Introduction: In 2001, California experienced an energy crisis. It was due in part to price controls that had been put in place there. What follows is part of the story.
DAVE MARASH
(VO) The speaker of the California Assembly, Robert Hertzberg, knows
the future of his state is on hold, until the supply-and-demand
crisis in energy is brought under control. Hertzberg also knows how
the crisis started. The 1996 Legislature passed what it called
deregulation.
ROBERT HERTZBERG
We didn't really deregulate. We only half deregulated. We said,
`Well, we'll let the--the wholesale side of the price float, but
we're going to freeze the retail side.'
DAVE MARASH
(VO) Protecting the retail rate payer was good politics, but there
was a fatal flaw on the wholesale side. Competition was expected to
send prices lower, but it didn't. At the California independent
system operator, which directs and monitors all flows of power in and
out of the state, they could measure the real results. Capping
retail prices encouraged unlimited use of power, while this growth in
demand drove prices higher.
TERRY WINTER
This year, starting around May and June, that supply began to
dwindle, as the other states' loads picked up dramatically and we
were experiencing low hydro for the entire region.
DAVE MARASH
(VO) Prices kept going up. Last May, when wholesale prices suddenly
doubled, they went higher than the capped retail price, which meant
for eight months, utilities grew a huge debt.
KENT HARVEY, TREASURER PG&E
For the month of December, for example, we were forced to purchase,
on behalf of our customers, at about 40 cents per kilowatt hour. And
we're only able to charge customers about five cents per kilowatt
hour. So, that's about eight times the size.
DAVE MARASH
In other words, you're losing 35 cents for every kilowatt hour that
you sell to a retail customer?
KENT HARVEY
That's exactly right. In the month of December alone, our shortfall
was over $1 billion.
nia.
DAVE MARASH
(VO) Which led, last Wednesday, to Governor Gray Davis not only
declaring an emergency, but dipping $400 million deep into the state
treasury to buy power that suppliers would no longer sell to the
strapped utilities. And the 400 million is just a stop-gap, another
billion in state-financed purchases of power is currently under
debate at the state Legislature.
TERRY WINTER
We finished the day-ahead market yesterday. We were about 7,660 some
megawatts short of energy. That means that immediately after that,
we start shopping.
DAVE MARASH
(VO) Terry Winter now leads California's daily search for power
supplies. Every day for the past nine, supplies have been so thin
that Winter has declared a stage-three alert. And on three of those
days, he had to resort to rolling blackouts to reduce demand to a
level he could supply.
MICHAEL SHAMES
The market has worsened with each day, that each--each week that has
passed. The prices have gone higher. The panic atmosphere has
gotten higher. And most importantly, the utilities have come that
much closer to the brink of bankruptcy.
DAVE MARASH
What's the state of play right now?
ROBERT HERTZBERG
Well, it's in flux. There's certainly, you know, we're faced with a
tremendous crisis in California. You see the blackouts and what's
happening in California. Our focus in the near term is to try to
stabilize the market by engaging in these long-term contracts, so
that it takes the air out of this having to go out and bid every
single day, and the prices are ten times what they--what they should
be.
DAVE MARASH
Two things about the state of California's long-running crisis of
energy, supply and demand. Number one, the time for finding a
solution seems to be just about up. And, two, going up seem to be
the two best words to describe the price of that solution. I'm Dave
Marash, for NIGHTLINE, in Sacramento.
TED KOPPEL
How California got into this mess and how it's scrambling to find a
solution when we come back.
ANNOUNCER
This is ABC News: NIGHTLINE, brought to you by...
(Commercial break)
TED KOPPEL
Joining us now from Sacramento, Severin Borenstein, director of the
University of California Energy Institute. From our affiliate KXTV,
Dan Morain, deputy Sacramento bureau chief for The Los Angeles Times,
and from our Los Angeles bureau, James Sterngold, who's covering the
power crisis for The New York Times.
And James Sterngold and Dan Morain, let me begin with you, Dan
Morain. Can we find a villain or a fool here?
DAN MORAIN, LOS ANGELES TIMES
Well, their--the--the villains, you know, I guess it's sort of in the
eye of the beholder. I mean, the--the--the governor is certainly of
the view that the power generators and the federal energy regulators
are the villains. Now, their--the generators are saying they're just
simply following the laws of supply and demand, and the federal
regulators are saying they're following the law. So...
TED KOPPEL
And why does the governor call them villains? Well, I mean, he may
not call them that.
DAN MORAIN
Well, he's calling...
TED KOPPEL
Why does he suggests that they are?
DAN MORAIN
Well, he has said that there--that--that the generators are--are
gouging. Now, he's toned down his rhetoric significantly in the last
few days. I mean, he clearly is focusing on--on trying to find a
solution here.
TED KOPPEL
Let me try and bring this, Jim Sterngold, down to a point perhaps
simpler than it deserves to be. But how in heaven's name can anyone
believe that you can put a PRICE CEILING on the retail price and have
no PRICE CEILING on the wholesale price and not in times of shortage
expect it to go totally out of kilter?
JAMES STERNGOLD, THE NEW YORK TIMES
Well, the short answer to that is that no one ever thought we would
be in a time of shortage. This is a classic case of what the
economists call PRICEs being determined on the margins. Three or four
years ago, no one ever dreamed PRICEs would be this high. We were in
a slight oversupply situation. Here we are in what's really only a
fairly modest slight undersupply situation, but you can see this
tremendous swing, where wholesale PRICEs have gone for something like
four cents, three cents a kilowatt hour, three and four years ago,
and today they've gone as high as 30 cents, 40 cents and higher a
kilowatt hour. And the swing in supply has not been enormous.
TED KOPPEL
Now, that's in California. Professor Borenstein, why is it that in
other states the wholesale prices are still fairly close to what the
retail prices are?
PROFESSOR SEVERIN BORENSTEIN, UNIVERSITY OF CALIFORNIA
ENERGY INSTITUTE
Well, there are a number of factors. The main issue is that in
Pennsylvania, for instance, where they have also deregulated, the
utilities are still owners of most of the generation. So, even when
the PRICE does go up, utilities are not buying very much power at
that--those high PRICEs. As a result the utilities are able to pay,
even when the PRICEs go very high, for a little bit of power, and
their overall cost of buying power and producing it is still pretty
low. So, they've been able to maintain a low cost overall acquiring
and producing power below the cost they're allowed to charge at the
retail level.
TED KOPPEL
Why--why doesn't the California Assembly simply pass a new law or
regulation in which it says, we made a really big mistake in putting
a CEILING on retail PRICEs, let's let the market handle this? Let's
lift that CEILING and see what the market does?
SEVERIN BORENSTEIN
Well, if the utilities--it were allowed to charge exactly what the
wholesale PRICE is, we'd see PRICE increases right now on the order
of five or six times, and there would be a revolt among the
consumers, I'm sure. The main issue is that the utilities have sold
off most of their generating capacity, and they can't get it back.
That combined with the shortage that Jim referred to has pushed up
the PRICEs at the wholesale level.
TED KOPPEL
Now, wait a second. I'm--I'm a little bit lost, so Dan Morain, maybe
you can--maybe you can bring me back into some kind of focus. Why
did they give up their generating capacity? Isn't that what...
DAN MORAIN
Well, they...
TED KOPPEL
Isn't that what power suppliers are supposed to have?
DAN MORAIN
Well, there--it's--it's a point of no small of debate, but, I mean,
the fact is that the--that the utilities made a ton of money by
selling off a lot of their generators. These were old generators.
They--they sold them for more than their--than they thought they were
going get.
TED KOPPEL
Who did they sell--who did they sell them to?
DAN MORAIN
Well, you know, they--well, they sold them to--to several power
generators that have, you know, sprung up, Now, you're--you're suggesting that there may be
something political in all of this, so why don't we leave that
hanging for a moment, and then let's come back to that issue in just
a moment.
(Commercial break)
TED KOPPEL
We're back with Severin Borenstein, Dan Morain, and James Sterngold.
Mr. Sterngold, the suggestion that politics may be playing a
role here. Big time national politics. Texas oil companies, are
they somehow to blame here?
JAMES STERNGOLD
No, I don't think they're the principal villains, although the
governor has, as was stated before, really vilified them. The real
villain is reality and the real politics is really state politics.
Assembly members have to be elected every two years. Governor Davis
is up for re-election in two years. No one wants to find their
opponents accusing them of socking it to utility rate payers by
increasing the rates dramatically. So in answer to your question
about the obvious solution of allowing retail PRICEs to reflect
wholesale PRICEs, no one wants to take the political hit.
TED KOPPEL
Professor Borenstein, if it's bad now it's going to get worse in
July, right?
SEVERIN BORENSTEIN
It's going to get a lot worse in July. Right now the only problem in
the electricity market is a financial problem. That is that the
utilities are nearly broke and they're having a hard time buying
power because they don't have much credit. This summer we're going
to have a real power crunch. And if we don't get some conservation
into the market by raising PRICEs and letting consumers, particularly
the large industrial and commercial customers, see those PRICEs and
cut back, we're just not going to be able to meet the entire demand.
TED KOPPEL
Is what we're seeing in California unique to California or are we
going to see it anywhere else.
SEVERIN BORENSTEIN
I don't think we're going to see anything like this anywhere else,
not because California is different, but because California went
first and the other states are learning very quickly from the
mistakes we've made. So, I think it would be very unlikely to see a
state deregulate and put--and allow PRICEs to float at the wholesale
level without any sort of long-term contract to hedge their risk, or
holding onto the generating facilities.
TED KOPPEL
There's a--there's a magic phrase, Mr. Morain, long-term contract.
Somehow I have heard suggested that if only the state of California
could now arrange for some long, long-term contracts, maybe five or
10 years, they would be able to bring this thing back into some kind
of focus again.
DAN MORAIN
Well, that--that's, of course, what's happening today, is the state
held an auction and got these power generators to--to bid for
long-term contracts. They're going to sell--the state's entering
the--the electricity business, buying electricity. They're hoping to
get the PRICE that will ensure that PRICEs don't go up because, you
know, there's--there's one element in California that--that is--well,
it's not unique to California, but we certainly do it, and that is
initiatives. And I think without a doubt, there will be an
initiative in 2002.
TED KOPPEL
Are--are--are things going to get so bad, Mr. Sterngold, that at some
point or another even politicians who want to get re-elected are
going to say to the public, `There's only way--one way out of this,
and that is for retail PRICEs to go up significantly'?
JAMES STERNGOLD
Well, that--that--there is potential for that, and everybody's kind
of hoping when that happens, it will be somebody else's
responsibility to fix it. But they are working very hard now. As
Dan said, there's a very important auction taking place today to try
to stabilize long-term electricity PRICEs. That's one piece of a
puzzle that's slowly taking shape in which it appears there would be
some modest hit to rate payers, but it would come in sort of a hidden
way so they wouldn't actually see big increases in bills. And
they--they are working hard at crafting this multipiece puzzle that
will try to avoid that. But, really, there's only about 10 days at
this point given the fact that the federal government has only
extended for two weeks the emergency order, that they've got about 10
days in the Legislature now to craft something that's going to have
credibility in the markets and that the politicians are going to be
able to sell to their constituents.
TED KOPPEL
There's one other factor, and Dan Morain sort of hinted at it
earlier, but Professor Borenstein, I'd like you to address it. And
that is that the Bush administration has been saying all along, `Hey,
we've got to develop more domestic energy sources.' This sure seems
to be supportive of that kind of initiative.
SEVERIN BORENSTEIN
Well, I'm not sure I'd agree with that, actually. The domestic
development of natural gas is a good idea, but what happened here was
the PRICE of natural gas was so low for 20 years that firms have
stopped looking for it because it wasn't remunerative. Now with the
PRICE of natural gas skyrocketing, and that's used to make a lot of