 1988, however, there has been a gradual decline in
fleet fuel economy. Consumers are purchasing greater numbers of light-duty
tracks relative to automobiles and the automakers do not perceive a benefit from
producing vehicles with fuel economy ratings greater than the current maximum of
27.5 miles per gallon (MPG). Congress could consider raising the CAFE
standard to match more recent technological advancements. I believe a
combination of both mandates and market-based incentives is the most effective
approach to achieve higher economy levels.
Also, while I believe the
incentives contained in the Alternative Motor Fuels Act of 1988 that encourage
the production of flexible fuel vehicles are important, the federal government
must now take steps to accelerate the development of the necessary fueling
infrastructure. By providing incentives to establish the necessary
infrastructure, Congress can ensure that the environmental and diversity
benefits of using alternative fuels in FFVs are realized. Congress also should
consider legislation that would allow the credit to be applied to a variable
range of gasoline/alcohol blends.
I believe California should continue
to pursue actions that balance energy and environmental policy. These issues are
inextricably linked. I encourage the federal government to continue its support
in a meaningful way in assisting California and other states to achieve the
balanced objectives of appropriate use of the automobile, achieving maximum
efficient use of our present petroleum-based system and moving to non-petroleum
fuels.
How can Congress address critical energy and environmental
concerns? The immediate step would be to provide appropriate funding to programs
already authorized. I encourage this subcommittee to show strong support for
energy conservation funding, sustained funding for environmentally friendly
fossil energy programs, and strong funding for the Energy Information Agency
(EIA). While we recognize you are placed under severe constraints by your 302(b)
allocations, in light of urgent energy needs, Congress should increase the
allocation and you should increase funding.
Congress should reauthorize
the Energy Policy and Conservation Act. It allows use of the Strategic Petroleum
Reserve, as well as authorizing a variety of other programs.
The State
Energy Program is the critical state-federal cooperative program. It is
under-funded at the $37 million house-passed level. The
combined SECP/ICP program received $53 million in Fiscal year
1995. Therefore, I would encourage an increase in funding.
In a broader
sense, it is important to recognize the critical balance of energy research,
development and demonstration (RD&D) and deployment programs for the
transportation, electricity generation and end-use sectors. Two and one-half
years ago you asked Bill Valentino of NYSERDA, Sara Ward of Ohio, and me to
testify on federal-state coordination on RD&D programs. Since then we have
initiated a series of Memoranda of Understanding to cooperate with DOE. While we
are now moving forward, it has been slow going.
For example, just this
spring we were able to work out a contract between the Energy Commission, DOE
and Lawrence Berkeley National Laboratories (LBNL) to permit LBNL to implement
important programs for the Energy Commission. This took a great deal of time,
but we hope it will be a template for future state-federal-laboratory
cooperation. We have also started a process of joint planning to identify
state/federal budget priorities. The point is, it is the right thing to do, but
changing a governmental culture and thinking "out of the box" is a hard thing to
do.
Also this year you initiated a small crosscutting RD&D program
to help implement state RD&D plans that resulted from the MOUs. We are
encouraged with the idea, though we had significant problems with the
solicitation. This program is a step in the right direction, even at a funding
level of only $6 million.
But, please recognize that
California alone will be soliciting more than $250 million in
RD&D projects with ratepayer funds over 4 years. The $6
million contribution from DOE to all the states is quite small. We are hopeful
that DOE can implement a simpler process and a larger funding base to support
collaborative RD&D projects with the states.
NASEO and DOE, with the
Energy Commission's support, have begun an aggressive effort to better
coordinate energy and environmental policies, programs, and regulations. State
energy, air, environmental, and utility commission officials met this March in
Washington, DC to discuss coordination and share ideas. In this effort we have
cooperation from DOE, EPA, and the White House. We will be having a larger
national meeting in September. Your counterparts on the House VA-HUD Independent
Agencies Appropriations Subcommittee have endorsed this effort in their Fiscal
Year 2001 report. We hope we can count on your support as well.
At the
federal level, increased cooperation between DOE, EPA and FERC is critical to a
reasonable energy future. These efforts have begun and should be encouraged.
Finally, from an energy policy perspective, we must work to expand
energy efficiency, renewable energy and clean-burning fossil fuels. And, we must
address the significant environmental issues associated with greenhouse gas
emissions and global climate change. We must also coordinate federal and state
activities to allow for enhanced electric transmission and distribution networks
and to build new generation. We need to consider siting of new gas pipelines
where appropriate.
I look forward to answering your questions.
END
LOAD-DATE: July 27, 2000
