A Lost Opportunity That Worsened Crisis
Utilities and federal regulators shut the door on renewable power in California
Susan Sward, ssward at sfchronicle.com, Chronicle Staff Writer
Monday, February 12, 2001
©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/02/12/MN54462.DTL

California utilities' long-standing distrust of the renewable energy industry has been a major force discouraging -- and in some case even blocking

--wind, solar and other ventures from expanding enough to ease the grip of the state's current energy crisis.

The utilities' stance -- along with regulatory actions, market forces and lack of governmental leadership -- have combined in the past two decades to prevent the renewables industry from producing more than 12 percent of state energy supplies, according to experts and industry sources.

By not developing more renewable sources, the state lost a potentially powerful hedge against its heavy dependence on natural gas and out-of-state producers. Almost one-third of the state's electricity is generated using natural gas.

"If we had invested in the past in more independent power -- especially the renewables -- we would have much more energy today and would be better situated to meet California's current energy challenge," said Marwan Masri, the California Energy Commission's renewables program manager.

"More renewables would have been very helpful because they offer environmental and price stability benefits," Masri said.

One of the key setbacks for the renewable industry came in a 1995 Federal Energy Regulatory Commission decision sought by Southern California Edison and San Diego Gas & Electric that resulted in the cancellation of millions of dollars in renewable contracts that were about to take effect.

"The FERC decision froze renewable development in the state, and it is only now beginning to defrost," said Michael Shames, executive director of the Utility Consumers Action network in San Diego.

Critics say that the FERC case was just one of the instances in the past two decades where the utilities fought or stalled when dealing with the renewable industry, fearing its high costs, risks and unwanted competition.

BIG-SMOKESTACK SYNDROME

Carl Weinberg, the respected former head of Pacific Gas and Electric Co.'s research department in the 1980s and early '90s, said the utility philosophy was "real men build power plants with big smokestacks on top."

"The utilities were extremely successful from 1900 through 1980 by building ever-bigger power plants and dropping the cost of electricity," said Weinberg, who retired in 1993. "When change began to happen with federal law (in 1978 requiring the utilities to sign contracts with the renewable industry), the environmental movement got going, and technological change occurred, the utilities protected their paradigm. They didn't know how to operate in a world that included renewables."

Weinberg said he had recommended that PG&E needed to look at smaller plants,

including micro-turbines and solar, to provide a more diversified, reliable power base in the modern information age, when blackouts in places such as Silicon Valley could be disastrous.

"It never really penetrated," Weinberg said of his advice. "At the time, they were worried about deregulation, and their focus began to go elsewhere."

It was, the utilities' critics say, a fateful error in judgment, and it occurred at a time when renewable sources such as wind and solar were making major technological advances.

"Renewables represent a way California could have reduced our dependence on natural gas, but the utilities missed the opportunity and chose instead to fight the renewable industry," said John White, Sacramento lobbyist for the Sierra Club and several other groups.

OTHERS SHARE THE BLAME

But California's three investor-owned utilities -- PG&E, Southern California Edison and San Diego Gas & Electric -- were not solely to blame for renewables' small share of the energy market. Regulators, politicians and market forces all helped stunt the growth of renewables:

-- Many politicians in Sacramento and Washington failed to push renewables' development and energy efficiency in the mid-1990s when energy prices were relatively low and the public's attention was elsewhere.

-- In the '90s, major state incentives to encourage renewables' development were not adopted until 1998, prompting many in that industry to turn to Europe and Japan, where strong incentives already existed.

"Japan has half the sun but has a market 10 times larger than California's because of its government incentives," said Dan Shugar, executive vice president of PowerLight Corp., based in Berkeley.

-- The state-set pricing structure for purchases of renewable and other independent power sources was tied to natural gas prices, which for much of the past decade were stable or spiraling downward. That scenario did not make renewables an attractive investment for newcomers.

NO PUSH FOR GREEN ENERGY

"The renewables have not been promoted heavily by the state or federal policymakers or by the utilities, and consequently the industry has not been able to evolve a strong commercial base," said Dan Kammen, an energy professor at the University of California at Berkeley.

Though the utilities helped create the magnitude of today's crisis by their lack of responsiveness to renewable energy, Kammen said, they are victims of the crisis as well.

"The real issue is government's failure to produce any long-term energy policy leadership that focuses on the need to diversify the energy mix," Kammen said. "So the utilities become pingpong balls going from crisis to crisis, and most of the crisis is due to lack of an energy policy."

Critics also cite two key instances in the past two decades when government took action that clearly halted renewables' expansion.

The first episode, which occurred in the mid-'80s, has been dubbed by some in the state's energy industry as ''the second California Gold Rush."

The state Public Utilities Commission offered long-term contracts to renewable and independent producers to produce power. The offering was so attractive that the response far exceeded what was expected.

Overwhelmed and confident that energy supplies were more than adequate, the state cut off its offering in 1985-86. Once that government program was withdrawn, renewables' development was dampened.

UTILITIES WANTED OUT

Then in the mid-'90s, Edison and SDG&E petitioned the Federal Energy Regulatory Commission to throw out a state PUC order that they enter into contracts for power from renewable energy projects and from modern fuel- burning plants that are far less polluting than older models. The utilities argued that the PUC had exceeded its authority by requiring them to pay more for these contracts than it would have cost the utilities to produce the power.

In 1995 FERC agreed that the PUC's procedures had violated federal law. PG&E then joined the other two utilities in canceling millions of dollars in renewable projects.

Some energy experts say FERC's decision starkly contradicts President Bush's claim that California's energy crisis results from its deregulation of the state's power industry and that the state must fix it.

"The federal government is so steadfast in saying it 'didn't create our problem -- it's California's problem,' " said Bill Marcus, a former senior economist with the California Energy Commission.

FEDS KILLED STATE CONTRACTS

"Excuse me, the federal government stepped into a set of power contracts ordered by the state and canceled them in 1995," said Marcus, who is now a consultant. "The result is all those projects were not built in California in the late 1990s -- enough for 1.4 million residential customers and enough to avoid some blackouts and to keep overall power prices down."

The three utilities' spokesmen said the long-term contracts would have weighed their companies down with above-market prices, and one of them said the state's utilities were understandably wary of renewables.

Gary Allen, Edison's renewables strategic planner, said his utility today had nearly 5,000 of its 18,000 megawatts generated by renewable and alternative power sources in response to federal law, state policy and the utility's own commitment to diversify its power base beyond oil sources.

But Allen added: "The way renewables were implemented in California in the early 1980s, it was a no-win, lose-only game" for utilities. "We didn't earn any profit on renewable contracts, (and) we were exposed to the potential for penalties" if the PUC concluded the utilities had poorly administered renewable contracts.

John Nelson, PG&E's spokesman, said his utility felt "no aversion to adding renewables to the state's energy mix -- in fact, we have one of the largest, most diverse clean-energy portfolios in the country."

But Nelson said the utility thought the PUC-ordered, long-term contracts would have tied the utility "to prices much higher than we could bill ratepayers, and our biggest concern was we might not be paid back given the impending deregulation the state had already begun."

SDG&E spokesman Ed Van Herik said the PUC bid process was "put together in a way where we weren't allowed to accept the lowest-cost bids."

LEFT TWISTING IN THE WIND

Along with the FERC decision on renewables, consumer groups also point to the controversy involving generation of wind power in the Tehachapi Mountains as an example of utility opposition to renewables.

Wind farm operators say Edison has contracted with them for about 340 megawatts of power, but Edison has never upgraded its transmission lines to carry that much. As a result, the farms are sometimes told to turn off turbines because the lines are unable to carry all the power they produce.

"Here we are in this energy crisis, and the wind industry wants to help alleviate that," said Linda White, executive director of the Kern Wind Energy Association. "But I believe the higher-ups at Edison don't want to incur the cost of building more transmission lines."

Edison's Allen said federal and state law and policy -- as well as Edison's financial plight -- bar the utility from making Tehachapi transmission upgrades. But he added that in the future "due to current generation capacity shortage, it may make sense for the ratepayers to pay for additional upgrades to capacity" if regulators approve it.

Elsewhere, some agencies -- such as the Sacramento Municipal Utility District and the Los Angeles Water and Power Department -- have moved aggressively to promote renewables.

Oakland Mayor Jerry Brown, who as California's governor in the 1970s and early '80s pushed renewable power options, has pledged to cut the city of Oakland's power consumption by 10 percent.

He said what was needed statewide "is collaboration of the utilities, government and everyone to create a more sustainable energy resource that does not disrupt the global climate. It's not enough to just solve this immediate energy crisis: It has to be solved by state and national policies and not by finger-pointing and blame avoidance."

---

Chronicle staff writer Bernadette Tansey and research librarian Johnny Miller contributed to this report. / Email Susan Sward at ssward@sfchronicle.com.

CHART:

 Renewable Energy 
SOURCES
Renewable energy sources make up 12 percent of California's energy use:
Natural gas         31%
Coal                20%
Large Hydro         20%
Nuclear             16%
Other (oil, diesel)  1%
Renewable           12%
.
Renewable 12%:
      Geothermal     5%
      Biomass-waste  2%
      Wind           1.5%
      Solar-thermal   .5%
      Small hydro    3%
--------
GENERATION
Amount of renewable energy sources generated in billions of kilowatt hours by 
selected years
 1983   7.8
 1991  27.3
 1997  20.1
 2000  24.7
----------
TIMELINE
  -- 1978: Federal law passes ordering the states to require their utilities 
to buy from independent generators, including producers of renewable energy.
 -- 1996: California's deregulation law provides $540 million for renewable 
energy projects from a surcharge on three investor-owned utility ratepayers' 
bills.
 -- 1998: First state-held auction using the deregulation law's funding for 54 
renewable energy projects that will receive $162 million and generate 540 
megawatts.
 -- 2000: Second state-held auction providing $40 million for 17 renewable 
energy projects that will generate 471 megawatts.
 -- 2000: Gov. Gray Davis signs legislation continuing renewable development 
funding by $135 million a year through 2012.
----------------------
GLOSSARY
-- Biomass: Production of electricity from organic waste such as urban wood 
waste, forest waste and agricultural waste such as prunings.
-- Kilowatt hour: Amounts to 10 100-watt light bulbs turned on for one hour. 
The average household uses 6,000 kilowatt hours of power in a year.
-- Kilowatt capacity: The average house demands five kilowatts in the middle 
of a summer day when the air conditioning is on.
-- Megawatt hour: Equals 1,000 kilowatt hours. 
-- Megawatt capacity: One megawatt serves the demands of about 1,000 homes.
.
Source: Calif. Energy Commission
Chronicle Graphic

©2001 San Francisco Chronicle   Page A1