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Fred Keeley
Speaker Pro-Tem, California State Assembly (D-27th District)
Answers to Written Questions from the Floor:
Q: San Francisco City Attorney Louise Renne says that she is developing evidence of collusion among the power suppliers. Do you believe that when the final chapter to this story is written that there will be evidence of collusion?A: I'm not a lawyer; I don't know the answer to that question from a legal point of view, and I certainly don't have sufficient data to be able to make a statement about that. What is happening in the electricity world and in the natural gas world is very interesting. The theory of this being like a commodities market, or this being like a free market in general, really doesn't hold up when you look at it.
There aren't many buyers and sellers. There isn't transparency in the transactions. It isn't easy to enter and exit the marketplace. It is inaccurate to characterize this as a free market and as competition. What you've got is a very few entities with enormous market power that they can exercise; that's the first issue.
The second issue is, they all look at the same data and make the same business decisions. When we experienced rolling blackouts this winter, people said, "My goodness, they must be conspiring to withhold power, because Duke Energy has got the Moss Landing power plant down for repairs, and this one and that one and another one are all offline; this must be collusion."
In fact, they don't have to talk to each other for five seconds to figure out. They look at the same data we do. They all look at the same information and say, "We know how much we can charge for electricity in the winter and how much we can charge for it in the summer, and we know when the peak demand is, and we've got to shut these things down at some point for repairs." Even if you think they are badly motivated, they all simply looked at the same data and made a business decision.
Now if that's collusion I don't know, but what I do know is that in the old world order, when they were regulated, they had to schedule their maintenance and schedule taking these things offline. There is legislation that Mr. Simitian and myself and others are advancing, which says that we are going to re-regulate that part of the industry, where they have to schedule their maintenance. Otherwise, even if there is not collusion, there is an adverse impact on consumers.
Q: Do you believe that the citizens of California have a right to know the price that the state is paying for long-term contracts? So far, the state has refused to release that information.
A: I do believe that, and it isn't entirely accurate to say that people don't know it. For the long-term contracts, the data we know is as follows: There were approximately 40 contracts, totaling approximately 8,800 megawatts, at an average price in the first five years of 7.9 cents a kilowatt-hour, and in the second five years averaging 6.1 cents a kilowatt-hour for a weighted average of approximately 7 cents a kilowatt-hour. What we don't know are the details of every contract.
The reason we don't know that: If the governor did disclose every detail of every contract, when we haven't bought all the electricity we need to buy (because that's only going to cover about 50 percent of what we need to cover in long-term contracts; the rest we're still going to be exposed to the spot market, and we don't want to be, as consumers, exposed to the spot market to that extent), that would weaken the bargaining position of the state in negotiating the balance of the long-term contracts.
I'm an advocate of public disclosure, of the terms and conditions of the contracts in broad terms, but not so much disclosure that we act adversely to our own interests as consumers in negotiating the rest of the contracts.
Q: You talk about per capita usage. Isn't it true that three-quarters of our power is used by industry? And it was industry that lobbied hard for deregulation. Why not tiered pricing accordingly?
A: It is somewhat less than that figure; it is fairly close to that, however. A bill by Assembly member Joe Nation from Marin County will put tiered pricing in place; that will go in the direction that you just described. When we passed Assembly Bill 1X, which put the state in the position of buying one-third of the power on the wholesale market that Californians need, we exempted 130 percent of the baseline usage from any rate increases in order to pay for that power.
We assumed that residential and small commercial rate payers were not the ones clamoring for deregulation, so we should insulate them as much as we can in some appropriate way from any of the obligation to pay additional rate increases.
Q: Why will the proposal to buy transmission lines prevail over your proposal to take over the hydroelectric system?
A: The hydroelectric purchase would be the best business decision for all of us as ratepayers, because it would give us an asset that is a revenue producer. The hydroelectric assets generate electricity at about one cent a kilowatt-hour. It would be very possible to take and sell that electricity, plus carry a portion of the debt burden in a way that would have almost no effect on rates in Northern California. It is a vastly preferable way to do it.
The reason it won't prevail is that the agriculture industry in California is absolutely convinced that the hidden agenda is to buy the hydroelectric system and proceed to tear down every dam on every stream and creek and river, and then really not have any hydroelectric generating capacity, and then not be able to perform on the water contracts that exist between the owners of the hydro system now and the folks in the Central Valley who receive that water.
Q: This seems proof that "all politics are local," as Tip O'Neill once said. Palo Alto has a municipally-operated utility. With what priority can municipal utilities buy electricity from the state's taxpayer credit-funded purchase, and how can municipal utilities have the power we purchased wheeled to us without ISO blackouts imposed because of PG&E's shortfall?
A: In Assembly Bill 1X, we in essence stacked an order of priority. First priority is to fill the net short position in the service area of the investor-owned utilities, because that's where the shortage existed. Second, it then allows the state to procure on behalf of the municipally-owned utilities any net short that they would ask to be purchased by the state on their behalf. They are expressly provided for; they are the second priority, however.
With regard to the issues around the ISO, the Independent System Operator, that is an area that is very, very difficult for us to effectuate positive change for the following reason: The ISO is a shared governance relationship between the federal government and the state government. We cannot unilaterally work our will at the ISO.
We can pass statutes, we can do a number a number of things, but every action we take needs to be ratified by the Federal Energy Regulatory Commission, which has not been helpful to the state during this crisis. Whether this fits in or not in to their architecture of things they are willing to do, I don't know – we haven't tested that question yet. Some people have said, "Why doesn't the federal government step in and help by putting a regional cap" – meaning throughout the western United States – "on wholesale prices? They have the legal authority to do it, why don't they do it?" There is a cap, but the cap is so high it's a bidding target now.
Instead it needs to be much lower, and the generators could still make a lot of money under that deal, and the consumers would feel much less pain. The answer is that it doesn't matter whether there is a Democrat president, a Republican president, a Green president, or a president from Mars – apparently the Federal Energy Regulatory Commission views its obligation and responsibility as being that of a protector of markets, not a protector of consumers.
It's stated in their mission to protect markets. So they take actions which accomplish that. They don't take actions that they believe are contrary to the interest of free markets, whether or not that is contrary to the interests of consumers.
Q: Are you opposed to increasing rates at retail level if there are increased costs at wholesale level?
A: No I'm not. Again, none of us like the situation we're in, and many of us, Mr. Simitian and myself, inherited this problem, but we have a responsibility to get through this.
To lead people to believe that somehow we can get through it by making up numbers and hiding the ball from people about the realities is intellectually, and from a public policy point of view, dishonest. So I am not per se opposed to that.
But here's what I am opposed to: not fixing what's wrong with the wholesale market, and saying, "Gee, the only thing we should do is raise rates." I'm not here to tell you that I favor raising rates, or that's my first choice of what to do – it should be our last choice of what to do in certain respects.
We met the other day with financial consultants who don't have a stake in the outcome of reforming that market. What they want to do is help us understand what market reforms might make sense. We've been consulting with folks at Stanford and others.
We think there are tools such as hedging, such as changing from a system in which the clearing price at the end of the day at the highest price is the price that all transactions clear at to genuine bilateral, independent, individual transactions, which will have the effect of driving prices down.
We can encourage and tear down the barriers to the products in the market that are longer term in nature. We can have laws which will have the California Public Utilities Commission not second- and third-guess every long-term contract, which is a disincentive under current law to entering into those long-term contracts.
Q: Has Governor Davis's leadership on the energy crisis been as nonexistent as it has appeared? If you were Davis, concerned that this crisis was jeopardizing your chances for reelection, what steps would you take to minimize political damage?
A: First – and this isn't about blame, and it isn't about finger pointing, it's about reality – the governor inherited the problem from a previous administration, as Mr. Simitian and I inherited this from a previous legislature.
That doesn't reduce the obligation any of us have to solve the problem. The governor is by nature a very, very careful person, and I think that serves him well in many regards, because it allows him to not act precipitously; it allows him to get all the information he needs to try to engage in problem solving.
This particular problem is very vexing. If Mr. Simitian and I and our Senate counterparts, and the governor, agree on an outcome that we want on a public policy issue, it's going to happen. In this issue, we can't guarantee that simply by acting we are going to get the reaction and the result that we want.
Why is that? We could decide right now that we want to commandeer all of the electrical facilities in the state, and that's not going to guarantee that one more electron is going to be one penny cheaper. We could decide that we want to say that every electron in California that gets generated in a new power plant has to be consumed in the state of California, because we are going to become energy independent. That wouldn't guarantee that one more electron gets put into the system in the state of California.
Who we are dealing with, the entities and the marketplace and the sector of the economy that we are dealing with, is simply to a great extent outside of our reach. They are deregulated by the federal government. They are either regulated or nominally regulated by the Federal Energy Regulatory Commission. The tools available to us, to genuinely solve the problem, are actually quite limited.
The governor has decided that the way he's going to do this though is to take some pretty big bites at this thing. He was willing to put his support behind the effort to sign AB1X into law. The state of California became a $10 billion purchaser of electricity in the wholesale market. That's a bold action. Some people say the governor is not being bold enough. It's pretty bold to me in seven seconds to become the largest energy service provider in the nation.
Secondly, the governor has said, "I am going to negotiate on agreements with every one of these utilities to resolve the question of debt, and get assets of value, and other items of value which when taken in their totality balance out against the debt that we are helping them resolve." That to me is serious, responsible leadership.
The governor has also said, "I will use my executive authority in an unprecedented way under a state of emergency to drive down the demand side and increase the supply side, and I will do that without sacrificing environmental quality."
Now for all of us, myself included, this is all I do with my life now. I didn't go to the legislature to do this. I am a liberal Democrat; I went to the Assembly to work on environmental protection and social justice and higher education. I didn't go there to work on energy. I, however, have been drafted into this army, and the task we have is to solve it. We are all spending all our time trying to do it, and God knows I wish I could wake up tomorrow and this would be over and I could go back to working on environmental protection, social justice and higher education.
But it isn't going to happen. What we are going to do is take a long march through this experience together, and the governor is going to be part of it and the legislature is going to be part of it. I think the governor is doing is a good job in his incremental, deliberative way of helping us get through this.
Q: You've said repeatedly that you and others inherited that crisis. It seems that the increasing supply-demand imbalance should have been obvious; a number of newspapers have reported that there were repeated warnings. Why did this get swept under the rug so long?
A: That's an absolutely legitimate criticism of what happened in this situation. It, however, has more dimensions to it than that. Tt was fairly obvious that when you grow at 400,000-600,000 people a year and don't add significant new supply, and you change the nature and pattern of individual and business usage of electricity, it shouldn't be a surprise that we have a supply and demand imbalance.
But here's why it wasn't easily obvious: Although we didn't have the supply in California, we were able to bring the supply into California. The Wall Street Journal – I like the newspaper but don't like the editorials – had a wonderful editorial the other day in which they called California the "What, me worry?" State – the Alfred E. Newman State.
How did they think California could grow and grow and grow and not build any power plants? The reason we thought we could do it is because we were buying power from others; we were entering into agreements to get power into the state from British Columbia's hydroelectric system, from the Bonneville Power system, and on and on and on. In the new world order, though, prices have gone out of control. That's the single difference. You can say, "Why didn't you see it?" We didn't see it because, in a pure supply and demand evaluation of it, we weren't short of electricity.
We became short of electricity as we became short of money. What we are going to experience this summer is a genuine supply and demand problem, because in British Columbia, and in our neighbors to the north, they are having a low hydroelectric year. In many cases they have sold all of their power with folks who we would otherwise go to as backups.
Q: It's the middle of August, it's averaging around 85, 90 degrees throughout much of California. What it's going to be like?
A: It could be God-awful, it could be awful, or we could struggle through it relatively comfortably. It has to do with a wide range of considerations. You painted a picture about the climate. The governor's office and the legislature have modeled four different scenarios based on what we know historic use is, adjusted for growth in our population and changes in consuming electricity.
The one we have decided to use climatically is the one-in-ten-year scenario. The one-in-ten-year scenario says, without any changes in behavior, and without any changes in supply, we will be about 6,000 megawatts out of balance. That's a God-awful scenario.
To make it awful, what we would have to do is bring on a couple of new power plants, some distributed generation, some PV. We can reduce demand through capital outlay at schools, public buildings, private businesses, and through public education we can make some changes just in terms of people making decisions about how to consume electricity. If we do that fairly well, it would just be awful. If we do it quite well then it will be pretty tolerable.
I don't see this scenario where we get through without some rolling blackouts. That is unlikely, no matter how good and responsible each one of us is and each business is. I think that the planning scenarios that assume you can do that are far too rosy for me to believe it can actually take place.
Q: What is being proposed to encourage private home solar panels and what legislation is pending or current to help subsidize the installation of PV on schools and public buildings?
A: If my staff put that question in here, I want to thank them for it. As it turns out, I am the author of Assembly Bill 83X, and X means it's in the extraordinary session. That is a bill which will tear down the barriers to the use of solar energy in California.
It does three things: One, it encourages what is called net metering. That means that when you are using electricity from the grid, the meter is running forward. When you are pulling electricity off your solar panel, it's running backwards, and all you owe is the difference, if there is any difference at all. Next, it eliminates the cap on the use of solar energy in California, which is currently at one-tenth of one percent.
Next, it says that the utilities cannot charge a standby charge, which has economically been the highest and unachievable barrier for folks to get over.
Lastly, it takes the cap on solar systems, which is currently at ten kilowatts, and says it now is one megawatt. This will work for virtually all businesses, agricultural applications, homes, and so on. It passed the Assembly Energy Committee this week and is set for hearing. And I'm very pleased to tell you, closing on a note of bipartisanship, that is passed with all Republican members and all Democrat members in the committee voting "aye."
