Wednesday April 11 08:51 PM EDT

http://dailynews.yahoo.com/h/sddt/20010411/lo/state_energy_prices_bound_to_skyrocket_further_expert_warns_1.html

State energy prices bound to skyrocket further, expert warns

Market forces that already have driven California energy costs through the roof are preparing to unleash an explosion this summer that will send them into orbit, an expert told a gathering Wednesday at University of California, San Diego.

"As bad as you think it might be, it probably has the potential to be much worse than that," said Severin Borenstein, director of the University of California, Energy Institute and a professor of business administration and public policy at University of California, Berkeley.

Borenstein, who also serves on the board of the California Power Exchange and as a member of the state attorney general's Gasoline Price Task Force, spoke at the UCSD Economics Roundtable.He gave the gathering of about 100 people a history lesson in the energy deregulation process that led to the current condition.

As things stand, power generators that control the supply of electricity are basically able to charge whatever they dare, checked only by the fear the government will take dramatic action to stop them, he said. The state government has not been able to control the situation,and the federal government has refused to step in, leaving the generators free to milk billions of dollars from California's three largest utilities and the state's coffers, Borenstein said.

The state finds itself in a position where the supply of electricity and the demand for it are very close to the same. Deregulation that took effect in 1998 created a marketplace where the suppliers -- power generators in California and neighboring states -- could get the highest price possible for their product.

With the margin between supply and demand so small, an individual company that controls about 10 percent of the generation capacity can demand more for its power, Borenstein said. Theoretically, the state -- which is now buying power for the utilities -- could refuse to pay, which would result in a supply shortage and blackouts. Or the state can continue to shell out, driving up the cost of power in the market even further, he said.

"Ten percent of generation in California puts you in a tremendous position to drive up prices," Borenstein said. "Why wouldn't they exercise market power? Exercising market power is completely legal." On the other end, with the state subsidizing the cost of electricity to consumers, there is no real incentive to conserve, Borenstein said. So demand does not drop as prices rise.

Another key facet to energy deregulation is that it transferred the authority to control wholesale energy prices from the California Public Utilities Commission (news - web sites) to the Federal Energy Regulatory Commission (news - web sites). And the head of FERC, Borenstein said, is completely committed to a free market and refuses to place a cap on what power generators can charge. A rate cap on wholesale electricity based on the cost of production, rather than the market power of the generators, would stabilize the market while new power plants are built to increase supply, he said.

Without a solution, the wholesale price of electricity could jump 500 percent this summer, Borenstein said. He offered some short-term plans of action, mostly aimed at forcing consumers to feel the cost of power, resulting in the reduction of demand:

Institute "real-time pricing," especially for large commercial users. Because electricity cannot be stored, its cost fluctuates widely everyday. If users paid the real-time price, they would pay more at peak times, and much less during off-peak hours, he said. That would give manufacturers and other commercial users an incentive to operate during off-peak hours, helping to avoid blackouts and driving down the price for other users.

Raise retail rates to residential and commercial customers even more than the 30 percent increases currently proposed. Price increases being considered are small in comparison to the actual price of wholesale electricity, he said. Big price hikes, especially for residential customers, could lead to conservation, he said. Normally, electricity consumers do not conserve large amounts in response to price hikes, but even a small percentage will have a big effect on market forces, Borenstein said.

Continue to pursue long-term contracts to buy electricity. Gov. Gray Davis (news - web sites) has struck deals with generators to buy electricity at fixed rates. They spread the high cost of power over time -- anywhere from one year to 10. They also hedge against market instability.

"What we really need to do is recognize that this is an emergency. We are in a position where tens of billions of dollars are going to flow out of California this summer," Borenstein said. "Between the outflow of wealth ... and the incredible economic disruption that occurs with blackouts in the manufacturing sector, I think it could have a really dramatic affect on the California economy."

"If we don't conserve, we are going to have blackouts this summer," he said. "You may not mind resetting your VCR, but the fabrication companies that are making computer chips really mind." Initially an opponent of cash rewards for conservation, Borenstein said anything that reduces demand will be helpful. The governor, for example, recently announced his 20/20 program, under which consumers that use 20 percent less electricity this summer than they did last summer will receive 20 percent rebates.

"We need to get incentives in place," Borenstein said. "If you want to pay them to get them to reduce, I can live with that. If you want to bill them to get them to reduce, I can live with that. If you want to plead with them to get them to reduce, I can live with that."

In other related news:

The Utility Consumers' Action Network, a San Diego-based advocate organization, released its plan for dealing with the summer crisis. UCAN called for the formation of a "buyer's cartel" to offset the market power of the energy generators, or the "seller's cartel." California should join with Oregon and Washington to create the organization, which would set a reasonable price for electricity based on the cost of production plus a 30 percent profit margin, the report said.

If the generators refuse to produce or sell power at that rate, then the group will not buy it -- which could result in blackouts during the stand-off period, the report said. If the generators continue to refuse, the state should then use the power of eminent domain to step in and seize the plants, the report said. Without such a confrontation, the power generators could suck $50 billion out of the state by the end of the year, the report said.

Two bills representing combined spending of $850 million were signed by Gov. Gray Davis on Wednesday, according to a press release from his office. The measures -- one introduced by Assemblymember Christine Kehoe, D-San Diego, and one by Sen. Byron Sher, D-Palo Alto -- are designed to create programs that will reduce energy consumption by 2,000 megawatts this summer. In all, Davis hopes to inspire the conservation of 5,000 megawatts this summer --or enough electricity to power five million homes.

The bills include money for the following programs: $50 million for energy-efficient household appliances; $60 million for high-efficiency lighting in commercial buildings; $35 million to improve demand responsiveness in industrial buildings; $35 million for real-time meters; $50 million for low-interest loans to schools and municipalities for energy reduction projects; $90 million for agricultural demand reduction and efficiency; $50 million for innovative peak-load reduction; $40 to increase efficiency in state buildings; $10 million for a statewide media campaign; and $7 million for classroom education.

The bills also include $105 million for renewable and other clean, distributed generation projects and $240 million for low-income assistance, including weatherization programs, cash assistance and discounts.

"Today, I'm signing legislation to give consumers more weapons than ever before in the battle to conserve," Davis said in the release. "Taken together, these programs represent the largest, most aggressive conservation effort ever launched by a single state."

-- Swissrose (cellier3@mindspring.com), April 11, 2001