Statement of U.S. Senator Dianne Feinstein
to the Senate Energy and Natural Resources Committee
on the California Energy Crisis

Washington, DC - At a hearing on the California energy crisis, U.S. Senator Dianne Feinstein (D-Calif.) today called upon the Senate Energy and Natural Resources Committee to consider legislation that she sponsored to permit the Secretary of Energy to set Western regional cost-of-service and reasonable profit based rates on wholesale power or a temporary wholesale rate cap.

The establishment of such measures would be contingent upon the Federal Energy Regulatory Commission finding that "unjust" and "unreasonable" wholesale energy rates were being charged and the Commission failing to take action itself. The governor of any state within the Western regional could opt-out of the program.

Noting that California faces a shortage of 2,000 to 5,000 megawatts every day this summer despite the emergency efforts underway by Governor Gray Davis and the State Legislature, Senator Feinstein said the federal government cannot afford to shy away from an issue that will have economic repercussions throughout the nation.

Senator Feinstein urged the following additional measures:

• Passage of legislation she introduced Tuesday with Senator Bob Smith (R-NH) and eight other senators to provide tax incentives for energy efficient homes, buildings, and schools
  
  
• Approval of legislation to provide tax incentives for the development of wind and solar energy.
  
  
• Fully implement new energy efficiency rules established last month by former Secretary of Energy Bill Richardson established new energy efficiency rules for air conditioners and other appliances, which could save the equivalent of 91 new 400 megawatt power plants.
  
  
• Require all federal agencies to develop new energy efficiency plans within the next 60 days.

On the State level, Senator Feinstein noted that Governor Davis and the State Legislature have made some progress on the following goals and urged even more concerted action:

• Increasing the energy supply through expedited plant construction and other sources of power generation.
  
  
• Decreasing energy demand and increasing energy efficiency.
  
  
• Expanding the use of long-term bilateral energy contracts rather than relying on the spot market.
  
  
• Maintaining the viability of California's public utilities.
  
  
• Reversing until at least 2004 the "divestment" provision of the 1996 deregulation bill, which required the utilities to sell off all non-nuclear and non-hydroelectric generation plants.

"This morning I received a letter from Governor Davis detailing the steps the State is taking. I believe that the State is fully engaged in finding a way through this crisis, which was brought on by a flawed deregulation law in 1996 coupled with 'price gouging' by power generators this year. To date, the State has spent $500 million to purchase electricity and may well spend another $400 million when that is gone.

Clearly, there will be a continuing problem which may well be compounded by a 2,000 to 5,000 daily megawatt shortage this summer despite bilateral contracting. This must be addressed.

I also believe the State Public Utilities Commission has to respond and allow the utilities to charge a reasonable rate of recovery, perhaps one that is now being considered by the Legislature that would target consumers who exceed their 'baseline' power allowance by more than 30 percent. This would exempt the basic level of usage from price hikes and encourage conservation.

I firmly believe unless there is some action on this front there will be little sympathy from other members of Congress to help California, especially those in the Northwest who are already seeing consumer rate surcharges of 50 percent or more."

Feinstein also said she was closely reviewing a set of recommendations from one of the panelists at today's meeting, Dr. Peter Fox-Penner, of the Brattle Group and a member of my advisory panel, to help California find the additional 2,000 to 5,000 megawatts needed this summer. These include:

• Scouring the entire Western United States for bilateral contracts.
  
  
• Discussing the development of a 'crash program' for real-time pricing, which has reportedly been drafted by the California Energy Commission but may have been held up by the California PUC.
  
  
• Ensuring that all large buildings with emergency generators use them (which could provide several thousand megawatts.)
  
  
• Exploring the feasibility of bringing in hundreds of megawatts of electricity on flatbed trucks, which was done last summer in Chicago.
  
  
• Examining whether mandating the increased storage of natural gas could help tide the State over during high-demand periods.

The following is the text of Senator Feinstein's statement to the committee:

"Today, California is in its 16^th straight day of a Stage 3 energy emergency. This means that California's energy reserves have remained below 1.5 percent since the middle of January. Fortunately and miraculously, California has only had two days of rolling blackouts.

With the help of the President's Emergency Order requiring out-of-state generators to sell energy into the California market, California ISO has managed to keep the lights on. Nevertheless, California cannot maintain the status quo indefinitely. The fact that there are extremely low reserves places incredible stress on our electric infrastructure and the financial underpinnings of that system.

Keeping the Lights On

California's peak demand during the winter is approximately 30,000 megawatts per day. The State is meeting this demand through various strategies-including implementing its interruptible load contracts, purchasing surplus power from out-of-state suppliers, and even waiving permits for smog-causing pollutants (such as Nox). The State, however, cannot keep up this juggling act.

This has been one of the driest years on record in Northern California and the Northwest. As a result, reservoirs are low. And because much of our power in the summer comes from hydropower, it is likely that there will not be sufficient supply to meet the increased summer demand of approximately 42,000 megawatts.

Unless the State and Federal government take action now, I fear that we will have widespread and debilitating outages in California and, possibly, other areas of the west.

Financial Crisis

Because of the way the electricity market was restructured, this energy crisis is causing a financial crisis as well. The cost of constant peak power has ruined the credit ratings of our two largest investor-owned utilities, PG&E and Southern California Edison and has them poised on the brink of bankruptcy. Consequently, the State has had to step in and buy power itself. In fact, the State has already spent $500 million dollars to secure power supplies.

Furthermore, the State is suffering from lost productivity as a result of this crisis. A recent study by the Los Angeles County Economic Development Corporation has concluded that California's rolling blackouts and interrupted service have taken an estimated $ 1.7 billion toll in direct and indirect costs on the economy. This figure includes costs to big businesses, small businesses, and institutions. When the lights go out, we suffer from lost wages, lost sales, and lost productivity. If nothing is done, the 6^th largest economy in the world is put at risk.

Two questions arise: How did California get into this mess, and how will it get out of it?

State Situation

In 1996 California passed a badly flawed electricity deregulation bill. It was problematic on several fronts, but the biggest problem with the bill was that it forced California to rely on the "spot" market and "day ahead" market for 95 percent of its electricity. At the time, supplies were high and prices were low, in large part because the State was still recovering from the 1990-1991 recession. Legislators assumed that deregulation would spur an increase in new generation and that demand would stay low and energy efficiency would improve.

All those assumptions turned out to be wrong. In the past four years, demand has skyrocketed and little has been done to improve energy efficiency. Demand for energy increased, but the supply of energy has remained constant. Inexorably, wholesale prices went up, and now we face shortages.

Solutions to the Energy Crisis

In theory, the solution to the energy crisis is simple: either increase supply or decrease demand or do some of both. In the real world, however, that is much more difficult to accomplish than it sounds. Power plants take 3-4 years to get sited and built, and people need energy to run their daily lives.

Nevertheless, California is taking steps to address the crisis. Already, the State has approved 9 major power plants, which will generate enough energy to power 6 million households (6,278 Megawatts). California has also implemented a conservation plan, which cuts energy use across the State by 7 percent.

In addition, the state has taken steps to fix the market which has caused this crisis. California has:

•Conducted an energy auction to cover up to one-third of the State's energy demand;

•Expedited siting of new generating facilities; and

•Eliminated environmental obstacles to in-state energy generation.

Through these efforts, I am hopeful that California will be able to avoid further blackouts in the next few weeks.

FEDERAL ROLE

The most important thing that the Federal government can do is provide stability and prevent price gouging.

To that end, I have submitted legislation to give the U.S. Secretary of Energy the authority either to impose an interim Western regional price cap or to set reasonable cost-of-service-based rates for power generators if the Federal Energy Regulator Commission (FERC) finds there are "unjust and unreasonable" rates being charged.

You can't have a situation where California is buying power averaging $300 per megawatt hour, but can only pass it on to consumers at an average of $75 a megawatt hour.

Under the Federal Power Act, FERC holds the exclusive authority over energy generators and marketers. But despite this authority and despite FERC's finding that rates in California are "unjust and unreasonable", the Commission has refused to take action.

Thus, I have this introduced legislation to provide the Secretary of Energy the power to impose a temporary regional price cap and thereby prevent the price gouging or to set cost-of-service-based rates, allowing a reasonable profit for the power generators.

If, however, a governor does not believe that the rate cap is in his or her state's best interest, that governor would be able to "opt out" of the cap.

Energy Efficiency

I also urge this committee to look at ways to improve energy efficiency. Earlier this month, former Secretary of Energy Bill Richardson established new energy efficiency rules for air conditioners and other appliances, which could save the equivalent of 91 new 400 megawatt power plants.

Building on these rules, I introduced legislation yesterday along with Senator Bob Smith (R-NH) and eight of our colleagues to provide tax incentives for energy efficient homes, buildings, and schools. I also urge approval of legislation to provide tax incentives for the development of wind and solar energy.

Working with Other States

For those who say that this is just California's problem, don't kid yourselves. This crisis will not be confined to California. Ultimately, it will have an impact on Washington, Oregon, Idaho, and the other western states -- either directly with regard to power supplies or indirectly through its impact on the regional, national, and international economy.

I strongly believe that the only way to address this problem is for our States to work together. Already, nine governors of western states have indicated that they are open to some sort of rate cap, and I hope that this Committee will be, as well.

Natural Gas

In addition to the electricity crisis, natural gas supplies and prices are presenting another troubling problem for the region. Stocks of natural gas are low everywhere and because of the cold winter, the demand has been much greater than usual. Low stocks and high demand have driven up prices across the country.

It has been especially troubling in California on two fronts. First, because of the economic uncertainty surrounding PG&E, California has had to rely on another Emergency Order from the President requiring natural gas suppliers to sell to PG&E.

Without this order, it is possible that 3.5 million homes in northern California could be forced to go without heat. And unlike rolling blackouts which typically end in 60-90 minutes, if there is a natural gas crisis, if 3.5 million pilot lights go out, it would be weeks before PG&E would be able to turn them all back on.

The second concern lies in Southern California where natural gas prices have remained at nearly double the national average. Last Friday's spot prices for natural gas were $12.99 per million British Thermal Units (BTUs) in San Diego compared to $7.14 in Chicago, $6.88 in Katy, Texas and $6.31 at the Canadian border.

Mr. Chairman, I know that you held hearings about the natural gas situation in the last Congress and I urge you to take another look at this problem.

Conclusion

Clearly, the energy crisis is a complex problem. I know the Governor and the legislature have been working tirelessly to find a solution to these problems, and I believe that they are on the right path.

But the Federal government has a responsibility as well. I urge my colleagues to listen to the testimony that you will hear today, and consider the legislation that I outlined above. As I said a moment ago, California has the world's sixth biggest economy. It simply cannot function without reliable sources of energy at reasonable prices.

This crisis may have originated in California, but I guarantee it won't respect State boundaries. We all have a crucial stake in working together to resolve it."