I have a friend who periodically gets into trouble. Whenever we review the history of an episode, his explanation is always the same: “It seemed like a good idea at the time.”
Such hindsight leaps to mind as California lawmakers once again overhaul the state’s electricity industry. History suggests that consumers will pay dearly to see how this movie ends, regardless of whether the result justifies the price of admission.
Federal data indicates Californians paid $171 billion in higher costs for power over the last 20 years, compared to the national average. For perspective, this works out to roughly $12,300 per household, but bear in mind the total includes residential, industrial, commercial and government usage.
Those two decades included the 1996 partial deregulation, resulting power crisis and partial re-regulation in 2001, followed by a historic plunge into green energy that began in 2006.
Each policy seemed like a good idea at the time, to somebody.
Between fuel types and the mix of industry and residential consumption, there’s nothing simple about explaining why California or, say, New York pays vastly more for energy than another large state like Texas.
Still, electric utilities are highly regulated or publicly owned, so the hand of government is heavy. If you pay less or more than the national average, state regulators and lawmakers get the credit or blame.
And yet, unlike my reflective buddy, officials don’t routinely go back and examine how their decisions turned out.
Before we unpack the last, expensive 20 years, let’s glimpse the future.
On Sept. 11, the Legislature passed Senate Bill 350. It requires utilities to get 50 percent of their power by 2030 from so-called renewable energy, about double today’s level.
For good measure, California will somehow electrify its entire transportation system, the nation’s largest.
In addition, the bill will “double the efficiency goals” for all homes and commercial buildings in the state by 2030. Does this mean we all must insulate walls and replace windows until consumption falls by half? The bill isn’t clear, but this herculean task presumably will fall to property owners.
If it seems like I have almost no clue what this bill will really do, that’s because nobody else does, either. In typical Sacramento fashion, lawmakers crammed it together late in the session.
Worried about catastrophic costs for low-income drivers, Assembly Democrats stripped out Gov. Jerry Brown’s promise to cut petroleum use by 50 percent. Brown has indicated he will sign the bill anyway and work through administrative channels to overhaul the gasoline industry.
Similarly, lawmakers delegated the nitty-gritty of what’s left of SB 350 to a variety of state agencies. They include the Public Utilities Commission, which is the subject of a criminal investigation into contacts between regulators and utility executives.
As for intentions and good ideas, California seeks no less than to save the planet from climate change by slashing use of fossil fuels.
We’ll see how that turns out. But we can assume it will be expensive.
In the mid-1990s, inspired by falling costs in deregulated industries such as airlines, telecommunications and natural gas, state lawmakers hatched a plan to deregulate the production and retail marketing of electricity.
This worried the state’s three big utilities; Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. To ease their transition, lawmakers let them bill their customers an extra $20 billion for “stranded assets,” according to subsequent news accounts.
Then California’s complex, politically designed market collapsed into rolling blackouts. In just two years, 2000 and 2001, energy firms gouged consumers for at least $40 billion beyond the marginal cost of generating power, according to a 2003 analysis by the Public Policy Institute of California.
Putting Humpty Dumpty back together went little better for consumers. A panicked former Gov. Gray Davis locked in the sky-high prices of the power crisis by signing $43 billion in long-term supply contracts. A chief beneficiary was Sempra Energy, the unregulated parent of SDG&E.
Next, Davis wanted a strong leader to revive utility control of the power supply. He found one in Michael Peevey, who directed policy under another deregulation-era law that put the PUC president in charge of key regulatory officials instead of the full commission.
With his first major decision, the former Edison executive transferred (in a 3-2 commission vote) up to $8.2 billion to PG&E through above-market prices to help the utility emerge from bankruptcy. Part of the 2004 deal peeled off $170 million for Peevey’s pet environmental and other nonprofits.
Until his retirement last year, Peevey presided over a series of decisions that accelerated the state’s renewable power push at the expense of consumers – and for the benefit of utilities and green energy developers.
In one of his biggest decisions, Peevey met in March 2013 in Warsaw, Poland, with Edison executives to discuss who should pay for scrapping the San Onofre nuclear power plant. The meeting, and other previously undisclosed communications, were detailed publicly in remarkable investigative stories by the Union-Tribune’s Jeff McDonald.
Three months after the Warsaw meeting, Edison CEO Ted Craver announced San Onofre’s permanent shutdown. A year later, the PUC agreed to a $4.7 billion settlement that a saddled consumers with 70 percent of the cost.
It’s reasonable to believe that Craver might have fixed the plant instead of scrapping it, if he wasn’t confident his shareholders and those of partner SDG&E would pay just 30 percent of the cost, instead of 100 percent.
Yet the settlement was just the beginning. Last year, I estimated scrapping San Onofre instead of reopening it put consumers at risk for $13.6 billion in direct costs.
And that doesn’t include billions for new infrastructure Edison must build to replace the plant’s lost output, which provided clean power for 15 percent of Southern California.
Then there’s the build-out to meet the state’s pre-SB 350 renewable energy goals. This month, Craver said Edison will spend $4 billion a year for the next three years to upgrade the utility’s distribution system.
SDG&E spent $2 billion on its Sunrise Powerlink, which it said was needed to reach solar and wind resources. This doubled its base of grid assets.
Under PUC policy, such upgrades produce profits of roughly 10 percent a year to utility shareholders for 30 years or more.
I could go on with more examples. In each case, the PUC or Legislature was pursuing worthy goals, from cutting costs in the 1990s to saving the planet this decade.
The point is that consumers have ended up paying most of the bill, come success or failure.
Long after the power crisis, rates were still rising sharply – 42 percent for residential customers of SDG&E since 2006, for example. And, because green power is more expensive (and profitable for developers) than fossil-fueled generators, billions in further rate hikes already are built into the system.
Setting aside the cost, it’s far from clear that the latest initiatives are technically possible. State officials have warned that SB 350’s 50 percent renewable mandate could destabilize the grid and burn up appliances, because wind and solar is inherently prone to weather-related volatility.
Meanwhile, economists say the investments required to double the efficiency of old buildings far exceed the savings in bills.
If extreme conservation is possible, plummeting consumption would force rates even higher to cover fixed infrastructure costs. It’s a nice problem to have from an environmental perspective, but employers and low-income families will surely suffer.
An optimist might suppose that the deregulation debacle would have taught Sacramento to slow its roll and ponder the unintended consequences when revamping an entire industry as essential as energy.
Such optimism is misguided, if the rush to pass SB 350 is any guide.