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California Energy Crisis

In the mid 1990's, at a time of surplus electricity, state legislators concluded that the state's three major investor-owned utilities--Pacific Gas & Electric, Southern California Edison, and San Diego Gas and Electric--were in a position to wield monopoly power over the state's electric marketplace to the detriment of consumers. As a result, the California State Legislature voted to deregulate California's energy industry in 1996. At that time, few could imagine a scenario where the supply of electricity would fail to keep up with demand.

Under the terms of deregulation, Pacific Gas & Electric, Southern California Edison, and San Diego Gas and Electric were required to sell at least one-half of their power producing plants to allow other power generators into the marketplace. The State Legislature envisioned that competition would lead to lower rates for consumers. Overlooked, however, was the role of independent power producers who were provided with the opportunity to raise prices above competitive market prices. While deregulation froze the amount that utilities could charge consumers, it did not address the wholesale prices the utilities had to pay power producers for electricity, in many cases, produced in the very plants the utilities once owned. As a result, the state's two largest utilities--Southern California Edison and PG & E--paid $12 billion more for energy last year than they were able to charge their customers.

Compounding the energy crisis is the steep increase in the price of natural gas. For over a decade, natural gas has been embraced as the fuel of the future based largely on it virtues as a clean-burning, inexpensive, and seemingly plentiful commodity. Today, California is more dependent on natural gas than any other state except Texas. Most of California's power plants are fired by natural gas. In response to concerns expressed by California consumers and public officials, including myself, the Federal Energy Regulatory Commission (FERC) has now launched an investigation into charges that out-of-state natural gas sellers are manipulating the market to drive up prices. President Bush has now appointed two new nominees to the FERC--Patrick Wood and Nora Brownell--who have committed to aggressively investigate the causes of high energy prices in California. In addition, the FERC is now closely examining whether to impose price-caps on the sale of natural gas and electricity sold into our state.

By all measures, electric deregulation in California has been a failure. A number of other factors, however, have contributed to California's energy crunch. The roots of this crisis extend much further than one year. The lack of supply can be traced directly to the fact that, in spite of record economic and population growth, no significant power plants have been built in California in more than 10 years. This was due, in part, to increased environmental and regulatory burdens placed on power plant construction. In addition, California imports more than 25 percent of its power from out-of-state facilities in Arizona and Nevada, states with high population growth and demand for power. The growing demand in neighboring Western states has dried up sources of energy that have traditionally flowed to California.

Having studied this crisis in some detail, I believe the State of California took a critical wrong turn last year. Shortly after energy problems first arose in San Diego, the Public Utilities Commission (PUC) voted to authorize long-term contracts with wholesale energy providers at a rate far, far less expensive than consumers are now paying. Within days, however, legislation to overturn the PUC decision was passed by the California State Legislature and signed by Governor Davis. As a result, power continued to be purchased on the highly volatile spot wholesale market rather than through stable, long-term contracts. As you know, this volatility has led to ever escalating rates for electricity and natural gas.

While the roadmap to recovery rests largely in the hands of the Governor and the State Legislature, I believe the federal government has a responsibility to develop a comprehensive energy policy addressing both short- long-term solutions. I am particularly supportive of efforts to develop additional domestic sources of energy and relieving the United States dependence on OPEC. Having said that, I have had frequent contact with Governor Davis and our state legislators who are largely responsible for overseeing California's deregulation process. In addition, I have met recently with Vice President Cheney, Energy Secretary Abraham, the Chairman of the FERC, and with key Bush Administration officials to deliver the message that you are so effectively delivering to me--we are beyond the finger-pointing stage. It is time for solutions.