California:

Energy reporter O'Donnell talks climate change, power, water issues for Calif.

Republican Gov. Arnold Schwarzenegger of California wants to drastically cut greenhouse gas emissions, vastly increase the use of solar panels and ship more coal-fired power in from distant states. And with a hotter than usual summer forecast, California may be in for more electricity shortages. In today's OnPoint, San Francisco-based energy reporter and author Arthur O'Donnell talks about the popular but controversial governor's agenda on energy, water and other pressing environmental issues facing the nation's largest state.

Transcript

Colin Sullivan: Welcome to OnPoint. I'm Colin Sullivan. With us today is Arthur O'Donnell, energy journalist and an expert on California energy issues. Also with us is Mary O'Driscoll, senior energy reporter for E&E Daily and Greenwire. Arthur thanks for being here.

Arthur O'Donnell: My pleasure.

Colin Sullivan: Now the U.S. Congress can't quite figure out what it's doing on climate change, but in California they're moving at a little bit faster pace. Can you talk about this executive order that the governor, Arnold Schwarzenegger, just signed into law last week?

Arthur O'Donnell: Sure, California has had a long history of trying to deal with environmental issues and frequently finds itself ahead of the national curve. In this instance, there's been a great dissatisfaction with any kind of effort at the national level, one, to quantify and recognize the problem of global warming and California feels it. We're a coastal state. We have a lot of concerns about potential impacts on the economy. The executive order signed by Governor Schwarzenegger last week would set specific goals for reductions of carbon and other greenhouse gas emissions that are somewhat on a par with the Kyoto Protocol. In the near term, it's an 11 percent reduction, looking out further, over a 30-year period, as much as an 80 percent reduction. The question is, what's the implementation behind that, and we really haven't seen very many of the details for implementation.

Colin Sullivan: So what are the possibilities? I mean how are they going to get there? They're setting 80 percent goals by 2050, some would call that unrealistic. How are they proposing to get there?

Arthur O'Donnell: Well the big key is who you involve in this and there have been a couple of different initiatives, one of them coming from the California Public Utilities Commission, that would be solely relegated to the investor owned utilities. Now that's a really small part of the market. As we know, carbon emissions is really a transportation and industrial issue, not just a utility issue. So this is an attempt by the state, one, to broaden the base for who will be responsible for trying to address this problem and to try and get a broader backing for policies that could then perhaps help to set a national policy.

Colin Sullivan: Now what's the political climate like in California? In Washington the political climate isn't quite right for climate change. They don't know what they're going to do in Congress. What's the political climate, what's the reaction among the IEUs and also among the legislatures in California?

Arthur O'Donnell: I think, surprisingly, there's almost a consensus that it is a problem, and it is a problem that we need to be dealing with right now.

Mary O'Driscoll: OK. I wanted to switch gears a little bit and talk about the California power market. California famously rescinded the retail competition program it had in the wake of the Western power market meltdown and that they would revisit it when everything settled down. Well it's now been about, what, three or four years since all the problems started and we haven't seen anything from them yet. FERC Chairman Pat Wood has expressed some measure of exasperation with the fact that there's nothing out there, there's nothing going on yet and that the utilities are kind of in a state of animated suspension right now. They don't know which way they're going to be going, if they're going to be competitive on the retail level or not. So where is California at this point?

Arthur O'Donnell: OK, if I can give you just a little background. It is exactly five years since the beginning of the California and Western power crisis. In September of 2001 the state suspended the availability of what we call direct access, which is essentially retail choice, and that's where things are now. Customers who had already signed up for alternative suppliers of electricity, rather than the utility, could remain in that and I think that it's important to note that currently as many electrons are being delivered under direct access as there were at the height of the California market, arguably in April or May of 2000. One third of all the electrons going to industrial customers, one fifth of those going to large commercial customers are all being supplied by non-utility providers. So that tells me two things, one is that people aren't going away and they're hoping for a reopening of the market. Now we don't have a mechanism for revisiting that right now. Last year there was a piece of legislation, S.B. 2006, that would have tried to adjust the market by allowing the larger customers to have this choice, again, while preventing smaller residentials, agricultural, small commercial customers from having that choice. We call that the noncore core split. Well, that piece of legislation never really went anywhere. Some variation of it passed, but then was vetoed by the governor for a whole host of other reasons. The governor would like to see a return to some kind of competitive market with a core noncore split, but we don't have a vehicle for right now. Where we are is we've been spending the last three years restoring the financial capabilities of the investor owned utilities. That's been state policy ever since Pacific Gas & Electric went into bankruptcy, ever since Southern California Edison almost went into bankruptcy, the big emphasis has been to get their credit ratings back to non-junk bond status, to credit worthiness, to get them back in the business of buying power, to get the state out of that business and, as a sidebar, to get the utilities to be generating their own power again and all of those things have been happening along with many other policies. So it's been a slow gradual crawling from out of the wreckage.

Mary O'Driscoll: OK, kind of related to that but looking at it in a national level, California was the bellwether for the competitive markets. When that fell apart a lot of other states pulled back and said they didn't want to do it. So everything has really pretty much stalled out as far as retail competition is concerned. There was some talk earlier this week at a conference of competitive power market enthusiasts, as they call themselves, that they really need to focus on what went right and what is going right with competition, but they really don't have any kind of vehicle to be able to do that. California is not working. Some of the state's programs that are still in existence are a little, are not doing all that well. So what is the status of that in the whole kind of the larger picture?

Arthur O'Donnell: OK. That's the key message coming out of this. It's actually, they called it a convention and they're really looking at it as a way of trying to find out who your friends are after all of this mess and to bring them together in order to formulate a unified message about competition. All right? What we're seeing is that there are some markets that they're pointing to as possible success stories. I say possible because it's a long-term transition, but Texas, the PJM market at the wholesale level, Alberta in Canada and on the gas side the Georgia gas story are all what they consider success stories. I was in Texas earlier this year and there was a lot of positive feeling about the state of competitive retail markets there. You have literally scores of competitors vying for customers. The switch rates have been pretty healthy, up in the 20 percent level and there have been significant savings over the past three years since they opened up the market to competition. Now the increase in natural gas prices has put a damper on this. What this means for people who are in support of competitive energy markets is it means that they really have to regroup. They have to get past the bad times that they've had, find a unique and unified message that they can take to policymakers at the national and at the state level and to gather up support. I think that there was some positive stuff that came out of this conference, this convention put on by the Center for the Advancement of Energy Markets, CAM, and we saw some new coalitions forming. One of them is called Compete and this is a diverse coalition of not just energy suppliers, but also end users, big box people like Wal-Mart and Target and others are joining in. Because when it comes down to it a lot of the bigger customers really do want choice. How far that choice extends down to the residential retail level is anybody's guess. I suspect that across the country we'll probably see it gravitate towards the bigger customers.

Colin Sullivan: Another pretty aggressive environmental initiative that's in play in California, just passed the California Senate last week, is called the Million Solar Roofs Initiative. Can you talk about what this is?

Arthur O'Donnell: Yeah, this is actually the second iteration of this proposal from the Schwarzenegger administration. It keys off of the federal Department of Energy's solar roofs initiative and actually, in California prior to this we had specific state subsidies. Whereas the California Energy Commission was overseeing a fund that would pay down half of the capital costs, the installation costs, for solar PVs and in lesser instances, kind of farm wind proposals. That's been a very successful program, in fact, we're reaching the point where the amount of money that's available for that program is drawing down the amount of subsidy, is lessening, and yet there's still a healthy demand. What this particular initiative would do would make it incumbent on builders of new housing to put solar roofs on and almost all of the new construction in California is happening out in the desert and the Central Valley region where we have an inordinate amount of energy demand from those houses because, one, they're bigger, they have to be air conditioned, they are in the areas where the temperature goes up to 110 degrees in the summertime. Almost anything that you can do to improve the efficiency and we have Title 24 standards among the most stringent efficiency standards for new construction in the country. This is another add on, this is the state saying, "We could be a leader in photovoltaics and this is the way we're going to do it."

Colin Sullivan: But doesn't it jeopardize the reliability of the grid and doesn't it jeopardize cheap power prices? If the goal is 5 percent of the state's electricity through solar by 2018, is that realistic and can you sell that politically in California?

Arthur O'Donnell: Well, realistic depends on a lot of things, like the availability of solar modules and that's a problem that we're seeing in the United States. All of the equipment is going to Japan and Germany and the United States, even BP Solar will tell you, is getting substandard equipment compared to the rest of the world. Now remember that this is off grid installations. This does not necessarily feed into the electric grid. In that sense, you might see it as a boon to reliability because if it's going to be in newer growing areas the utilities would have to build new infrastructure, new substations, new transmission lines, new generation plants in order to serve that anyway. So you might see this as a way of avoiding some of that capital expense and in that case, the cost effectiveness balances out.

Colin Sullivan: Are you surprised at how aggressive Schwarzenegger's been on the environment? Some critics have said his wife's cousin, Robert F. Kennedy Jr., environmental attorney, is actually dictating environmental policy in Sacramento. Do you think that's valid? Is that OK --

Arthur O'Donnell: No, no, I don't see Kennedy fingerprints on any of this stuff, and I've long been of the opinion that energy policy in California is neither a Democratic nor Republican policy. Even when we had Republican governors, Democratic governors with Republicans running the agencies or vice versa, energy policy has been fairly consistent and really the policy of California is to be better than everybody else in these regards, to really make environmental concerns part of everybody's lifestyle, because that's a reflection of our population. They do consumer surveys and 90 percent of Californians say they are environmentalists. What that means is different for every person, but now you have an administration that's really putting some meat to the bones of these kinds of ideas and espousing policies. I find it very welcome.

Mary O'Driscoll: Kind of along those lines, about the environmentalism of Californians, Governor Schwarzenegger and several other Western governors recently announced with much fanfare the huge Frontier transmission project that would bring Western generation into California, and California as everyone knows is always short of generation and really needs the power. But the proposal was promptly denounced by Michael Peevey, the chairman of the PUC and environmental groups because they say, oh, this is a vehicle only to bring in coal generation from Montana and Wyoming and that they don't want any part of that. How can California afford to have that kind of an attitude when they need the generation so badly?

Arthur O'Donnell: OK. The Frontier Line is one of about a half dozen transmission proposals, most of which emanate from the Rocky Mountain region and there are two resources to be exploited there. One would be a lesser quality gas, natural gas, and also relatively cheap coal. Right? So you're looking at that, now that is the quandary for any of these projects is, are we just simply exporting an environmental problem to places where there are fewer people to complain about it? There are two ways to look at this. One is that there is an offshoot proposal from Frontier, there would be a substation built. This is going to be a high-voltage DC line, OK? Almost a one way highway from these areas to California, but the thought is to build a substation as it passes through Nevada where there is a very aggressive proposal for a renewable area land with wind and solar and geothermal that could then tap into it. So there you're balancing out the portfolio. I think it will come down to a consideration of state policy. State agencies, over the last two years, have agreed, have reached a consensus that we should have a loading order for new resources and the loading order is efficiency, renewables and clean energy supply. Now clean energy supply, in this case, would almost dictate that the new technologies, the new power plants that get built to use this coal or gas, be of the highest quality standards and I think that's where Mike Peevey's coming from. His objection is we have a loading order. Does this violate the loading order? Well, we're going to do everything we can to make sure that the technology is clean coal. We're five years away from those technologies being perfectly viable and cost effective. That's about the timeline that it will take to build this transmission line. We have to have policies that work in lockstep in order to accommodate both of those or else you're going to run into that kind of environmental opposition.

Colin Sullivan: Another big issue in California is water scarcity, and there was an article you wrote actually for Greenwire recently on the CalFed water project where you quoted a state senator in California as saying, "The fish are diminishing. The levies are in worse shape than ever and water quality has not been improved." Can you talk about how big a problem it is, the ongoing controversy over CalFed in California?

Arthur O'Donnell: It's the biggest concern for the future in my regard. Water, of course, is essential to life and California, for the most part, is a desert. We've been very blessed with abundant natural resources and over the past 50 years have built an incredible infrastructure of dams, of levies, of the aqueduct that carries water from Northern California to Southern California. The key, I guess part of the puzzle there is what we call the San Francisco-San Joaquin Bay Delta and this is just outside of San Francisco Bay. It's where the American River and the Sacramento River flow into San Francisco Bay and an offshoot goes down through the aqueduct and this is where the resources from Northern California can go to Central California. Well, there's always been a political fight over allocation, over the cost of the facilities, over upkeep for all that and 10 years ago there was a grand collaborative agreement called CalFed, California-Federal government, in which 26 state and federal agencies got together and said, "We will not fight with each other anymore. We will coordinate our efforts." Part of the coordination of the effort is to build up the infrastructure and to make sure that there is sufficient supply and a delivery mechanism. That costs a lot of money. The last framework for funding that CalFed put out in October envisioned $9 billion over the next 10 years. The problem is where's the money going to come from? The federal government has never stepped up to the plate and given adequate funding for this even though they were supposed to be a one third partner in all this. At best, we're looking at maybe 35, $40 million out of the current appropriations bill and California has had to foot that bill. What that means is a reallocation of the liabilities, higher user fees are in the offing. That's going to be an issue, of course this is political. Because of all this, it's been a great strain. The director of CalFed, Peter Wright recently quit. I mean he had to undergo bypass surgery because there was so much strain on him. Secondarily, but almost as important, the chief scientist for CalFed quit during the same week. So we have a turmoil there. We have the state legislature being unwilling to fully fund this effort without any steps from the federal government and the state senators have proposed cutting $110 billion out of the $220 billion budget proposed by the Governor. So right now it's a mess and I don't see an easy reconciliation.

Mary O'Driscoll: OK. I wanted to switch again. You've chronicled the rise in municipalization among cities in California and the West, looking to move from being served by investor owned utilities to forming their own municipal utilities or joining other municipal utilities. This has been a threat that's happened several times over the past 20 to 30 years. What makes it different this time?

Arthur O'Donnell: OK, actually public power in California has a long history. Our oldest public power entity is 130 years old, that's the city of Alameda's electric department and periodically, about every 20 or 30 years there's a resurgence in this local control issue and really it comes down to local control over energy destiny. Municipalization is a very difficult process. It involves a lot of political activity. It involves a lot of money. The utilities fight it tooth and claw. So what we're actually seeing are lesser variations of full blown public power and I'll give you a couple of examples. One of them is called 'muni-light', this is where an area that's a fast growing area is taking over a green field development, something where there had not been housing or commercial development in the past and instead of forming a new municipal utility for the existing city, will set up a special district to cover that new area. They don't run into quite as many roadblocks doing that and they don't have to condemn property for instance. So that's one. A second one is community choice aggregation and this is afforded by a state law that was passed in the wake of the energy crisis that allows the city to become a broker or aggregator. They step in and then they become responsible for buying generation and power supplies. The utility is still there as the distributor of energy. You're not going to get rid of them. They own the wires, but you avoid the fight over valuing and condemning these properties. San Francisco and Chula Vista are very interested in following community choice aggregation. The key issue there is what kind of cost structures are involved? Can the city actually make money with this and what kind of exit fees?

Colin Sullivan: OK. We're just about out of time. Arthur O'Donnell thanks for visiting us in Washington. I hope you come back.

Arthur O'Donnell: Colin, Mary, my pleasure.

Colin Sullivan: Join us tomorrow for another edition of OnPoint. Until then, I'm Colin Sullivan for E&ETV.

[End of Audio]

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