Statement of U.S. Senator Dianne Feinstein
At the Senate Government Affairs Hearing to Examine High Cost
of Natural Gas and Electricity in California
June 13, 2001

“As a member of the Senate Energy Committee, I have been carefully watching what has been happening in the deregulation of electricity and natural gas in California. I have watched the problem now spread to seven other Western states so California is no longer alone.

I must tell you that I have really come to question whether the deregulation of electricity and natural gas can work. When we deregulated airlines, individuals had a choice of airlines. If they did not like one, they could go to another. When we deregulated telephones, individuals had a choice so if they did not like one service there was another.

Yet, in the area of natural gas and electricity the consumer has no choice. You get your bill and you cannot change companies if you don’t like it. What I have also seen it is a broken market caused in part by California not having adequate generation. However, having said that, I have got to make a point that from 1990 to now, the increase in demand is less than 4 percent. The energy savings today is 11 percent. And the cost of all power for California in 1999 was $7 billion dollars. The cost in 2000 was $28-$30 billion dollars and the cost this year is predicted to be $50 to $65 billion dollars.

In that milieu, you’ve had two big investor owned utilities, the middlemen buying the power on the wholesale market, selling it to the consumer and then going into or close to bankruptcy. One, PG&E, is already in bankruptcy. The other, Southern California Edison, if it does not work out an arrangement with the state, will be in bankruptcy. And you have the State so far this year having spent $8 billion dollars buying electricity to try to keep the price low.

As recently as two weeks ago, electricity prices in California were almost ten times higher than they were a little more than a year ago. Now, the Federal Power Act clearly states that if the Federal Energy Regulatory Commission (FERC) finds prices to be ‘unjust and unreasonable,’ then FERC must regulate and set those rates. They did find the rates unjust and unreasonable last November. They have really refused to move aggressively to set those rates. And I and many other Californians have tried to sound a consistent drumbeat to move to do that.

In late April, FERC issued a limited price mitigation order which would cap wholesale costs during Stage 1, 2, and 3 emergencies. And it now appears that on Monday, FERC may extend this order to the entire Western energy market and may ensure that the order stays in place at all times. This means the order would be in effect 24 hours a day, 7 days a week and would require power generators in the entire Western region to sell electricity back into the grid. That’s another step forward. But the question I have about it is manipulation because this is tied to the least efficient megawatt. So it’s tied to the dirtiest and most polluting plant. Now I ask this question, is that then an incentive to keep dirty plants operating in order to drive up price and produce profitability for clean plants? And we’re going to have to see.

I called the head of the California Independent System Operator (ISO) yesterday, Terry Winters, and he agreed that this could be manipulated. He agreed that we don’t have enough information yet to know whether in fact the acute drop in prices over the past week or so is a result of: the April FERC order; whether it’s a result of the generators now feel the heat’s on; whether it’s a result of the Senate having changed power; or whether it’s a result of Senator Smith’s and my bill which now has a markup date in June and would set Western regional caps.

But we don’t know what the case is but we do know a couple of things. And that is that just a few days ago one generator admitted to selling electricity into California at $3,000 a megawatt hour, 5,000 megawatts at that price. And another generator fessed up to $1,900 a megawatt. So what we still have out there is a ribald unregulated marketplace.

The natural gas issue has also been an interesting one because natural gas is three times higher in California than anywhere else in the United States. The FERC is looking into this situation. There is no transparency when it comes to natural gas. It’s very hard to tell what is going on, but when you have three times the price when the transportation cost of natural gas should be between 50 and 70 cents a decatherm and the gas is selling instead at three or four dollars, raising the price in California to $12 to $15 dollars, you really come to question what is going on.

Let me give you a couple of examples of what’s happened. We have one sugar refiner in my back yard in Crockett, California. It’s called C&H Sugar and they employ about 1,200 people. Their normal cost of natural gas to produce steam is $450,000 a month. It has now risen to $2 million per month. They have had to lay off people. They’ve had to close down the plants. They’ve had to try to get Bridge financing. I can tell you also about California’s steel industry with the costs jumping literally millions of dollars. Now that’s not even including the restaurants, that’s not other any of the other businesses that use electricity as well.

You should know that yesterday California Attorney General Bill Lockyer announced that he will convene a criminal grand jury to look at whether power generators have illegally manipulated energy prices. The investigation will begin shortly after July 1 when a new 19 member Sacramento County grand jury is seated. As Attorney General Lockyer said, ‘This does not mean we have reached a conclusion. It’s a process to get at the truth. This is the beginning of the criminal focus.’

So the belief among many of us, and I am one, is that the generators have made use of the problems in California to manipulate the market and gouge prices. John Bryson, CEO of Southern California Edison, testified before the Energy Committee in answering a question of mine of when they divested of a generating facility and sold those facilities to out-of-state generators. I asked this question, what were you selling a megawatt hour power from that facility when you owned it? The answer was $30. And then the next question I asked was when it was divested what did the company that took over ownership charge? The answer was $300 a megawatt hour. So in other words, power that had been selling at $30 dollars when the facility was sold and then they had to buy that same power back at ten times the price. This is one of the reasons they are close to bankruptcy today.

I am sure that Senator Craig mentioned the concerns in Idaho and I am sure that Senator Burns and others mentioned the concerns in Montana where you’ve got a mine closing and people are losing their jobs in these seven western states where it is anticipated that there will rate increases from the low of 14% to a high of over 100%.

So the situation is changing dramatically and I thank you Mr. Chairman. I wrote you a letter urging that you take a look at some of the relationships between the big generating companies and the regulatory agency that is supposed to be regulating these very companies.

Today, we see no semblance of really meaningful regulation yet and, in particular, the area of natural gas there is very deep concern. My bill will be marked up, I believe, on June 27th. Whether we can pass it in the Senate or not or pass it in the other House, I don’t know. I should tell you when Senator Smith and I went to see Congressmen Tauzin and Barton, they were not very sympathetic. I now think that (the climate for federal action) is changing in the House and instead of the word control, the word mitigation is being substituted. Whatever you call it, its fine with me as long as it works.

Thank you very much Mr. Chairman.”