Myths v. Facts The California Electricity Debacle And The Lessons To Be Learned July 2001

MYTH: California Is Not Responsible For Its Own Energy Destiny FACTS: California completed no new electric generation facilities in over ten years; despite recent blackouts, and some new facilities, opposition to needed power plants continues. California adopted a fundamentally flawed electric power system in 1996 that, unlike any other state, forced all purchases into the highly volatile spot market, leaving the state completely vulnerable to short term price spikes. Retail rates were frozen even though a utility’s power purchase costs were dependent on the volatile spot market, a prescription for the utility bankruptcies and blackouts that followed.

MYTH: California Is A Victim Of Out Of State Generators FACTS: California is the victim of bad decisions by state officials despite warnings that its unique regulatory structure was flawed. Rather than concentrate on solutions, California state officials have made political demagoguery their focus, thus discouraging investment in the state’s power system and driving prices up. California has repeatedly ignored or disavowed FERC Orders to restructure its electric market; California’s blatant disregard of these Orders has cost California and West-wide consumers billions of dollars in higher electricity costs.

MYTH: California Is A Victim Of Out Of State Generators- Part 2 FACTS: When spot market prices spiked in the Midwest in 1998, there were no recurring blackouts or major retail rate increases because those states had long term contracts, as Enron recommended to California in the mid-1990’s. The shortcomings of the wholesale electric market- requiring the California utilities to buy all of their power through the California Power Exchange and preventing them from entering into forward long-term contracts for energy- contributed to the increase in wholesale prices. When spot market wholesale prices increased because of power shortages and increasing generation costs, the utilities had no option but to purchase the high-priced power. (Source: Energy Information Administration document on EIA website) California rejected Enron’s offer to sell long term power at reasonable rates. “Last year, Houston-based Enron and several other firms offered to sell power to California’s utilities for just five years at about $50/Mwh.” (LA Times, June 13, 2001, “Power Deals Exceed Prices on Spot Market”) Instead, the state paid $300/ Mwh on the spot market, costing consumers $2.5 billion.

MYTH: California Has Enough Generation and Transmission Capacity FACTS: Until recently, not a single new power generating facility had been constructed in California since 1988 despite the state’s growing power demands. There are major transmission bottlenecks that block the free flow of power from where it is generated to where it is needed, such as the “Path 15” link between northern and southern California. Transmission congestion on Path 15 through the Central Valley is increasing. This bottleneck was a culprit, grid operators say, in the mid- January blackouts in Northern California. (L.A. Times, June 14, 2001, “U.S. Invites Private Funding for Grid Expansion”) At present, this point in the state’s grid is like a two-lane freeway tunnel between three lanes of bumper-to-bumper traffic at rush hour.

MYTH: The Cause Of California’s Problem Is Higher Prices FACTS: California has been dependent on the Bonneville Power Administration’s hydroelectric power facilities and other imports for years. Unfortunately, the worst drought in the Northwest in 60 years has greatly diminished water levels, making much less power available to export to California. Overall, imports into California from other states have declined. Arizona and Nevada now retain power once available for export to California to supply their own growing states. Imports in the past accounted for up to 25% of California’s power supply during peak usage. Recent events demonstrate the need to address supply issues if retail prices are to remain stable.

MYTH: Electricity Rates Went Up Because Natural Gas Rates are Artificially High at the California Border. FACTS: While natural gas is now used to fuel almost half the electricity generated in California, it is important to address the fundamentals affecting natural gas supply and demand in the state. Prices reflect these fundamentals. Many California power plants and commercial customers held off buying gas for storage last fall as prices were climbing; when high prices persisted, panic buying among users ensued, driving prices through the roof in the short term. An exceptionally cold winter in California compelled consumers to use more natural gas and electricity to heat their homes and businesses than normal. Intrastate pipelines are filled to capacity, so transmission costs are increasing. California has 6,150 mcf of natural gas pipeline capacity entering into the state, but only 5,530 mcf of capacity on the in-state pipeline system. On July 12, 2001, FERC announced steps to push the state’s regulators to expand the in-state pipeline system. (The Energy Daily, July 13, 2001, “FERC: California Must Fix its Own Gas Woes”)

MYTH: Price Controls Are The Answer FACTS: Price controls only address the symptoms of the state’s woes; they actually make matters worse by discouraging new investment in supply and by increasing demand. The FERC “price mitigation” order of June 19 has increased uncertainty and led to blackouts beyond California. “The price cap idea sounds so simple at first, but then the unintended consequences start showing up,” said Puget Sound Energy spokesman Grant Ringel. “It presents a whole list of problems for states outside California, as evidence by the blackouts in Nevada.” (Dow Jones Newswire, July 7, 2001, “Caps Raise Blackout Risk”)

MYTH: California’s Recent Switch to Long- Term Contracts Has Solved its Problems. FACTS: In early 2001, when prices were at their peak because of California’s own mistakes, Gov. Davis signed long-term contracts with a nominal value of about $43 billion. These contracts are now $15-20 billion over market prices, because prices declined as supply and demand improved, particularly once consumers knew retail rates would not be frozen and conservation increased as a result. “[The contracts were signed] in a moment of panic… the decision will haunt current and future taxpayers in the generations to come,” said State Controller Kathleen Connell (D-CA). (Dow Jones News Wire, June 29, 2001) Gov. Davis claims the average price to be paid under the new contracts is $69/ Mwh, while an L.A. Times analysis of price payments made through June shows the average was $173/ Mwh. (L.A.Times, July 7, 2001)

MYTH: California Is Entitled To $9 Billion In Refunds. FACTS: California state officials created the system that led to higher prices (e.g., total reliance on the spot market) and now want others to pay for their mistakes. After overseeing a two-week mediation process and hearing from all interested parties (including the State of California), FERC’s chief administrative law judge rejected the state’s claim for $9 billion in refunds. “Can a cash refund be required where a much larger amount is due the seller? The chief judge thinks not,” he said. (Washington Post, July 13, 2001, “Judge Rejects Power Refunds for California”) Much of the $9 billion claimed by the state involved purchases from California entities such as the Los Angeles and Sacramento municipal utilities that sold power far in excess of that charged by out-of-state suppliers. (L.A. Times, July 7, 2001)

MYTH: Enron Played a Leading Role in the California Debacle and Should Pay Refunds FACTS: Enron CEO Jeff Skilling warned against the flawed CA regulatory system as far back as 1994: “if that poolco (the CA legislation) turns out as I expect…I think we are going to have capricious or high pricing.” (California Public Utility Commission, Jeff Skilling testimony, Aug. 4, 1994) Enron does not own generating facilities in California (except wind). California rejected Enron’s offer of long term power at reasonable rates in 2000, paying much more in the spot market instead. According to state records, from Jan-March of 2001, Enron charged prices for power that were well below the average of what CA was paying: Sacramento Municipal Utility Dist. -- $330 LA Department of Water and Power -- $292 Average price paid by CA -- $243 Enron -- $181 (*all prices per megawatt-hour) (Source: LA Times July 10, 2001)

MYTH: Enron Played a Leading Role in the California Debacle and Should Pay Refunds – Part 2 FACTS: Enron mostly was a net buyer of power in the state to meet its obligations to California customers. Enron is owed substantial sums by California utilities that far exceed the state’s de minimis refund claims against Enron. Even if Gov. Davis’ exaggerated refund claim was valid, under California’s own numbers, Enron’s portion would amount to less than one percent of the total, a negligible amount that pales in comparison to the heated political rhetoric of state officials directed at Enron. Based on myths, Gov. Davis says “Where do we go to get our money back?” Enron says based on these facts “Where do we go to get our good name back?”