Energy issue will test Schwarzenegger’s skills

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Contra Costa Times (California)

Rolling blackouts and painful energy rate hikes during the 2000-01 energy crisis generated a tidal wave of voter anger and frustration that swept Gov. Gray Davis out of the Statehouse.

And while erasing the budget deficit will top the new governor’s agenda, his long-term success will also depend on his ability to assume his other role as the state’s top kilowatt cop.

Schwarzenegger’s ability to wrestle with the complex political and policy issues of the energy sector, give businesses and residents promised relief from high power costs and avoid another round of blackouts will test his political clout and skill.

During his campaign, Schwarzenegger failed to offer new ideas on energy issues. Instead, his campaign platform called for expanding energy competition and conservation, an approach not radically different from the orientation of the Davis administration, as even Schwarzenegger advisers acknowledge.

The governor-elect’s energy road map and a plan approved in May by Davis appointees are “generally quite consistent,” said James Sweeney, a Stanford University management and engineering professor and Schwarzenegger energy adviser.

That doesn’t thrill Doug Heller, spokesman for the Foundation for Taxpayer and Consumer Rights in Santa Monica, which has opposed energy deregulation and frequently criticized Davis energy policies. The embrace of the dispatched governor’s energy policies by the new administration promises to play like “a Schwarzenegger movie in which the hero kills the enemy and steals his identity,” Heller said.

Schwarzenegger’s campaign appealed to voter anger and frustration but also sounded positive themes, such as bipartisanship and support for business-friendly policies.

But friendship to business gets complicated on energy issues. Often, energy debates are driven by powerful interests — entrenched utilities, aggressive energy sellers, aggrieved owners of companies and institutions with multimillion-dollar power bills — that have big stakes in the market and resources to contest every ruling by regulators.

Interest group conflicts, combined with public inattention, proved a recipe for disaster in 1996, when a plan to introduce competition into the regulated power industry was unanimously passed by the Legislature and signed into law by Gov. Pete Wilson, who is now a Schwarzenegger adviser. That law — AB 1890 — set out to deregulate power markets, but was packed with goodies and protections demanded by utilities, power sellers and big energy users.

“In the negotiated settlement of 1890 everyone got something they wanted but the pieces didn’t fit together,” said Timothy Duane, an associate professor of energy and resources at UC Berkeley.

The current energy debate bears eerie similarities to the pre-AB 1890 period. A desire for expanded competition predominates among big players in the energy industry, but those players strongly disagree on key issues.

The Schwarzenegger energy platform shares with the Davis plan “a pretty clear philosophical point supporting competition” in the electricity industry, said Sean Randolph of the Bay Area Economic Forum and a contributor to Schwarzenegger’s energy document.

Beneath that apparent consensus, there is friction. Utilities that sold power plants to open the way for wholesale competition are back in a buying mood. The prospect of expanded competition from utilities has upset owners of non-utility power plants already hit by sagging energy and stock prices. Big electricity users saddled with high costs and debts from the energy crisis want the freedom to shop for bargains, and that upsets utilities worried about loss of customers and consumer advocates worried that small customers will get stuck with high power costs and energy-crisis debts.

“It’s going to be tough politically to get all the players to buy in” to any comprehensive program for the energy industry, said Severin Borenstein, executive director of the UC Energy Institute.

Adding to the potential for stalemate is heightened public skepticism about deregulation, which is associated with the energy crisis. That has steeled the resolve of consumer advocacy groups to fight any changes that they see as threats to keep rates high or trigger a new round of blackouts.

“We never supported (AB 1890) but we withdrew our opposition when there seemed no point in fighting it,” said Mike Florio, a lawyer for The Utility Reform Network. “We’re going to put up a bit more of a fight” this time, he added.

TURN won’t be alone. “I think there are more people who are just wholly against anything except going back to old-style regulation,” Borenstein said.

The new administration hasn’t assigned its energy portfolio. “Discussions are being done internally and in confidence,” said H.D. Palmer, a spokesman for the transition team.

Things won’t stay internal. Whoever ends up with the Schwarzenegger energy portfolio will have to deal with a Legislature controlled by Democrats and autonomous agency officials appointed by Davis.

All those energy policy makers will have their work cut out for them. California’s electricity industry is “about where it was in 1996 — about four years or so away from another shortage if you don’t get the rules straightened out that will attract investment when it is needed,” said Lawrence Makovich of Cambridge Energy Research Associates, who also helped draft the Schwarzenegger energy platform.

State analysts and Schwarzenegger advisers agree that a new round of blackouts could threaten as early as 2006. A report issued Thursday by the overseers of the statewide power grid warned that stronger than expected economic growth and hot temperatures could bring on energy shortages next summer.

To stave off the threat of blackouts, Schwarzenegger — like the Davis team before him — wants to rely mainly on incentives to private power plant investors.

That could be a tough order. Lower power prices have evaporated Wall Street’s willingness to extend loans or make investments in new plants.

The main break with Davis’ energy policy written into the Schwarzenegger energy platform is a proposal to abolish the state Power Authority, an agency set up in 2001 with a mandate to sell up to $5 billion in bonds and use the proceeds to fund power plant development and energy conservation.

That would be “a fatal mistake,” warned Heller, the consumer advocate: “The Power Authority is the state’s last defense against future manipulation or real shortages of energy supplies.”

It may not happen. Abolishing the Power Authority would require action by the state Legislature. And even if the Power Authority ends up on the scrap heap of history, Sweeney thinks the state might want to save its bonding authority by transferring it to another agency.

In the end, Schwarzenegger may be judged less for his ideas than for his willingness to use some muscle. The governor-elect’s energy platform plan contains “not one word about enforcement,” worries Loretta Lynch, a member of the state Public Utilities Commission and advocate of a return to traditional regulation of an industry made up of monopoly utilities. That could signal “a green light for the gougers to come back to California,” she said.

Even Schwarzenegger’s supporters acknowledge that he will have to do a lot of heavy lifting in the energy arena. “Just because everybody will agree to a compromise doesn’t mean you’re going to get it right,” Makovich, the Schwarzenegger adviser, warned. “There is a clear need for leadership (willing to make) tough decisions that make some people unhappy.”
Rick Jurgens covers the housing, development and energy industries. Reach him
at 925-943-8088 or at [email protected]

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