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California Energy Official
Sees No Crisis Repeat

by Rick Jurgens
Contra Costa Times, January 3, 2005

As a candidate, Arnold Schwarzenegger called for "a rational and consistent power policy" and "a clear energy strategy that focuses on attracting new investments in California."

Keeping those promises now depends on the cooperation and action by a host of players in the private and public sector, including government officials not directly answerable to the governor.

Important energy policy makers include two largely autonomous commissions still composed mainly of Davis appointees: a Public Utilities Commission with the constitutional power to set utility rates and an Energy Commission that approves new power plants. The state Legislature, still controlled by Democrats, can also weigh in.

The man expected to implement Schwarzenegger's energy policy is Joseph Desmond, who in May became deputy secretary of energy at the state's Resources Agency. Desmond, who had a ringside seat for the last crisis as head of the Silicon Valley Manufacturing Group's energy policy task force, thinks the state has learned enough lessons from that debacle to prevent a recurrence.

QUESTION: What does your new job entail?

ANSWER: My primary responsibility is for coordinating and developing energy policy across state agencies and including neighboring states and the federal government and other organizations and departments. The focus this year has really been on electricity issues.

Q: To an outsider, it appears the name of the game in electricity is to keep the lights on.

A: Another way of saying that: reliability is ... job No. 1. And reliability means keeping the lights on. The second priority ... is making sure that (electricity) is competitively priced as low as it possibly can be.

In terms of how we meet our goals, the first priority is energy conservation. Beyond that, we have to look at renewables, diversity of fuel supplies, and a whole host of other issues, not the least of which is transmission.

Q: When we talked 2 1/2 years ago, you observed that "the lights are on but problems are still there." Does that also describe the current situation?

A: No. I think there's been a significant change in the underlying fundamentals. California has turned the corner on electricity policy and how we intend to meet our major energy needs.

In the short term, though, we still face a very tight situation this (coming) summer ... primarily due to transmission constraints. The concerns are in the Southern California area. But obviously we're working. We have a plan.

That plan includes accelerating power plants already under construction and making sure they're on line. It's locking up resources under contract and making sure that power is available to California. It's aggressive conservation. It's what you might also call demand response programs (designed to cut electricity usage when supplies are short). And through the combination of all these efforts we're clearly working towards ensuring that summer 2005 does not represent a problem. To a large degree, this governor inherited an electricity crisis, and we're working to correct that.

Q: How would you differentiate the current administration's approach from that of its predecessor?

A: First, it's proactive, it's not waiting for problems to happen. It's taking specific, concrete steps to improve the supply situation, to promote conservation, to be proactive, and to avoid something that is a problem from mushrooming into a crisis. Second is the unprecedented level of cooperation in planning and policy discussion between the agencies that include the Energy Commission (and) the California Public Utilities Commission (and) the California Independent System Operator. We have biweekly meetings where we sit down and run through a list of issues making sure that we understand what is happening, what the timing is, what the appropriate next steps are, and how does this fit within the governor's vision for energy policy.

Q: Is there enough of a public consensus possible to support doing some tough things on energy policy?

A: We've been very attentive to making a very significant effort to work with all the stakeholders. That includes utilities, independent power producers, large users, consumer organizations, environmental organizations, state government and other institutions. (And) it is important to recognize that when it comes to energy policy, California is not an island. We are an integral part of the Western electric grid. And so as we think about energy policy, it's not just about California but how we affect our neighbors, and how do our neighbors' decisions affect us.

Q: What do you consider the administration's most important energy accomplishment?

A: The governor asked the Public Utilities Commission to accelerate the requirements for the utilities to have sufficient planning reserves. That was adopted on a 3-2 vote back in November. What that does is require people who sell energy -- investor-owned utilities and others -- to ensure that they have 15 percent planning reserves -- some insurance, if you will -- capable of meeting the maximum peak demand given a one-in-10-year hot weather forecast. They have to have it as of summer 2006, but more importantly, they must demonstrate that they have that lined up and under contract 12 months in advance.

Q: The state's 1998 deregulation plan sought to clear the way for competition by limiting the role of utilities and regulators. Is the administration's current approach different?

A: Yes. You cannot simply leave it to the market to solve that problem (of boom and bust). The state has an active role to provide guidance and direction to ensure that adequate supplies are being brought in a timely and orderly manner. (Just as) you want to attract investment in new construction ... you also want to avoid boom and bust in the retirement of those resources.

Q: If you were faced with the type of crisis that the previous administration was, what new tools would you have to keep the lights on?

A: Let me make sure I answer that question in the appropriate way. There are diminishing returns by continuing to invest more and more (in power plants) and having additional supplies to meet capacity needs. What you need to do is strike a balance. (You want to) plan for adverse conditions, but you don't necessarily want to insure against every imaginable catastrophe ... because the cost would just far exceed the potential benefits. But having said that, the important thing is constant update of information, meaning the ability to know what's available, what's being scheduled, when it's coming online, what the forecast is, who's committed under contract, to coordinate that across the agencies.

In fact, it's almost what I'd call ... a back to basics approach, which is good planning, making sure the supplies are there, minimizing usage and doing it in a way that promotes diversity, emphasizing renewables. Renewables are a hedge against price volatility. Conservation means you don't have to add that resource. Insuring sufficient transmission means that the power can move where it needs to go at the lowest possible cost.

I know it might not be exciting, but to a large degree these are highly complex systems. They're dynamic so they're always changing, and it's a massive amount of information that needs to be handled in real time. But making sure that everyone is on the same page is the best defense.

Q: During the crisis, many big electricity users that had become customers of non-utility power sellers returned to the utilities. Now, many of those former "direct access" customers want the right to again shop for better deals for power. Will that happen?

A: The governor believes in the value of competition as a way of driving innovation. Direct access customers (who didn't return to the utilities) have in fact been able to avoid the costs of the crisis. They were out. The subject is those who switch back and forth. That's what we really need to talk about, and making sure that the rules prevent that or any costs shifting onto other customers.

There are a lot of details. But I don't want to lose sight of the overall philosophy, and that is competition, managed competition, drives innovation, it leads to lower prices, and it can improve the levels of customer care and service. So in order to achieve those benefits we need to be very careful about how we go forward. And that means thinking through the rules around switching, making sure that if (a utility) incurs an obligation on the part of a customer and they later decide on a different supplier, that there's a way of allocating those costs to those customers. It's a complicated discussion, but the benefit is there.

The good news is that the rulings that I talked about put us on the path of guaranteeing that there will be sufficient supplies and sufficient reserves. So that then opens the door for reconsideration (of direct access).

Q: So you're confident that it can eventually be restored?

A: I'm confident it can, but it can only be done with the input of all stakeholders. It's going to require everyone understanding and agreeing to what conditions make sense.

Q: So what's the toughest part of your job?

A: I can't say there's a hard part. I'm fortunate in that there is a spirit of cooperation across all the stakeholders to make sure that we get this problem fixed, and that we do it right once and not have to revisit these issues years from now. I only wish there were more hours of the day ... because obviously I enjoy what I do and love the energy field.

I've been doing this 20 years. It's endlessly fascinating. And this is a unique opportunity to work with a governor who provides such strong leadership to get this done and get it right to benefit Californians. It's not just Californians. It's the West and, to a degree, it's the nation. When we talk about expanding transmission, we have to talk about national security issues and fuel diversity and laying the foundation for our economy going out over the next 20 to 30 years. There's plenty to be done.


Rick Jurgens
Knight Ridder/Tribune Business News contributed to this report.
California Energy Official Sees No Crisis Repeat
Contra Costa Times, January 3, 2005

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