Republicans George Deukmejian and Pete Wilson tended to leave energy matters to their appointees at the Energy Commission and the California Public Utilities Commission, and I can think of only a few rare instances during those 16 years when the sitting governor got directly involved in policy decisions (Wilson once ramrodded a Canadian natural gas pipeline through the CPUC approval process, and, of course, Wilson's top aides brokered the deal that eventually led to the flawed restructuring law, AB 1890). Legislative bills were signed and others were vetoed, but policy did not really emanate from the Governor's office.

Governor Gray Davis thought he was a strong leader during the power crisis. But because he lacked a clear understanding of the industry and his political handlers were at first afraid of exposing him to dangerous, third-rail issues, Davis never got the tone right. He waited too long to respond, failed to take several opportunities to head off looming problems, alienated potential allies, then pursued a policy of blame and recrimination against federal regulators, power generators and everyone else. I’m not one who considers Davis’ energy responses to be the main reason why he was recalled, but it sure made it difficult to vote for him -- even though I opposed the recall.

Almost one year has passed since Arnold Schwarzenegger was elected as governor to replace Davis, and the energy industry has been eagerly awaiting some formalized energy policy statement ever since. There have been some teasers, such as his campaign statements of support for a "hydrogen highway" for fuel-cell vehicles and for widespread installation of solar photovoltaics on household rooftops. Last April, the energy media got all worked up about a "policy statement" -- in reality a letter to CPUC president Mike Peevey -- that urged regulators to continue working towards stabilizing the energy market. Schwarzenegger at the time expressed support for minimum resource adequacy measures, for restoring utility power procurement under existing law AB 57, and he added a vague endorsement for a "core/noncore" split in energy markets that would allow large commercial and industrial to resume direct-access purchases from non-utility power sellers.

The letter amounted to less of a plan than a statement of support for things that the regulators were doing anyway. Except for recognizing the need for legislative action to restore direct-access markets, Schwarzenegger appeared content to leave energy policymaking to the people he’d put or held in place, while he was busy working on the state’s budget mess.

The major piece of energy legislation coming out of Sacramento this year was AB 2006, authored by Assembly Speaker Fabian Nunez (D-Los Angeles). At best, the measure is a product of the vacuum in energy leadership in the Legislature; at worst it’s a mess of murky intentions. The bill was ostensibly an “energy market stability” plan that changed so many times in committee that it’s impossible to describe it accurately. I still see news stories that refer to portions of the measure that had been deleted (reluctant support for core/noncore markets) or were altered beyond recognition in the final draft. Suffice it to say that what ended up in the final version of AB 2006 has only the weakest support from anyone but consumer advocates opposed to restoration of retail competitive markets.

A veto of AB 2006 is expected any day. Although consumer groups, including The Utility Reform Network (TURN), are considering an initiative campaign to promote elements of AB 2006, it’s difficult to see anyone getting worked up over it once the governor applies the veto stamp.

Schwarzenegger’s only formal energy initiatives so far have been the co-sponsorship of a broad policy in support of renewables and energy efficiency at the Western Governors Association [see The Business Electric, “The West is Poised for Energy Innovation,” July 27] and an official directive telling state employees and agencies to conserve power during this summer of sequential, record peak loads.

That doesn’t mean the administration is ignoring energy policy. In fact, elements of a comprehensive energy plan are finally being discussed in public by top energy officials. The good news is that most of these elements are already in the works, do not require legislative action, and -- best of all, from my point of view -- do not depend on Arnold Schwarzenegger for success.

Joe Desmond, the governor’s appointee as deputy secretary of energy within the California Resources Agency, comes as close as anyone to being an “energy czar” in the state, though he eschews the title. Desmond previously headed a company called Infotility that put in place an emergency notification system for industrial energy users during the power crisis. He brings to the job an understanding of how the system works and an interest in applying new technologies to effect demand response from customers and to relieve transmission constraints.

The governor’s point person for energy policy, Desmond has been working behind the scenes on a variety of issues. As keynote speaker for the “New Directions for California Energy Markets” conference that I co-chaired in San Francisco earlier this month, Desmond outlined the administration’s energy priorities.

Not a policy, per se, but a multi-faceted list of issues and areas of importance:

1. Resource adequacy -- accelerating minimum requirements for operating margins and reserves by all load serving entities, utilities and other load-serving entities. The issue is already set for determination by the CPUC next month.
2. Transmission -- after a lull in approving new lines and eliminating bottlenecks, state policymakers approved 53 upgrades and construction projects in the past year. Desmond also pointed out one key issue that has not received much attention -- and which lies beyond the power of regulators and lawmakers -- the tensions between municipal utilities and the California Independent System Operator over transmission rights and market designs. The big news in Desmond’s discussion was that there is now a working group of ISO and muni control-area operators that is approaching detente on ways to coordinate operations while preserving autonomy of public-power entities.
3. Wholesale market reform -- these are largely the same issues raised in the April letter to Peavey, including resource planning, adherence to the established “loading order” of resources (efficiency first, renewables, other generation), and utility procurement under terms of AB 57. Desmond suggested that the procurement process could be more open and transparent (read: fair and logical).
4. Rate relief for all ratepayers -- this would come from maximizing any refunds from the cases at the Federal Energy Regulatory Commission and from revamping the expensive power contracts signed by the Department of Water Resources during the crisis. The issue here, acknowledged Desmond, is how to allocate rate relief. Large customers took on a heavy burden for the crisis related increases, and should receive relief in direct proportion.
5. FERC refund settlements --already noted as part of rate relief along with DWR contract negotiations. The FERC process might take a long time, many believe -- especially with the broadening of the refund/offset window as a result of a recent Ninth Circuit court decision. On the DWR front, Desmond told the audience to “expect progress in coming weeks” over revamping some of the less flexible terms for delivery of energy, and maybe pricing, under the pacts.
6. Increasing natural gas supplies -- in-state production incentives and independent gas storage were two of Desmond’s ideas, along with interstate pipeline expansions and support for LNG terminals that will serve the region.
7. Retail choice -- Desmond reiterated support for a core/noncore market structure, signaling the governor’s preferences for “tightly managed” competition. “Competition brings innovation,” he said. The challenge is to prevent creation of new stranded costs, and to make sure that one class of customers does not pay for others. “No one is suggesting that anyone escape the costs” of the crisis.
8. Renewable Energy -- “Renewables are the cornerstone of California’s future,” said Desmond. “Expect a more aggressive and comprehensive program,” that also emphasizes distributed generation and concentrated solar collectors. The state is “on track” to meet a renewable portfolio standard of 20 percent renewables by 2010.
9. Efficiency -- More money, about $400 million beyond current expenditures, is being proposed by utilities for efficiency programs next year, he noted. “There is still a tremendous opportunity,” he added. The state government should “lead by example.”
10. Agency consolidation -- energy agencies, like all other components of state government, were recently targeted by the California Performance Review (CPR) group for possible reorganization. Already on the chopping block is the California Power Agency, a legislative creation in response to the crisis that never figured out what its real job was supposed to be.
11. CPUC reform -- “There’s always room for improvement,” Desmond said, although the CPUC’s structure remains largely out of the reach of the Legislature because of its Constitutional status.
12. Dynamic pricing and advanced metering -- this is an area of Desmond’s expertise, so it might be expected to get a special push in the near term. Obstacles remain, including fears of large prices swings for consumers and the lack of market pricing mechanisms. “Over time, we’ll see a valid short-term price signal developed,” Desmond said. “We want people to make rational decisions” about energy use. He pointed to an upcoming CEC workshop to review available technologies for demand response and to discuss results of a state pricing pilot. The CPUC also has a proceeding on metering underway. “We need policies that reflect technologies available today,” he said.
13. Distributed energy -- Desmond mentioned encouragement for cogeneration and other DG resources.
14. Research & development -- the state spends about $60 million per year for electric R&D and the CPUC recently approved $14 million for gas efficiency. Desmond cited the CEC’s Public Interest Energy Research (PIER) program as a success and role model for funding R&D through public goods charges.
15. Transportation fuels -- key drivers for policies in this area will be state and federal requirements for the environment, problems meeting goals in the Central valley, and the state’s ability to dictate fuel efficiency standards for its fleet vehicles.

The Bottom Line: You might say, “Nothing new here,” and you wouldn’t be far wrong. Most of these issues and developments have been in the works long before the current administration took office. Most important, though, is the fact that Desmond -- and by extension, his boss Arnold Schwarzenegger -- understand that all of these issues must fit together into a comprehensive package of action. Retail competition is impossible without good wholesale markets, we have learned, and nothing happens if transmission is bogged down. The experience during and after the crisis proved both that unfettered deregulation is unfeasible and a return to traditional regulation is nearly impossible. These policies could well carve out a new middle ground between the extremes. Some will find form in a legislative bill next year, most others don’t need to wait that long.

Another hallmark of the state’s new directions does not show up on the menu, but took a superceding place in Desmond’s list: recognizing that “California is not an island,” and that energy policies must be coordinated with neighboring states, with federal regulators, and with in-state public power entities not subject to the regulatory agencies. Schwarzenegger is already taking a leadership role with the Western Governors and Desmond has been active at the pragmatic level.

Success in this regard could be the key to achieving many of the components of energy policy, with or without Arnold.

Arthur O’Donnell is Energy Central’s Editorial Director, Newsletters.
The Business Electric is found exclusively on Energy Central.