Energy

By Bill L. Jones

We need to reverse California's disinvestments in energy that led to our electricity and gasoline crises, pursue multiple strategies to ensure our energy supply keep pace with our population and economy, and ensure this State retains its lead in technology.

June 24, 2004

Continued access to stable supplies of reasonably priced energy lies at the heart of California's ability to compete economically in the 21st Century. Our recent history of price spikes and supply disruptions in the delivery of fuels and electricity have strained our families' budgets and significantly raised the cost and risk of doing business in this State. The high price of energy in California is repeatedly cited in surveys as a disincentive for businesses to stay here and grow the jobs needed by our ever expanding population.

At the national level, Washington has failed to deliver a sustained and aggressive energy policy. Proposals have stalled in Congress--most often the Senate--as special interests have vied against each other, killing all progress in the process. The Senate has often acted to vote against proposals to increase our supplies of domestic energy, but has failed time and again to pass any measures that would make up these continued shortfalls.

As a result, we as a nation have failed to chart our own path to a secure energy future. By failing to act to invest in supplies here at home, our default energy policy has been to rely more and more on imports of energy of all forms.

It is time to cut through the impasse. It is time we once again as a nation take charge and chart our own destiny. The creation of new energy supplies--both traditional and alternative sources--takes years if not decades to develop and bring to market. If we don't start today, the energy we need for our jobs, our families, our schools, and our hospitals and other public services will not be there tomorrow.

1. Increase electricity capacity by removing regulatory barriers to power plant expansion and to a functioning wholesale market.

Governor Schwarzenegger has already begun taking the steps necessary to create the market conditions necessary to encourage the construction of more power generation in California. His implementation of AB 57 combined with the policies laid out in his April 28, 2004 letter to the Public Utilities Commission are intended to move California towards a more stable and competitive wholesale and retail market.

On the federal level, the Federal Energy Regulatory Commission (FERC) and other federal agencies need to be working with the state on the following actions to increase electricity capacity by removing regulatory barriers to power plant expansion and to a functioning wholesale market. These steps are needed to provide the proper investment signals to encourage expansion of our power supply base:

• Improve the national data base for energy information. Full information is critical to efficient markets. The California Energy Commission provides an outstanding service in the range of energy data and analysis it maintains for California. However, similar quality of data has become less available on the national level as the changing state and national energy markets have resulted in less funding for cooperative private sector efforts, and federal funding changes have affected the Energy Information Administration and other federal programs. Current and comprehensive energy data is needed to ensure full market information for all participants and for regulatory and planning agencies.

• Ensure a competitive wholesale market that provides incentives for investments in new power plants. Uncertainty over market returns and the changing regulatory signals under the Davis Administration did much to dry up private financing for new power plant construction, and led to the withdrawal or deferral of thousands of new megawatts in capacity that likely will be needed within a few short years. Through implementation of AB 57 and other actions, Governor Schwarzenegger is moving to reduce the regulatory uncertainty that has stalled new power plant construction. The federal government through FERC needs to take actions that complement these moves by creating the proper market signals that will help reduce the financial risks of these new investments.

• Conduct a joint repowering study of federal and state hydroelectric plants. California relies for about a quarter of its power plant capacity on hydroelectric facilities, a renewable resource with no emissions of global warming gases. There are now 386 hydroelectric facilities with a combined capacity of over 14,000 MW in California, along with significant amounts of additional hydroelectric power imported from other states. Many of these power plants are old, and many are coming up for license renewal. Just as the CalFed project has looked at increased coordination between the state and federal water projects for water supply and water quality purposes, a joint repowering study could identify opportunities for investments in more efficient hydroelectric production from public and major private facilities.

• Expand public investments in energy efficiency research, with a focus on candidates for commercialization. We need to continue sound investments in conservation, where energy savings make economic sense. We do not need "conservation" that reduces energy demand by shutting down jobs. We do not need "conservation" that forces savings by shutting down services that inconvenience the public. We do not need "conservation"--driven by California's electricity crisis--in Idaho where utilities bought out farmers and in Washington where factories were shut down so that the electricity could be sold at a higher price into our state. These are all short term responses to failures in public policy, not a proscription for long term programs. The focus of conservation needs to be on energy efficiency improvements--expanding our quality of life and expanding our economic competitiveness by doing more with a lower per unit use of energy. Further investments are needed to support existing research and development at our universities, research consortiums, and energy labs to complete the next generation of commercial applications for energy efficiency and distributed generation systems, with a particular focus on small business and consumer applications.

Further actions will be needed to keep pace with continued increases in demand for imports to make up for the lack of in-state production capacity. A recent report by the California Energy Commission projects that California will need to expand its current transmission line interconnections by about 50% in order to meet electricity import demands in 2030. Given a minimum lead time of 10 years to construct major new lines and continued regulatory uncertainty over investment returns on these lines, action is needed now to keep the lights on in the coming decades.

• FERC should enter into a cooperative permitting process with the California Public Utilities Commission (CPUC). Regulatory authority over transmission lines is currently split, in general, between FERC's determination of rates and the CPUC's siting authority. Consolidating these proceedings to the greatest extent possible will reduce permitting delays and speed construction of this critical infrastructure.

• Western Area Power Administration (WAPA) should continue as the developer of last resort for critical line improvements. The action by President Bush cut through a long standing impasse on designating a developer for the critically needed Path 15 improvements. Transmission line projects tend to be a high-risk, low return investment, and many projects may become more feasible if the permitting risk is first taken by a federal authority such as WAPA.

California is dependent on imports of natural gas more so than any other energy source. In state production meets only 16% of demand, with 28% from Canada and the remaining 56% from maturing basins elsewhere in the US. While additional in-state production is possible, this source is generally expected to continue declining. Additional production from the lower 48 states remains in doubt due to continuing impasses related to development on federal lands. Overall, competition from the other states for natural gas will increase substantially as more power plants are shifted to natural gas as a fuel for Clean Air Act and global warming emission reduction purposes. The end result of this supply picture is that California will face higher prices and reduced supplies from its traditional sources, and is faced with the challenge of developing import infrastructure for a changing mix of import suppliers.

• FERC should implement a facilitative process for the siting and approval of new natural gas lines. The pending rapid increase in US demand for natural gas combined with constraints on new domestic production has the potential for creating a new energy crisis similar to what we have faced in electricity and gasoline. California--with its greater existing reliance on natural gas--stands to be hurt more than any other state by such an event. New interstate pipelines under the authority of FERC and new intrastate pipelines under the authority of CPUC should be reviewed in an expedited and coordinated process by the two agencies.

• FERC should implement a similar facilitative process with the state for LNG terminals. Permitting of these facilities is currently hindered by regulatory disputes between FERC and the CPUC. However, these projects cannot be approved without state participation, and the economic and environmental consequences are too severe if the permitting continues to be delayed by agency in-fighting.

The key problem behind this year's price volatility is the same as it has been for several years. Our refinery capacity is limited. The US and California have a refinery capacity shortage. No new refineries have been built in this state since 1969, and in the US as a whole since 1976. Instead, we have seen refineries close as regulations have increased, and as older and smaller refineries have become outdated. As California and the US have changed their requirements for reformulated gasoline and reformulated diesel, the cost of updating older refineries to meet these new standards has not always proven to be economic.

• FERC and Department of Energy should identify refinery capacity expansion as a national priority, and work with the refinery center states to expedite approval of new investments. For California, the immediate priority should be to identify the regulatory constraints to expanding existing refineries within their current footprints, and reopening closed or closing refineries. Should expansion of existing refineries prove to be infeasible for financial or regulatory reasons, FERC should enter into a consultative process with the PADD V states to site and permit a new refinery to serve West Coast markets, along with necessary new product pipelines into California.

• USEPA should enter into a negotiated rulemaking with the states to reduce the number of fuel specifications in the US. A growing constraint on the transportation market to respond quickly to spot shortages is the increasing number of fuel specifications to meet individual air quality issues. These specifications vary by region and by time of year, and the number of refineries with the capacity to serve these increasingly balkanized markets is becoming limited over time. Refineries must be modified to produce specific fuels for specific regions, and the ability of one region to increase production to make up for temporary shortages in another is decreasing as a result. States, however, remain responsible under the federal Clean Air Act and their own laws to meet the air quality standards, and should be partners with the USEPA in how the rules can be consolidated to the extent practicable.

• FERC should expedite permitting for new product lines to serve the West Coast states. Product pipelines could provide considerably more flexibility in moving supplies to meet temporary shortages. Providing more transportation flexibility would also remove one of the key barriers to entry for new refinery investments. While California's refinery market remains tight, it is also isolated from the rest of the US. As a result, a new refinery built specifically to meet our needs would have an immediate and major effect on gasoline prices, at the risk of automatically making such an investment uneconomic. Adding new product lines would open California to the rest of the US market, increase the flexibility of where new refineries could be located, and stabilize prices and investment returns over the long term. Increasing pipelines would also increase the number of product ports that can serve California and address this looming constraint as well.

Longer term, pipelines are needed to connect California to the broader national market to expedite transportation solutions that can mitigate short term supply emergencies and stabilize prices. To reduce the regulatory risk that has hindered these investments, FERC should pre-permit routes where possible along existing rights-of-way for other linear infrastructure and along appropriate federal lands.

• Department of Energy should expand applied research into enhanced oil and gas recovery technology. The oil and gas reserves of California and the nation are largely in declining basins which in some cases--such as some California fields--have been in production for over 100 years. Techniques such as horizontal drilling and enhanced recovery have extended the life of many existing operations, and additional technology applications are needed to continue this work. A key focus for California remains stripper wells. These low volume wells still make up a sizable percentage of California's production, but once shut down for technological or economic reasons remain shut down forever.

• California should secure a legislative waiver from the federal oxygenate standard as part of a broader federal energy bill. Unlike the federal fuel regulations, California maintains a performance-based standard that can be met through different blending formulas. To ensure the clean air requirements are met at the lowest cost possible, refineries should be given greater latitude on how to meet the standards. The House-passed Energy Bill--which is currently held up in the Senate--contains this waiver and should be passed out of the Senate. A legislative solution is likely needed to ensure the USEPA has the authority to issue a waiver, and providing this authority through a broader energy bill will help ensure that the final outcome actually increases the range of fuels available to California motorists and businesses.

This October, we will note the 31st anniversary of the first Arab Oil Embargo against the US. That event came at a time when the country and California were far more energy self-sufficient. It came at a time when world production and consumption of oil was far below the levels we will see in the next 20 years. And still the effects of that event on our economy and our sense of security were immediate and severe.

That event should have been a wake-up call to the nation to make real investments to reduce our continued dependence on a single fuel. Instead, we have seen 31 years of political fighting that has simply led to inaction on this needed solution to our long-term energy needs. Our dependence has become stronger. Our sources have become less secure.

• Expedite use of alternative fuels that are commercially available now. There are commercially available alternatives such as ethanol and natural gas that have the potential to expand immediately the availability of transportation fuels, and prevent a replay of short supply-induced price increases again next year. Blending stocks such as ethanol can be introduced through existing transportation and distribution systems, and can provide a renewable resource that supplements the constrained output of our existing refineries. Natural gas already is used extensively in fleet applications, especially medium and light duty vehicles and buses. Alternative fuels can also play a key role in California's efforts to reduce CO2 emissions, and they can play a more immediate role by fueling the existing vehicle mix in this state.

Further investments in natural gas vehicles will be dependent on expectations of the cost and availability of this fuel. Early commitment to the actions identified above for natural gas infrastructure is needed to send the right market signals to fleet operators.

• Take the next step and develop the next phase of commercially viable alternatives through a commitment to the energy equivalent of the Manhattan Project, the creation of Silicon Valley, and the race to the Moon. When dedicated to a well defined goal, the economic and scientific might of American ingenuity succeeds for even the most impossible-sounding of dreams. While the federal government already spends heavily on energy research, there needs to be a focus, a dedicated and increased flow of research funds, and a more concerted link to commercialization.

In the case of pure research, the specific needs should be identified by the National Academy of Sciences, with a continued component for review of research progress and course corrections. The National Academy can provide a check on the natural inclination of Congress to redirect funds of this nature for district priorities, and provides a means to focus the best scientific talent available in our universities and public and private labs.

The bulk of any new funds, however, should focus on technologies with chances of becoming commercially viable in the mid-term. Similar efforts under the Carter Administration often went to projects that while politically popular, had little or no commercial backing in the end. To rectify this pitfall, this component should focus on existing research and development projects. Funding should be made available through states and coalitions of states that have assembled consortiums of their universities and related private sector efforts such as California's Fuel Cell Partnership. These consortiums should also be required to contain a commercialization component comparable to the San Diego region's CONNECT program. CONNECT has energized California's leading role in biotechnology by being a constant monitor to identify research within the UC system that has passed the bench-test phase, and links it with commercial partners to take it to the pilot plant or full production phase.

Governor Schwarzenegger has proposed the first cornerstone in this vein through his Hydrogen Highway. We have extensive research programs in our universities and our energy industries related to solar, fuel cell, distributed energy, small scale turbine, and a host of other energy systems, fuels, and technologies. Through the federal laboratories under University of California, CalTech, Stanford, our other universities, Silicon Valley, and our aerospace labs, we retain the leading edge of energy research. We need to seize on this initiative and this critical scientific mass, and make California the OPEC of energy ideas for tomorrow.