Last month, the strange world of Sacramento politics offered a clear view of both the risks and rewards of addressing complex utility issues in a forum that allows greater public input, but which can also show the naked power of special interest campaign spending. A long awaited conference committee, chaired by Senator Steve Peace, began work on finalising a deregulation blueprint. State legislators had returned from a summer recess on August 5 -- Clean Power Day at the state Capitol -- and Peace did not waste time before generating controversy. He set the tone of the debate when he told the large gathering of renewable supporters that the deregulation plan put forward by the California Public Utilities Commission (CPUC) "sucked" and that state legislators would craft a better scheme. He added: "The agenda will not be if we will continue with alternative energy and diversity of energy sources, but how we will accommodate it."
Though these words were welcomed by the Clean Power Day crowd, which gazed at the huge nacelle of Zond System's Z-40 wind turbine parked on the state capitol steps, those working feverishly under the rotunda to gather support for wind power could be seen shaking their heads. Jane Kelly of the Union of Concerned Scientists, a strong supporter of the "renewable portfolio standard" proposed by the American Wind Energy Association (AWEA), said: "The crown jewel of California's energy system is at stake. Given the likelihood of a multi-billion nuclear bailout in the deregulation package, it is incumbent on the Legislature to ensure that cleaner, cheaper renewable resources continue to provide a substantial fraction of the state's electric supply."
Peace, an unpredictable and outspoken legislator, quickly threw out major portions of the proposed restructuring package developed by the CPUC, including provisions addressing wind and other renewable resources. In the process he killed the renewable portfolio standard, a measure which San Diego Gas & Electric (SDG&E) was opposed to. SDG&E is a major source of campaign funds for Peace, with the utility and its employees contributing close to $10,000 over the last two and a half years. When CPUC president Gregory Conlon asked Peace why not stick with the portfolio, Peace responded, "a mandated renewable energy obligation wasn't going anywhere. It can't get the votes [in the Legislature] or the governor's signature." He acknowledged, though, that "the practical political problem" facing the standard was that it would raise rates for customers in his legislative district since the utility would be required to add substantial amounts of renewables under the policy. Unlike Pacific Gas & Electric (PG&E) and Southern California Edison (SCE), SDG&E buys very little renewable capacity. According to the California Energy Commission's Electricity Report (ER) 94, SDG&E only has 10 MW of net dependable renewable capacity on-line; this compares to PG&E's 1060 MW and SCE's 1545 MW.
Peace's other primary change to the deregulation package developed by the CPUC was in reshaping methods of collecting the Competition Transition Charge (CTC), which would recoup the costs of nuclear and some wind power plant that are higher than current electricity market prices. Peace has proposed that the portion of this "stranded cost" surcharge that is owed by residential ratepayers be separated and somehow amortised so that these customers get an immediate rate break, instead of having to wait until early next decade for rate reductions. The latest modification to the CPUC approved deregulation plan offered by utilities and large industrial consumers was to further accelerate the collection of stranded costs, with the majority recouped by the year 2001, instead of 2003 or 2005, as was proposed previously. This accelerated depreciation schedule is linked to a rate freeze, but no near term rate reductions.
Peace, who has received over $25,000 in campaign contributions from the SCE and PG&E during the course of the deregulation debate, cast himself as a populist looking out for the interests of small ratepayers. "I have been hired to be the investment advisor for small customers and I think they should get a fixed mortgage," said Peace, referring to his stranded cost plan when first unveiled on August 8. He said this approach is justified on the grounds that "small customers are not asking us to do this [deregulation] and the margin of benefit for these customers does not justify the level of risk." Large customers, who have the most to gain in deregulation, should have a higher level of risk, he said, adding: "These are some of the largest companies on earth -- the oil companies. These companies can make a business-like assessment of what is at stake. They have the computers and a level of sophistication that can tell me what the CTC is." These large customers should then negotiate annually with utilities on the costs to be collected through the CTC. "That's a fair fight," said Peace.
An RPS alternative
On renewables, Peace suggested that instead of relying upon the renewable portfolio standard, a three-pronged strategy could be introduced for preserving existing renewable energy capacity and bringing new capacity on-line: state purchases of renewable energy; promotion of voluntary renewable power purchases; and a state surcharge on consumer bills to help provide funding during the transition to a fully competitive electricity market. A similar policy is currently being pursued on the UK energy policy agenda.
Under the final restructuring bill, California state government agencies would be required to purchase some of their electricity needs -- 5% starting in 1998 with annual increases of 5% until a cap of 25% is reached by 2001 -- from renewable plants. The representatives of the state Department of General Services, which purchases roughly $300 million of electricity annually, was opposed to this requirement, but Peace, as well as renewable energy advocates, argued that spreading the additional costs of cleaner power across all state taxpayers is better than imposing these costs only on ratepayers of investor-owned utilities.
The second part of the package, for a provision giving customers the option to specify electricity from a renewable energy source, was promoted by numerous polls showing that people are willing to pay premium rates for clean power. Peace suggested utilities in the state could be required to offer green power to customers through advertisements in monthly bills. He claimed such monthly offers of green power would help defray advertising costs to reach residential customers, costs assumed to be one of the key market barriers to wind companies in a deregulated market. Utilities would also be offered small incentives to promote sales of renewable power.
To provide an incentive for the state, as well as other buyers, to purchase renewable energy, the Peace legislation offers to cut the CTC in half for those customers voluntarily choosing to buy at least 50% of their power directly from private wind or other renewable energy developers. Another option for customers would be purchases from a separate Renewable Power Exchange, a pool consisting of renewable power that would operate alongside the Power Exchange pool. This main pool would sell existing utility and non-utility nuclear, hydro and fossil capacity.
Few subsidies in strategy
In the third prong of the strategy, the only direct government subsidies would be those earmarked to pay for the portion of renewable energy costs that exceed today's exceedingly low market prices. This pool of funds would be raised, along with funds for energy efficiency and perhaps low-income programmes, through a separate surcharge in customer bills. A little over a third of the funds raised from this charge would go to renewable energy. Of this pot of money, estimated to generate roughly $465-540 million over a four year period, 40% would be earmarked for existing projects and 40% for new projects. The remaining 20% would be divvied up according to recommendations to be developed by the California Energy Commission in a report due in March.
In addition, up to $90 million of this total was earmarked for underwriting various contract buy-outs between SCE and the winning wind and geothermal bidders in the cancelled Biennial Resource Plan Update (BRPU). Had the BRPU not been disallowed by federal regulators nearly two years ago, it would have added several hundred megawatts of wind capacity to California's generating base.
The subsidies now proposed -- negotiated between the Independent Energy Producers (IEP), SCE and large industrial consumers -- are however inadequate, according to AWEA lobbyist Joe Caves, speaking at an August 15 hearing in which the final renewable energy policy was unveiled before the conference committee. "That level of funding can't sustain the industry," said Caves after Senator Byron Sher, a long-time supporter of renewable energy programmes, questioned whether this amount of support was enough. Caves suggested $700 million was closer to the mark. He pointed to the infamous 11-year energy price payment cliff for current wind developers, exceedingly low natural gas prices and the uncertainties of deregulation as all critical factors in destabilising the state renewable energy market. "We need enough funds to provide a bridge to get through the current market uncertainties while maintaining the existing level of on-line renewable energy capacity," argued Caves.
IEP's Jan Smutny-Jones responded to these criticisms by saying the current version of the bill "was not a Rembrandt. It's more like modern art." He added that the level of funding included in the bill was not based on an assessment of what the industry needed, but rather on what large industrial customers "offered on the table."