The western electricity and natural gas crisis

provided by Ralph Cavanagh, Natural Resources Defense Council Energy Program Director


his memorandum summarizes and responds to the crisis in Western electricity and natural gas prices and reliability. These issues increasingly are national in character, but the impacts in California are especially grave and immediate. The public is not fully aware of the magnitude of the problem, since most of the pocketbook impacts have been deferred, but that is about to change.

To test the limits of understatement, wholesale gas and electric prices in the West are far above normal levels. For example, spot market electricity that normally costs 2-3 cents per kilowatt-hour has sold in recent days for as much as $1.50 per kilowatt-hour, and the average wholesale price since June is at least fifteen cents per kilowatt-hour. Natural gas spot prices, which normally are in the range of two to three dollars per million BTUs, recently reached almost ten dollars per million BTUs nationally, with prices peaking above fifty dollars in Southern California.

Today, California's hourly electricity prices are bouncing between 20 and 30 cents per kilowatt-hour, and natural gas futures on the New York Mercantile Exchange top eight dollars for February 2001 and remain above five dollars through February 2002.

No single factor explains these extraordinary increases, which are linked.

The gas price increase most prominently reflects a prolonged contraction in exploration and storage due to low commodity prices, coupled (in the Southwest) with reduced pipeline capacity as a result of an explosion last summer.

This much more costly gas helped drive up the operating cost of electric generation; high electricity prices also in part reflect reduced Northwest hydropower production due to low rainfall, a generally overstressed power grid, widespread failures to hedge spot market prices with long-term contracts, and reduced investment over the past decade in both energy efficiency and generating capacity throughout the West.

Environmental constraints on electric generation are also sometimes cited as a factor, but regulators have worked hard to introduce more flexibility and there is no credible argument that somehow clean air standards or California siting rules are the true culprits.

Abundant opportunities persist to reduce pollution at relatively low cost by cleaning up older fossil generators, which could then further increase their production while continuing to reduce emissions.

A political crisis is unfolding now, as customers begin to get high gas bills and electricity distribution companies demand permission to pass the high electricity costs through to customers.

The two biggest electric distribution companies in the West, PG&E and Southern California Edison, claim losses in excess of $8 billion since May on unreimbursed wholesale electricity purchases; they are confronting Governor Davis with a choice between bankruptcy proceedings and 25-30% rate increases.

The California legislature began a special session this month, and the California Public Utilities Commission has proposed raising electric rates temporarily by about 10% overall.


NRDC's response

1. Energy efficiency and renewable energy represent the fastest, cheapest and cleanest way to lighten the load on the West's energy distribution systems.

Thanks in part to legislation that NRDC helped pass last August, California has many immediate opportunities to ramp up its energy-efficiency and renewable-energy investments, which have already contributed more than 15,000 Megawatts to a western power grid that never needed them more. For example, the California Energy Commission is issuing emergency upgrades for efficiency standards governing all new buildings and equipment, and the legislature has created a new ten-year investment fund for sustainable energy technologies that exceeds $5.5 billion.

The next legislative session should help the state do still more of what it already does best, starting with a substantial contribution from California's budget surplus.

Environmental groups will also support additions of highly efficient natural gas generation; more than 10,000 Megawatts of these plants (equivalent to about one-fifth of total California generation today) should clear the state siting process by next summer.

But for those angered by rising fuel prices, the best revenge is still needing and using less. Congress could help immediately by enacting last year's S. 2718, a bipartisan bill that provides new financial incentives to improve dramatically the energy-efficiency of new buildings and equipment.

2. This is not just a California problem.

California accounts for only about 15% of the increase in Western peak power use since 1995, although the state represents more than 40% of the total system; in other words, electricity consumption for the other ten Western states has been growing more than twice as fast as California's, on average.

The efficiency and renewable-energy imperatives apply at least as strongly outside California's boundaries. This is one more good reason for Congress to revive S. 2718.

3. Solutions do not require degraded environmental quality, and indeed should improve it.

California's air, water and land-use safeguards are not to blame for this crisis.

Developers of new, clean generation are taking advantage of expedited siting processes, and the new plants (both renewable and fossil) are dramatically cleaner than the incumbents. Indeed, the capacity additions anticipated over the next several years are both clean and large enough to begin improving California's air quality by displacing dirtier competitors during at least some hours of the year.

NRDC will be vigilant in opposing short-term solutions that rely on dirty diesel back-up generators.

4. Low-income citizens need immediate relief.

California and other Western states have traditionally sought to ensure that low-income households get targeted energy efficiency assistance and rate discounts; in California, these programs are administered by the state's utilities and funded through a modest surcharge on bills. Additional resources must be added at this crucial time, to ensure that no one loses access to essential services.

Key NRDC staff working urgently on all these issues include Evelyn Arevalo, Sheryl Carter, David Goldstein, Gail Feuer, Rachel Gold, Noah Horowitz and Peter Miller.

Contact NRDC at