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Guest Commentary: May 3, 2001
Energy Crisis:
Country May Face "Economic Disaster" This Summer
The Honorable Dianne Feinstein (D-CA)
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May, in many parts of California, is the start of a 5-month summer and the start of a five-month period of the highest electricity demand. The day also marks the 12th consecutive month we have been in an energy crisis -- I add to that the Pacific Northwest -- meaning for an entire year we have experienced energy prices that are about 10 times higher than they were in the previous 12 month period. And it also marks the 12th consecutive month that the Federal Energy Regulatory Commission has failed to take decisive action.
It took the Federal Energy Regulatory Commission until November to declare what people in San Diego, California discovered last May, electricity rates are "unjust and unreasonable" and the market is broken.
Last week, FERC attempted to modify the broken market with so-called "price mitigation." In its April 26th order, the FERC outlined its proposal "to mitigate the dysfunctional market." Unfortunately, what FERC offered as a solution will not do nearly enough to solve the problems in California and the Northwest.
First, the order for the most part, ignored the Northwest -- offering only a limited investigation of the broken market in Oregon and Washington without any promise of even the feeble price mitigation offered to California.
Second, the order will last only one year, not nearly enough to get enough supply on line to meet our energy needs.
Third, the order only applies to stage 1, 2, and 3 energy emergencies, practically ensuring that prices for the rest of the time can remain exorbitantly high.
Fourth, the FERC order decreed that the cost based rate of the price for the least efficient megawatt of power needed at any given hour would go to everyone who bid into the market. With natural gas prices still averaging three times higher in California than elsewhere, it is almost a guarantee that this would mean at many hours, the average price of electricity will be $400-$500 per megawatt.
Which brings up the most glaring problem with the FERC order: It does not address natural gas, which is the major cost in electricity production and a problem in itself for heating, cooking, food and manufacturing production, etc.
Read from some letters I have received about the energy crisis. ...
...From the California Steel Industries:
Our company is a relatively large consumer of both electricity and natural gas. Our historical gas bill was about $12 million annually. With the price gouging going on in California, that bill will rise to $40 million or even $50 million this year. For electricity, we historically paid about $15 million per year. That number will double this year due to increased retail rates, which became necessary as a result of skyrocketing wholesale prices.
...From the Dairy Coalition of Concerned Energy Consumers:
As the number one-ranking dairy producing state in the nation, the California dairy industry uses substantial quantities of natural gas to run its processing plants. Between December 1999 and December 2000 the cost of gas to dairy plants in California increased 4,000%. Our paramount concern is the dramatic increase in the non-commodity portion of the price of gas.
...From the California State Floral Association:
While our state decision makers have devoted most of their attention to the supply and cost of electrical energy, it is the high cost of natural gas that is of the greatest concern to our grower members. They have seen their natural gas bills increase by five to six fold. For example, one of our nurseries reports having their monthly gas bills increase from $26,000 in December of 1999 to $145,000 in January of 2001. This is fairly typical of the industry.
I have a letter from the H.K. Canning company which states that they are going to be forced out of business because of the high costs of energy today in California.
I have a letter from California State Senator K. Maurice Johannessen. This letter points out that the Shasta Paper Company is now closing its doors because of rising natural gas prices and the suspension that has resulted on pulp production.
Last week I reported that C&H Sugar, the only sugar refinery on the west coast, that had employed 1,000 people, closed its doors for 5 days. Its cost of steam went from $450,000 a month to $2 million a month. I would like to update that report. That company is now looking for a special bridge loan. If it is unable to find that loan, the only sugar refinery on the west coast will have to permanently close its doors.
These complaints are all centered on natural gas prices. People have not yet been hit with the 40-percent increases planned for the average ratepayer in electricity this month. This does not even address gasoline prices which some are predicting may reach $3 a gallon in California this summer. So things are going to get a lot worse before they get better.
The California Independent System Operator has said that the State will be 2,000 to 5,000 megawatts short in meeting its energy needs. In other words, millions of homes and businesses are at risk of being blacked out, maybe every day. This affects traffic lights, ATMs, farmers, assembly lines. It affects vineyards; it affects small hospitals -- and the list goes on and on.
Since January, the State Department of Water Resources has been purchasing all of California's power needs because of the poor financial condition of the State's utilities. Last week, I updated my colleagues in the Senate on the amount the State has spent so far to keep the lights on. At that time, it was $5.2 billion. In the last week, that number has gone up by $1 billion, to $6.2 billion. And the State continues to buy power at the rate of $73 million a day.
The implications of these high power prices are devastating to the State. In fact, State budget officials are already making deep cuts in California's $105 billion budget that the Governor will sign into law in late June. Last week, the California State Senate Budget Committee chairman called on the Budget Committee to come up with a list of cuts totaling $2 to $4 billion to compensate for higher energy costs so far.
I would like to put the costs in perspective. California, as I said, is spending $73 million a day on power. How much is that? It is enough to fund the annual budget of the Santa Ana Police Department. It is one-fourth of the cost to run California's entire judicial system for 1 year. It would provide health coverage for almost 300,000 working families in the State. And it is gone in 1 day.
The major problem was a flawed deregulation bill passed in 1996 called AB 1890. However, the State is doing today all it can to increase supply and reduce demand. The State will have an additional 3,572 megawatts on line by the end of the summer and an additional 6,923 megawatts on line before the end of 2003, and by 2004 the State expects to add 20,000 more megawatts. That is enough power for 20 million additional homes.
The problem is in the interim. The problem is the absence of price stability. The State spent $7 billion in 1999 for energy -- total -- $32 billion in the year 2000, and it is estimated to spend $65 billion in 2001. Simply stated, this is the result of price gouging. Simply stated, it is a Federal responsibility to provide a period of reliability and stability in price before we bankrupt every industry in the State of California and close businesses from Eureka to San Diego. The Pacific Northwest is in the same crisis, and the Midwest and other regions will be as well, unless the FERC takes action. ...
The Federal Government has a duty to help. California and the Northwest badly need a period of stability and reliability, and this is where the Federal Government can help. ...This is where the Federal Government has a duty to step in and protect consumers from being gouged.
The alternative may be an economic disaster for the entire country this summer.
Note: This column has been adapted from a speech Sen. Feinstein delivered on the floor of the Senate, May 1, 2001.
 How to contact Sen. Dianne Feinstein (D-California)
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