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Burden of Proof

How Will California Keep the Lights On?

Aired February 12, 2001 - 12:30 p.m. ET


ROGER COSSACK, HOST: Today on BURDEN OF PROOF: An energy crisis in California causes rolling blackouts and skyrocketing utility costs. How will regulators, business-owners and consumers keep the lights on for the long haul?


PHILLIP PADADOPOULOS, RESTAURANT OWNER: It's too little too late. And, again, we pay a ransom to the utility companies. That's what it amounts to: Either you pay us or we turn it off.

JOHN STOUT, RELIANT ENERGY: All of us have one common goal. And that's to keep the lights on. But Reliant wants to make sure that we get paid when we do provide the power.

GOV. GRAY DAVIS (D), CALIFORNIA: It will help keep the lights during the peak periods this summer. And they will reduce our dependence on out-of-state generators.


ANNOUNCER: This is BURDEN OF PROOF, with Greta Van Susteren and Roger Cossack.

COSSACK: Hello and welcome to BURDEN OF PROOF. I'm in Los Angeles today. And Greta is off.

Well, there's a power struggle going on in California. But it's not a political or governmental skirmish. What so many consumers take for granted has been slipping through the fingers of residents in this state: power, lights, energy, the very source which keeps heat pumping on a cold and rainy night -- and, believe me, it is cold and rainy here in Los Angeles -- and the core of a business manufacturing products for customers across the nation. The cause of the crisis is clear: too much wattage demand from a finite source of energy. But the solutions aren't so clear.

And joining us today from Sacramento is Charles Robinson, general counsel of California Independent System Operators, a non-profit organization which oversees the state's power grid. From Washington, we're joined by Republican Senator Frank Murkowski of Alaska, who's chairman of the Energy and Natural Resources Committee. Also in Washington: Craig Goodman, president of the National Energy Marketers Association; and Kevin Curtis, vice president of Government Affairs with National Environmental Trust.

Craig Goodman, I want to go directly to you. And I'm going to ask you the same question that I think I'm going the ask most of our guests: What went wrong in California?

CRAIG GOODMAN, NATL. ENERGY MARKETERS ASSN.: Virtually everything that could have gone wrong did go wrong. Unfortunately, the California deregulation program was developed politically. And all of the fundamentals of the market structure were basically disregarded.

You didn't have enough supply. Generation wasn't coming online for an entire decade. You had explosive demand. You had prices capped in the retail market with wholesale prices going through the roof. Basically, politics and economics didn't go well together in California.

COSSACK: So who do we point the finger at? Do we point the finger at the politicians, who just dropped the ball? Do we point the finger at the advisers who failed to see the demand increase? I mean, somewhere along the line, the voters of this state are going to know what happened.

GOODMAN: And they have a right to know what happened. This is a major, major problem. And it's going to take a while to dig out. I think they are making some good initial first steps. Unfortunately, they've got to dig out if about 10 years of problems. They haven't had a new generating plant come online in 10 years. You've got supply going -- I mean, demand going through the roof.

We are literally operating on an electric system that was built for the Industrial Revolution. And we have more than entered the digital age. So we have a lot of things to get done.

COSSACK: Let me go to Charles Robinson now.

Charles, the issue here is that we have an outdated electric system. But I would think that every state in the Union has an outdated electric system. Why is it, then, that California is paying the price?

CHARLES ROBINSON, CALIF. INDEPENDENT SYSTEM OPERATOR: Well, one point that I would like to make is that the problems that we are experiencing right now are largely regional problems. You have indicated that there's not enough supply in California to meet demand.

That's, frankly, a problem throughout the Western United States. And, to some extent, California is bearing the brunt because we've not been able to rely as much on our neighbors as we have in the past. And the same is true with respect to us providing assistance to our neighbors.

COSSACK: But that statement seems to imply that there's nothing wrong with what happened in California. This is a regional problem. And it should be expected all up and down the region. But, in fact, there is something dramatically wrong here in California. And I think to isolate it and say it is just a regional question sort of begs the question.

ROBINSON: Well, California did -- the California utilities did divest themselves of their generation units. And there is a need for contracts with generators to make sure that we have supplies, given that the utilities no longer have generation units of their own to meet the demand of their customers.

COSSACK: But, Charles, how did this go wrong? I mean, to say that the plants divested themselves or that there was regulation, I mean, somewhere along the line, somebody has to step up to the plate and say: This was a terrible plan. This was a good plan that ran amuck. I mean, who did it? What happened?

ROBINSON: Well, Roger, frankly, my role at the California Independent System Operator is to ensure that the transmission grid is up and running and that we do everything that we possibly can to avert blackouts. I think you should probably address your concerns to the policy-makers. It's not really my responsibility or the responsibility of my company to point fingers at this point.

COSSACK: But you must have an opinion.

ROBINSON: My opinion is that there is insufficient supply currently in California and throughout the West to meet the demands of California's customers and the customers throughout the West.

COSSACK: Well, it seems I've been asking the question -- I agree with you. There's insufficient supply. But I'm been asking the question why. Senator Murkowski, help us out. What's -- what went wrong here in California?

SEN. FRANK MURKOWSKI (R), ALASKA: Well, it was predictable when you analyzed -- and, of course, hindsight is cheap -- the type of deregulation that California initially adopted. What it did is it put a cap on retail. And so it left open the issue of what happens when there's a shortage.

Well, over a period of time, California depended about 25 percent on energy coming in from other states. As those states begin to use more and more of their energy, they wanted to keep it at home. So, as a consequence, California had to pay the going price, whatever it was, to get wholesale power into California. And then, in that deregulation, there were some flaws that basically occurred when they simply mandated that California utilities could no longer make long- term contracts -- in other words: fixed contracts for a fixed amount.

They had to go on the market and buy on the spot market. And that was a mistake. That was a terrible mistake because, while you had an increase of supply temporarily, and you could buy power on the spot market cheaper, when you didn't have that, you were stuck. And that's what happens. California suddenly found itself: no long-term contracts, buying on the spot market at a high price.

And then, remember, the utilities in California in that divestiture had to get rid of all their non-nuclear- or nonhydro- generating facilities, and spun those off to, in some cases, outsiders. So California is suddenly faced with the reality that you can't pass onto the consumer in California the price of power because of the cap.

COSSACK: All right, let me interrupt just you one second. Let me interrupt you for one second because I've got to take a break. Up next: Is softening of California's environmental laws the answer to today's problems? Or are there natural resources elsewhere to tap into?

Don't go away.



Convicted Oklahoma City bomber Timothy McVeigh has requested that his May 16 execution by injection be broadcast publicly. The Federal Bureau of Prisons is preparing a closed-circuit broadcast for survivors and the media. And officials say they won't consider broadcasting the execution nationally.


COSSACK: Amid California's rolling blackouts, there's been lots of blame to go around in the state's current power crisis. Some point to aging power plants. And others blame five-year-old deregulation laws or a deficit in energy resources.

Kevin, I want to go now to you and talk to you about another state that did the same thing pretty much that California did, but didn't seem to end up with the same kinds of problems: Pennsylvania. Tell us a little bit about what Pennsylvania did right and apparently California did wrong.

KEVIN CURTIS, NATIONAL ENVIRONMENTAL TRUST: I think one of the things I would like to also stress before I do that, sir, if you don't mind, is thank the guests for not joining in the chorus that we've heard from some parts of this debate of blaming environmental regulations for California's problems.


COSSACK: Kevin, I think you may be jumping the boat on that one, because I'm not sure that when we get to the environmental regulations, you are going to be keeping that big smile our face. I'm not so sure they are going to agree with our environmental regulations. That's why I wanted to ask you this question now about comparing a little bit to Pennsylvania. And then we are going get to those environmental regulations, because I'm not sure everybody will agree that perhaps one of the ways to solve them is to change those environmental regulations.

CURTIS: OK. Well, again, in California, they did not build new power plants for 10 years for a variety of reasons that the other guests talked about. Pennsylvania, I believe they continued to build power plants. And they also had a larger grid to draw from that wasn't experiencing the population growth and the economic growth in that area that was experienced in California.

And, again, I think I would like to stress that, as we go forward in solving California's problems and looking at that the rest of the nation, is what we need to do is really keep a balanced energy approach in mind: that would involve some new capacity, but also lots of measures designed to promote energy efficiency, conservation, renewables and really noninvasive or nondamaging approaches to the environment -- which can be done.

COSSACK: All right. Now, as I indicated earlier, Pennsylvania went about deregulating their power and they didn't seem to end up with the same problems that California did. Are you familiar with what Pennsylvania did and why they didn't end up with those problems?

CURTIS: To be honest with you, I really can't give you a crisp answer to that. Maybe one of the other guests. So I would stop there.

COSSACK: All right, now let's get into what you do -- it is clear you do want to talk about, which is the environment.

Some would say that one of the problems in California is that the environment laws are so strict that they really -- they really have an effect of making people who maybe want to go into the power business not go into the power business, and that, in fact, if we would do something to perhaps lessen these environmental laws, it could go a long way in helping out this problem. Do you agree?

CURTIS: No, I absolutely do not agree. And we at the National Environmental Trust, in our analysis what happened in California and what the path forward is, are really quite confident that environmental regulations did not cause the California problem and don't stand in the way of California getting its way out.

There are over a dozen new facilities being constructed as we speak. Over two dozen, I believe, are permits are in the pipeline, regulatory pipeline. And many predict that, in 18-24 months, California will have sufficient generating capacity in state to meet its needs.

COSSACK: Senator Murkowski: environment. You are from the wonderful state of Alaska. And there's been a lot of talk about perhaps we could solve California's problems if we increased the drilling in Alaska. Do you agree or disagree?

MURKOWSKI: Well, first of all, you've got to consider what drilling you are talking about. California's needs now obviously are more generating facilities and the availability of power. And they are going to have to get it from other states until they can develop it themselves.

Much has been made of the issue of oil development in Alaska. That isn't going to help out California's immediate needs. What oil will do -- from Alaska, if we are allowed to open up the area in ANWR -- is continue the oil that comes from Alaska to California, because most of the oil that California uses comes from Prudhoe Bay. That's declining now. The question is: As we look to other areas to replace that oil, can we open ANWR safely? And clearly, the science suggests we can.

Now, if we don't open ANWR, California is going to get its oil from overseas, from Saudi Arabia and other nations. They're going to get the oil. There's no question about. And it -- currently, it comes in on U.S. flag vessels subject to Coast Guard regulations. And the significance of our safeguards for developing in the United States is much greater than it is overseas. Would you rather drill in the rain forests of Columbia?

Now, clearly, we have the technology. We can do it safely. We've got 30 years of experience in the Arctic. The same arguments are being used today against opening ANWR that were used against opening the Prudhoe Bay 30 years ago. We have greater technology now. We have 3-D seismic. We can do it with a very, very small footprint. But that isn't the issue now.

California needs more energy production. They've got a supply problem and they've got a credit problem because they can't pay for it. And the reason that Pennsylvania is so successful is, what they did is they put a cap on both wholesale and retail, but they allowed a certain flexibility in that cap. And, as a consequence, they have tremendous competitive power coming into Pennsylvania because they did it the right way.

Now, I think California and all of us can learn from the success in other areas. I think we have to help California. But California has to help itself. The real problem in California is that consumers, outside of being inconvenienced in a stoplight or an elevator, aren't paying the price of pass-through power, like they're paying in Washington, Oregon and Idaho. And that's just the fact.

COSSACK: But, Senator, wouldn't that mean that they would have incredible increases here in California, if that's true?


COSSACK: I mean, wouldn't the price of power go way up?

MURKOWSKI: It is going up now. That is what is happening. The difference is, the utilities have taken the brunt and are facing bankruptcy with $10-$11 billion in debt because they haven't been able to pass through. Now, who is going to take that responsibility. Is it going to be the utilities to go broke and a bankruptcy judge to dictate what the consumer has to pay in California? Or is the legislature of California going to pass bonds?

Somebody has to address that in indebtedness, because the California consumer did get that high-priced power. And everybody else is paying for peak power around California. But the California consumer is not because of the political situation in California, which makes it tough to pass that onto the consumer.

(CROSSTALK) MURKOWSKI: California, in '76, had a cut of 10 percent. Then they added another 10 percent. So California consumers are -- they are not paying the hit yet.


COSSACK: Senator, the California consumers are about ready to get their prices raised.

Let's take a break. When we come back: searching for answers in California's power debacle. Stay with us.



Q: Prosecutors are looking to have a change of venue in the murder trail of Michael Skakel. They're trying to move the trial to what Connecticut city?

A: Bridgeport. The defense wants to keep the trial in Greenwich, where the murder of Martha Moxley occurred.


COSSACK: As part of its deregulation law, California set a freeze on rates offered by three stateside utilities. But that freeze was not imposed upon independent firms, which marketed energy from outside the state. The plan unraveled when wholesale prices skyrocketed. And some consumers found themselves paying as much as five times as their neighbors per kilowatt hour.

Craig, I want to go back to you. The senator suggests that one of the problems here is that Californians just, by hook or by crook, ended up not paying for their power like everyone else in the country. I guess that goes what you said, in the sense that there's been a tremendous increase in demand. Is the notion that, if California would pay their fair share, this problem would be solved? Is that really the answer?

GOODMAN: Well, there are several answers. One is that you've got 10 years of a problem in the making. Just making them pay the price today doesn't solve the 10 years of no supply coming on. And there's a different level of problem when you talk nationally. And Senator Murkowski has got a bill coming out shortly that is going to address this nationally. Hopefully, it won't address it in a way California did.

But for your viewers to understand: Between supply and demand, over the last 60 years, there have been two monopolies. In order to get real price competition -- which is what everybody is looking for for the consumer -- which is lower prices for energy -- you've got to have national economies to scale. You've got to get monopolies not to sell competitive services and monopoly prices. You've got to give back the monopoly prices to consumers so they can shop for energy competitively. And you have to have at least incentives or at least a competitively neutral environment in which to bring on new supplies of energy. And that's electricity, natural gas and crude oil. And I agree with the senator in that regard.

COSSACK: Does environmental regulations play any part in this?

GOODMAN: Huge. Unfortunately, in California, a lot of the decision-making was taking place at a very, very local level. And I don't believe, in those decision-making processes, they had any clue what their decision -- what the impact of their decisions were going to be on the state, on the region, or on the country, or possibly even globally, if Silicon Valley is affected.

COSSACK: But in terms of these regulations, I mean, do we have to pay a price?


COSSACK: And I shouldn't say we. I'm not a Californian anymore.


COSSACK: But do the Californians have to pay a price environmentally to have enough supply of power in this state?

GOODMAN: The price of energy in California is the price that Californians didn't know they were paying for 10 years for not having new energy supplies. And the silver lining here, believe it or not -- and there is one -- is that the price could be so high as to make all kinds of distributed generation economic a lot sooner than it would be.

And there's a lot new technology right on the horizon, in my opinion, that can be competitive very quickly. Unfortunately, because of the economic disequilibrium in California, this is the price that California chose to pay for environmental protection.

COSSACK: Charles Robinson, do we see an end in sight? Will, in fact, this problem in California be solved within the next year?

ROBINSON: I think it may take a little longer than that, Roger: perhaps two to five years. Again, the basic problem is a supply problem. And it will take some time to bring online the various generation projects that are in the pipeline.

COSSACK: Are there enough generation projects in the pipeline to solve the problem? All there going to still be rolling blackouts?

ROBINSON: Well, if you assume that of all those that are in the pipeline are actually built, then that may be sufficient to make up the deficit that we are currently experiencing.

Part of the problem is that we have a very old and aging number of power plants in the state. And there may very well be additional plants that come offline for which we would need to plan new projects. COSSACK: All right, I'm afraid that's all the time we have for today. Thanks to our guests. And thank you for watching.

Today on "TALKBACK LIVE": Can Bill Clinton be impeached again? Send your e-mail to Bobbie Battista and tune in at 3:00 p.m. Eastern Time. And we'll be back tomorrow with another edition of BURDEN OF PROOF. We'll see you then.



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