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May 30, 2001

California Update: Bush and Davis Have Face-to-Face Meeting;
No Compromise in Sight 

By Will McNamara
Director, Electric Industry Analysis 

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With California facing a summer of anticipated power outages, Gov. Gray Davis 
and President George W. Bush met for approximately 20 minutes on May 29 to 
discuss the state's energy crisis in general and a federal cap on wholesale 
energy prices in particular. Davis did not win any concession during the 
brief meeting, in which he reportedly reiterated his contention that Texas 
energy producers have engaged in price gouging in California. In fact, after 
the meeting, Gov. Davis said, "On the thing that really matters above all 
others [price caps], I'm disappointed that we still have a fundamental 
disagreement." 

Analysis: For once, it's rather easy to imagine myself as a fly on the wall 
during this much-anticipated meeting between the nation's leader and the 
leader of the nation's most populous state. The firmly held positions of both 
President Bush and Gov. Davis have been so well defined and articulated over 
the last few months that it is not hard to speculate on how their brief 
conversation unfolded. Unfortunately, their positions are currently so far 
apart that any compromise on the key issue of Western wholesale price caps 
shows little chance of being reached. Once again, the issue appears to be 
headed to court, with Gov. Davis having now confirmed that he will bring suit 
against FERC. Meanwhile, what was previously perceived as "California's 
problem" has now become a national concern and one of the issues (if not the 
main issue) on which the political reputations of both Bush and Gray 
currently depend.  

For clarity, and to establish why compromise is so unattainable, let's 
crystallize the philosophical gulf that exists between Bush and Davis. 
Although the issues surrounding California's energy crisis are complex, the 
main issue on which Bush and Davis disagree is rather simple: price caps or 
no price caps. Gov. Davis claims that Californians have been unfairly charged 
nearly $8 billion since January and acknowledges that his own plan to keep 
Pacific Gas & Electric Co. out of bankruptcy failed. The governor also 
pointed to a record price of $2,000/MWh that the state paid for power last 
week, compared with an average price of $30/MWh in the spring of 2000. 

Thus, Davis wants the Bush administration to enforce federal law by making 
FERC put wholesale price caps into place for a period of six or seven months 
(long enough to get past the summer power crunch). The temporary price cap 
also would allow for the four power plants that are already under 
construction in the state to come online. FERC already has instituted a price 
cap for times when California's power reserves fall below 7.5 percent, but 
Davis has argued that this approach is not sufficient. Davis' argument is 
based on the belief that FERC has not fulfilled its federal obligation to 
ensure just and fair electricity prices.  

In an interesting development, Davis has gained some influential support 
regarding his plea for price caps from a consortium of ten economists, 
including Cornell professor emeritus Alfred Kahn, generally considered the 
"father of deregulation." In a letter sent to the president late last week, 
Davis and the group of economists claimed that FERC's failure to act soon on 
the issue of price caps "will have dire consequences for the state of 
California and will set back, potentially fatally, the diffusion of 
competitive electricity markets across the country." 

In contrast, President Bush, along with Vice President Cheney, maintain that 
price caps won't solve the power shortage, and in fact would only do further 
damage to California's power problems as price restrictions would discourage 
further production. In addition, Bush has argued that the core of 
California's problems is a supply / demand imbalance, something that price 
caps would do nothing to solve. Vice President Cheney has said that price 
caps might worsen the situation by limiting supply, resulting in more 
blackouts for California this summer. Further, Bush has argued that 
California officials (including Davis' predecessor, Pete Wilson) are 
responsible for the state's power woes and that the only real solution is a 
combination of increased supply and conservation efforts. 

The subtext of the Bush administration's approach to the California power 
crunch is that the problem can be solved in time, but not with temporary 
band-aids. Under the recently released federal energy plan, President Bush 
has outlined a plan to increase power supply over the next 20 years, fueled 
by traditional and non-traditional sources. Bush's approach to California is 
that, in time, increased production and transmission capacity upgrades will 
rectify the state's current supply / demand imbalance. Affixing temporary 
price caps, according to Bush, would do no good and could cause a great deal 
of damage.  

While touring California, President Bush announced a proposed expansion of 
the Low Income Home Energy Assistance Program, which provides special help to 
cash-strapped residents of California and other states. Funding of this 
program, which requires congressional approval, would increase by $150 
million (adding to the already-budgeted $300 million). Gov. Davis again 
responded that this measure was "inadequate" and reiterated that all 
California wants is for Bush to invoke the federal power that only he has as 
president and provide short-term relief to the state. 

Gaining momentum for Bush's travels in California, Energy Secretary Spencer 
Abraham weighed in on the California debate on May 29. Abraham stated that 
the state's problems were not just a result of insufficient supply, but also 
related to poor transmission capacity. As such, Abraham directed the Western 
Area Power Administration, a federal agency, to finish its pending plans for 
increasing capacity along the so-called Path 15, an 84-mile stretch of power 
lines that presently is insufficient to carry the necessary load between 
Northern and Southern California. Bottleneck problems along Path 15 have been 
cited as a main cause of power outages in the central part of the state. 
Remaining at issue is whether or not there will be enough funding to support 
a new transmission line along Path 15. 

Of course, politics continue to play a key role in this ongoing saga. Both 
Bush and Davis have seen their approval ratings dip as a result of the power 
crisis and are seeking redemption (and a place to transfer blame). A Field 
Poll released last week indicated that President Bush's approval rating in 
California is at 42 percent (40 percent disapproving), 12 points behind the 
national average. Gov. Davis' approval rating in the state is also at 42 
percent, with disapproval coming in at 49 percent (a sharp decline from more 
favorable ratings held in January). In addition, remember that President Bush 
lost the state of California in November's election (by as much as a 12-point 
margin, or more than one million votes). It is also reported that Gov. Davis 
may make a play for the presidential election in 2004. Further, Davis has 
publicly singled out a handful of power suppliers such as Reliant and Enron, 
which are based in Texas, the president's home state.  

Now that any sort of compromise appears unlikely between California and the 
Bush administration, Gov. Davis has confirmed that he will pursue legal 
action against FERC, hoping to force it to honor rulings that electricity 
prices in California were unjust and unreasonable. Further, Davis indicated 
that the U.S. Senate, soon to be Democrat-controlled, would hold hearings 
into the soaring prices and perhaps be more responsive to the state's claims. 
The California State Legislature already has filed a suit against FERC, 
claiming that the federal commission has failed in its efforts to stop what 
it already determined were unjust and unreasonable wholesale prices.  

Nevertheless, on May 29, the 9th U.S. Circuit Court of Appeals declined to 
order FERC to cap wholesale prices in California, responding to a sideline 
claim issued by the city of Oakland and two California legislators. The 
three-judge panel of the court ruled that the appeal did not warrant 
intervention on the part of FERC. However, this ruling does not directly 
impact any additional lawsuits that are pending or might be filed.  

Keep in mind that FERC continues to apply pressure on California to join RTO 
West, the regional transmission organization that is overseeing transmission 
in the Pacific Northwest. California officials have maintained that they want 
the California ISO to remain independent. Consequently, California and FERC 
may reach a deal sooner than Gov. Davis and President Bush, as a trade-off 
between price caps and California joining RTO West could become the 
much-sought-after compromise. On the record, FERC officials share the Bush 
administration's opposition to price caps, but Chairman Curt H&eacutebert has 
previously indicated that he is open to the use of price caps as a temporary 
solution. 

An archive list of previous IssueAlerts is available at
www.scientech.com


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