Welcome to the Hotel California: How will the california electricity crisis shape federal energy policy?

Electricity Journal

Volumn 14, Issue 6, 2001, Pages 54-69

  Santa, Donald F ^a  

^a Troutman Sanders LLP   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ENERGY RESOURCES;

CALIFORNIA; CALIFORNIA ELECTRICITY CRISIS; DEMAND-SIDE; FEDERAL ENERGY; MARKET PRICING; POLICY MAKERS; STATE REGULATORS; TRANSMISSION GRIDS;

ELECTRIC POWER TRANSMISSION;

EID: 0035402377     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(01)00215-9     Document Type: Article

References (53)

1. 1. Eagles, "Hotel California," on Hotel California (Elektra / Asylum / Nonesuch Records, 1976).
2. 2. As the Eagles sang in "Hotel California," "We are all just prisoners here of our own device."
3. 3. Electricity demand grew at more than twice the rate of economic growth during the 1960s. By the 1980s, the ratio of electricity demand growth to economic growth had declined to 1.0, and it is predicted that over the next two decades, the ratio will decline even further due to more efficient equipment and appliances. Energy Information Administration, Annual Energy Review 1998, DOE/ETA-0384 (98) (1999), http:// www.eia.doe.gov/emeu/plugs/ plaer98.html (July 6, 2001).
4. 4. U.S. Secretary of Energy Spencer Abraham, A National Report on America's Energy Crisis, Remarks at the U.S. Chamber of Commerce National Energy Summit, March 19, 2001.
5. 5. Silicon Valley Looks at Electricity Use, Elec. Daily, June 2, 2000.
6. 6. Peter Huber and Mark Mills, Got a Computer? More Power to You, Wall St. J., Sept. 7, 2000, at A26.
7. 7. Annual economic losses in the United States from minor supply interruptions already total an estimated $50 billion, and this could grow dramatically if outages become more frequent. David Stipp, The Real Threat to America's Power, Fortune, March 5, 2001, at 140.
8. 8. Llewellyn King, Energy Crisis Looms: The Old Economy is Sinking Under the New, Energy Daily, Aug. 25, 2000.
9. 9. Eric Hirst, Expanding U.S. Transmission Capacity, Edison Electric Institute, July 2000, at 7.9.
10. 10. Nationwide reserve margins declined from 22 percent in 1990 to 16 percent in 1997. Annual capacity additions declined from 9,700 MW between 1991 and 1995 to only 5,200 MW between 1996 and 1998. Reserve margins are expected to decline to 10 percent in 2007. Still, projections for out years are problematic due to uncertainty about the level and timing of merchant power plant additions. Eric Hirst and Stanley Hadley, Maintaining Generation Adequacy in a Restructuring U.S. Electricity Industry, Oak Ridge National Laboratory, 1999, at 3.
11. 11. Total installed generating capacity grew by less than 1 percent per year between 1990 and 1998. During that same period, peak demand increased on average by 2.4 percent per year. Arthur Andersen and Cambridge Energy Research Associates, Electric Power Trends 2001, 2000, at 31.
12. 12. See Findings and Recommendations to Enhance Reliability From the Summer of 1999: Final Report of the U.S. Department of Energy's Power Outage Study Team, March 2000, at 2.2, 2.8. This report examined eight separate power outages and system disturbances that occurred within the United States during the summer of 1999.
13. 13. Energy Information Administration, Annual Energy Outlook 2001 -Market Trends, Electricity (Dec. 22, 2000), www.eia.doe.gov/oiaf/aeo/ electricity.html (July 6, 2001).
14. 14. It has been estimated that it would cost at least $50 billion over the next decade to add new electric power lines at the same rate that peak demand is projected to grow. Stipp, supra note 7, at 142. It is projected that 92 percent of the new generating capacity will be gasfired combined cycle or combustion turbine technology. This, combined with increased demand for natural gas for other uses, will result in the need for 38,000 additional miles of transmission pipeline and 255,000 miles of distribution lines at an estimated cost of $120 to $150 billion. Supra note 4.
15. 15. See, e.g., Rebecca Smith, Northwest Feels Shock Waves from Power Deregulation, Wall St. J., Aug. 18, 2000, at A2; and N.W. Utilities Reach for Rate Increases to Cover Costs in Competitive Market, Power Markets Week, Aug. 21, 2000, at 12-13 .
16. 15. See, e.g., Rebecca Smith, Northwest Feels Shock Waves from Power Deregulation, Wall St. J., Aug. 18, 2000, at A2; and N.W. Utilities Reach for Rate Increases to Cover Costs in Competitive Market, Power Markets Week, Aug. 21, 2000, at 12-13 .
17. 16. Douglas Caves, Kelly Eakin, and Ahmad Faruqui, Mitigating Price Spikes in Wholesale Markets Through Market-Based Pricing in Retail Markets, Elec. J., April 2000, at 13-23.
18. 17. These fundamentals include (1) the fact that peak demand growth has out-stripped generating capacity additions in California, (2) significant load growth in the rest of the Western Interconnection, (3) below-normal hydro conditions, and (4) higher natural gas prices and nitrogen oxide emissions credit prices.
19. 18. An FERC staff report summarized the structural flaws in California's electricity market as follows: Among the factors that appear to have contributed to the recent high electricity prices in western markets, and California in particular, are rules and policies of the [California Power Exchange Corporation] PX and the [California Independent System Operator Corporation] CalISO, and statutory requirements and regulations administered by state and local regulatory bodies. For example, until very recently, [San Diego Gas & Electric Company] SDG&E, [Southern California Edison Company] SoCal Edison and [Pacific Gas & Electric Company] PG&E were required by [California Public Utilities Commission] CPUC regulations to purchase and sell all of their electricity through the PX. While the three IOUs now have some additional authority to purchase outside the PX, their purchases are subject to an after-the-fact prudence review. These state policies greatly limit the options available to the three IOUs and have created an impediment to their use of forward contracts. Also, state retail rate policies currently prevent customers from seeing and responding to market prices, and they provide weak incentives for the IOUs to minimize the wholesale cost of electricity once their stranded costs are paid off. In addition, certain [Cal-]ISO and PX rules appear to have contributed to underscheduling of load and generation in forward markets, causing operational problems for the ISO and forcing it to procure energy out of market at high prices. Federal Energy Regulatory Commission, Staff Report to the Federal Energy Regulatory Commission on Western Markets and the Causes of the Summer 2000 Price Abnormalities, Nov. 1, 2000, at 5-8.
20. 19. Lawrence J. Makovich, Cambridge Energy Research Associates Senior Director, Prepared Testimony before the U.S. Senate Committee on Energy and Natural Resources, Oversight Hearing on California Electricity Crisis and Implications for the West, Jan. 31, 2001.
21. 3 - Timely Issues About Pennsylvania's Environment, Energy and Economy, Aug. 29, 2000 (discussing Pennsylvania's deliberate choice not to follow the California model for electricity restructuring).
22. 21. Title VII amended the Public Utility Holding Company Act of 1935 (PUHCA) to lower barriers to entry for non-utility wholesale generators and amended the FPA to authorize FERC to order transmission access for wholesale transactions on a case-specific basis.
23. 22. For example, the FERC has found it difficult to find a consensus on whether participation in regional transmission organizations should be mandated. It also has been divided over whether to impose price caps in regional markets administered by independent system operators, and when a market-base rate no longer satisfies the just and reasonable standard.
24. 23. Charles J. Cicchetti and Colin M. Long, Politics as Usual: A Roadmap to Backlash, Backtracking and Re-Regulation, Pub. Util. Fortnightly, Oct. 1, 2000, at 42.
25. 24. Lawrence Makovich used this term in his testimony before the Senate Energy and Natural Resources Committee to characterize the process in California: The flaws in California's power markets resulted from a flawed process of deregulation based on an idea riddled with uncertainties -stakeholder democracy. Stakeholder democracy is the belief that if all of the stakeholders of a problem are brought together, the correct policy will emerge through negotiation and compromise. Supra note 20.
26. 25. Supra note 24, at 42.
27. 26. Severin Borenstein and James Bushnell, Electricity Restructuring: Deregulation or Reregulation, University of California Energy Institute Program on Workable Energy Regulation, Feb. 2000.
28. 27. Supra note 4.
29. 28. Bob Davis, Bush Energy Plan Increases Nuclear Power, Natural-Gas Supplies, Wall St. J., Apr. 9, 2001, at A3.
30. 29. This approach stands in significant contrast to the Clinton administration's activist posture in response to the California crisis. Secretary of Energy Richardson petitioned the FERC to mandate marginal cost-based bid caps for individual generators and invoked emergency powers to compel the sale of electricity and natural gas into California, and the Clinton administration acted as an intermediary in a series of high-profile meetings involving the state and the affected stakeholders.
31. 30. The legislation was introduced twice. A version without any of the tax provisions (Titles 1-8) was referred to the Committee on Energy and Natural Resources, and a complete version including the tax provisions (Titles 1-9) was referred to the Committee on Finance.
32. 31. The Murkowski legislation includes enhanced tax incentives for domestic energy production, while Secretary Abraham has signaled that the Bush administration does not view tax incentives as playing a significant role in its energy strategy. For example, the Secretary has said that "capital is best allocated to its highest uses through the workings of the free market, not the manipulations of the tax code. Government regulatory policy should not be aimed at picking winners and losers in any market, including energy. Nor should tax policy." Supra note 4.
33. 32. Cong. Rec. S1548 (daily ed. Feb. 26, 2001) (statement of Senator Murkowski).
34. 33. Id. at S1549.
35. 34. Title II of S. 388/389 would establish a research and development (R&D) program for advanced clean coal technology for electric generation. Title IV authorizes an R&D program for advanced nuclear reactor and fuel concepts, for improving the reliability and productivity of the United States' existing nuclear power plants, and incentive payments for existing nuclear power plants to increase production and efficiency. Title VI promotes energy efficiency, conservation, and assistance to low-income families by expanding and extending a series of existing federal programs. Title VII, in addition to promoting alternative fuels for motor vehicles, establishes a grant program to offset the cost of residential renewable energy systems. Also, as part of the initiative to promote increased utilization of renewable energy, title VII would reform hydroelectric licensing under the FPA. The tax provisions in title IX of S. 389 include incentives for the production and deployment of the suite of energy sources and technologies targeted in the bill's R&D titles.
36. 35. S. 597 would amend the FPA to authorize the creation of an industry-administered reliability organization, and would authorize consumer protections for retail energy consumers, including FTC disclosure rules for retail energy providers. The bill would not repeal PURPA prospectively and would not repeal and replace PUHCA. Like S. 388/389, the Bingaman bill does not propose many of the FPA amendments that had been in earlier restructuring bills.
37. 36. Potential jurisdictional flashpoints include the composition of the Cal-ISO board, the state's appropriation of wholesale power contracts held by the PX, and, should the state proceed with appropriating the IOUs' transmission assets, whether FERC would find such a transfer to be consistent with the public interest.
38. 37. The Court also granted certiorari to review a series of issues raised by Enron suggesting that the court of appeals erred in holding that the Commission had the discretion to interpret the FPA as denying it the necessary jurisdiction to remedy the undue discrimination it had found in the provision of interstate transmission. In particular, with respect to the interpretation of the FPA, Enron presented the following issues: (1) whether FERC has jurisdiction to regulate all transmission of electric energy in interstate commerce, including interstate transmission of electric energy that is sold to retail customers at a "bundled" price; and (2) whether FERC has jurisdiction and the obligation to eliminate pervasive "undue discrimination" in the provision of interstate electric energy transmission services by requiring transmission-owning utilities to provide interstate transmission services on the same terms to all users, for all interstate transmissions, including transmission bundled with retail sales.
39. 38. See Donald F. Santa, Jr. and Clifford S. Sikora, Open Access and Transition Costs: Will the Electric Industry Transition Track the Natural Gas Industry Restructuring?, 15 Energy Law Journal 1994, at 273.
40. 39. Supra note 27.
41. 40. Stipp, supra note 7, at 137-38.
42. 41. From Electric Power Trends, 2001, supra note 10, at 13. This market response also calls into question the advisability of the proposal in section 956 of S. 389 to provide seven-year depreciation for property used for the generation of electric energy. In particular, might this incentive only serve to overstimulate generation development and contribute to what some already fear will be a boom and bust cycle? As an alternative, would it be a better tax expenditure to expand this section's incentives for the "wires" business beyond transmission to include distribution facilities as well? It is well documented that the obsolescence of the distribution infrastructure was a cause of the summer 1999 blackouts in Chicago and New York City.
43. 42. The North American Electric Reliability Council paints the following picture of the transmission system over the next decade: In the long term, transmission providers need to reevaluate their systems in light of open access, including planning for necessary reactive support. Business is increasing on the transmission system, but very little is being done to increase the load serving and transfer capability of the bulk power transmission system. Most of the transmission projects planned over the next 10 years are intended to reinforce parts of the system to alleviate local problems. Only 8,445 miles of transmission facility additions (230 kV and above) are planned throughout North America over the next 10 years. This represents only a 4.2 percent increase in total installed circuit miles and most of these additions are intended to address local transmission concerns and will not have a significant impact on long-distance power transfers. North American Electric Reliability Council, Reliability Assessment 2000-2009: The Reliability of Bulk Electric Systems in North America, Oct. 2000, at 30-31, ftp://www.nerc.com/pub/ sys/all_updl/docs/pubs/2000ras.pdf (July 6, 2001).
44. 43. NERC's Reliability Assessment 2000-2009 (Id. at 5) characterized the situation as follows: Unless proper incentives can be developed to encourage investment in new transmission facilities and siting problems can be resolved, few new transmission facilities and reinforcements will be constructed. The lack of necessary additional transmission facilities and reinforcements will require that either new technologies be developed to alleviate transmission congestion or that generating facilities be located and dispatched in a manner to minimize the use of constrained transmission corridors.
45. 44. Furthermore, federal authority could be triggered only if the proposed transmission facility was the product of a transmission planning process conducted under the auspices of an RTO and approved by the FERC.
46. 45. While the author has not comprehensively researched state law on this matter, it is likely that within some states' codes a stand-alone transmission company would not fit squarely within the definition of a public utility. This is especially likely in states that have yet to address retail restructuring and the need for a statutory framework to regulate a disaggregated electric power industry.
47. 46. Eric Hirst and Brendan Kirby, Retail Load Participation in Competitive Wholesale Electricity Markets, report prepared for the Edison Electric Institute and the Project for Sustainable FERC Energy Policy, Dec. 2000, at 59.
48. 47. Id., at v-vi.
49. 48. Empirical evidence suggests that even modest sensitivity to price during peak demand periods can significantly reduce the market clearing price. Supra note 17.
50. 49. For example, a robust demand side that participated in bulk power markets might obviate the need for the price or bid caps that all four operational ISOs currently impose on generators during peak demand periods. Supra note 47, at 2.
51. 50. Supra note 47, at 18-21. Georgia Power operates the largest dynamic pricing program in the United States. Approximately 1,600 of its customers representing approximately 5,000 MW of load face hourly prices. Duke Power operates a similar program in North and South Carolina, with about 110 customers representing 1,000 MW of load.
52. 51. For example, as part of the EPAct, the Congress amended section 111 of PURPA to require that states consider the advisability of adopting standards for integrated resource planning, cost recovery for energy efficiency programs, and rates to encourage energy efficiency in generation, distribution, and transmission.
53. 52. This review would be very useful. Many states, in adopting their retail restructuring programs, have erected inadvertent roadblocks to the adoption of dynamic pricing programs. These roadblocks include mandated rate discounts, rate freezes, predetermined load profiles, and indecision on metering policy. Supra note 47, at 55-57.