VII. Potential Solutions to the Impending Energy Crisis
As in the past, involvement of the San Diego community, state regulators, and local, state, and federal representatives will be necessary to help shape local energy policy. San Diego's emerging energy challenges could be turned into an opportunity if policy makers move toward transforming the region into a "mecca" for low-cost, environmentally-sensitive and innovative power technologies.
Inaction by San Diego could perpetrate SDG&E/Sempra's monopoly lock on an expensive and archaic reliance upon imported and high cost energy using outdated transmission line solutions.
State policymakers should recognize the potential of San
Diego as a proving ground for energy competition by restricting SDG&E's market influence and then directing renewable and energy efficient incentive funds to the area, as well as accelerating the unbundling of monopoly service costs.Also, some attention should be paid to enabling consumers to react to and send market signals to energy providers. For example, the mass deployment of meters capable of sending accurate market prices to all customers may be a meaningful endeavor.
But this will not occur without an organized and focused community effort to develop a local energy vision. UCAN recommends the convening of an "energy summit" at which the community can begin to determine whether and what role local government and business can play.
Community leaders can wait until the problem becomes a crisis - but by that time, the major decisions will have already been made and San Diego will be locked into solutions that may be expedient, but costly. Ultimately, San Diego stakeholders are in a position to preempt a serious energy price rise succumb to a full-fledged energy price crisis in the next decade. The sooner the community begins to attend to these issues, the greater the potential to turn a liability into a strength.
Rising energy bills and a dependence upon old-style centralized power service are the real energy issues for San Diego in the next decade. Will energy bills soar like they did in the 1980s from 50% to 80% higher than other regions of the state? Are the current electricity price hikes harbingers of a future of continuous price spikes? If so, what would be the impact on the local economy? The questions are easy. The answers are not. They depend on the actions of the San Diego community, state regulators, and local, state, and federal representatives.
San Diego's looming energy crisis could turn into an opportunity if policy makers move toward turning the region into a "mecca" for low-cost, environmentally-sensitive and innovative power technologies. San Diego has proven itself to be a welcoming host for nascent computer, communications and science technologies. There is no reason that San Diego could not become a center for emergent energy-related industries as well.
For example, national (and international) energy industries are entering a period of very high levels of technological innovation that San Diego has not yet placed upon its radar screen. The deregulated energy markets in California were designed to spur this type of innovation. New decentralized generation technologies such as fuel cells, micro-cogeneration and photovoltaics are promising businesses.14 In addition, advances in wireless and broadband communications, electronic metering design and Internet services promise new ways of delivering electric services and alternative electricity providers to the small customer market.
San Diego is positioned to attract that innovation first among the State's region. On the other hand, San Diego may choose to perpetrate SDG&E's monopoly with an expensive and archaic reliance on costly, imported energy using outdated transmission line solutions.
A. Steps that State Regulators/Legislators Must Take.
There are three primary courses of action that state policymakers should pursue. They must recognize that with limited local generation potential, transmission constraints, an intransigent utility/holding company influence local energy decisions and a moribund retail energy services market, San Diego may be the most poorly positioned of all California locales to take advantage of a deregulated energy market.
Their first order of business should be to define the utilities' role in the providing of energy. The failure to define SDG&E's role is a huge market barrier that stops development of the competitive market. State and federal regulators should stop allowing this 800-pound energy gorilla to turn San Diego energy policy into a Big-Fish Eat-Little-Fish economic jungle. Unless regulators allow new non-utility competitors to establish a competitive economic beachhead in these dramatically changing energy markets, there will be few competitors with the resources and market position to compete with a utility in its own service area. As has been painfully learned in the local telephony market, an incumbent's war chest contains a multitude of diverse weapons.
SDG&E must be limited to a neutral role as a seller of distribution services. UCAN believes that as a monopoly, SDG&E should have only limited monopoly functions. In the current environment, the only true monopoly functions are distribution system operations and maintenance. Until the monopoly's role is clearly defined, Sempra will have the continued interest and ability to build roadblocks to prevent entry by competitors.
Regulators must face those roadblocks head on, right now. For example, they should resist imposing higher gas transmission prices upon San Diego, as is currently proposed by Sempra. They should also resist policies that discourage entry of competing gas or electric transmission links into the region, such as those attempted in SB418.
More importantly, they should communicate to the utilities that they have an unparalleled opportunity to exploit an undervalued asset: the distribution system. It has the capacity to provide more than just electrons. Throughout the world, electric utilities are realizing that distribution grids can offer telephony, internet, and other communications services. The rights of ways in which distribution lines are placed also have economic value that hasn't been fully developed. Regulators should be looking for ways to direct utility energies to developing this asset and discouraging utility efforts to "protect" the existing asset.
Instead of compounding San Diego's restricted access to new energy sources, policymakers should view San Diego as a proving ground for California's commitment to energy innovations and use the region to show that a competitive market can result in the deployment of lower cost, higher efficiency energy technologies. This could mean directing renewable and energy efficiency incentive funds to the area, as well as accelerating the unbundling of monopoly service costs, so as to stimulate innovation by the private market.
Policymakers must also recognize the failure to achieve many of the retail energy competition objectives contemplated when the Legislature passed the sweeping reform law. Currently, San Diego has no ESPs offering small customers discounted power (with the exception of green energy providers dependent upon a state subsidy). There are no ESPs offering to install real-time meters on residential units. There are only two offering any kind of energy efficiency services. The results are not surprising; only 2% of small customers have chosen to use an ESP. In order to reinvigorate wholesale and retail competition, the Legislature and the state regulators must look at ways to increase availability of meaningful choice to all consumers.15 Proposals to create competing default providers should be seriously considered, along with other programs designed to reduce transaction costs incurred in finding and serving small customers. Otherwise, small customers may be subject to the highest increases in energy costs.
Perhaps the greatest paradox of the restructuring effort has been the expense incurred by the State to create an electric market that now accurately reflects the price of electricity, but the absolute failure to send that clearer market signal to small customers. While large customers are able to take advantage of the market by using meters that measure electric consumption by the hour, small customers are inhibited by 30-year old meters that only show the averaged monthly consumption. And, in the midst of one of the greatest housing booms of the century, new San Diego homes continue to have old-style meters installed.
Until "real-time" meters, which record consumption of power at the time it is used, are widely available to small customers, most of the benefits of this new real-time energy market will elude small customers.
Policymakers can not continue to turn a blind eye to Sempra's hegemony in the San Diego/Baja California region. As an unregulated company, Sempra is in a position to create barriers to entry against competitors as well as impose self-interested energy solutions upon the region.
Sempra and its utility affiliates have proposed transmission and access prices that severely compromise the San Diego region, but benefit Sempra affiliates. Affiliate transaction rules between the holding company (Sempra) and its regulated energy affiliates must be made more stringent and enforced more aggressively. There are some specific steps that should be taken by the CPUC and the Legislature.
- the CPUC and CEC should be directed to conduct a joint assessment of supply and demand-side solutions to San Diego's problems and present the findings to the Legislature as soon as possible.
- the CPUC should be directed by the Legislature to take any steps possible to mitigate disparity in the costs of gas and electricity in San Diego until the market can begin to deploy solutions.
- the Legislature should direct the Independent System Operator to consider pricing and supply-side solutions to transmission planning. Large scale transmission construction should be viewed as a last resort, not a panacea. SB735 takes a minor step in that direction by funding research by the California Energy Commission to investigate alternatives to transmission. However, the law may be too little too late, and it won't specifically address San Diego's unique circumstances.
- The Legislature and the Public Utilities Commission should focus their attention upon accelerating the deployment of real-time meters to San Diego customers, so that demand-side solutions and energy management services can begin helping residents better control their energy consumption.
B. How San Diego Can Take Control of its Energy Future
In response to the energy price shocks of the 1970s and 1980s, local governments in the San Diego region became involved in energy policy. In 1980 and again in 1984, the City of San Diego investigated energy policies and became active in state energy policy. Out of those investigations came innovative interventions by the municipalities in the guise of issuance of low-interest construction bonds, issuance of building ordinances requiring energy efficient design and the termination of all-electric homes.
In 1994, the San Diego Association of Governments completed another review of energy policy. While it underestimated the increased demand for electricity, it recognized the importance of governments to take advantage of opportunities in the coming competitive market and subsequently created a buying-block for San Diego based government agencies.
It is time for the community to come together again and develop a vision of how San Diego residents and businesses should be powered in the future. Electricity is a commodity not unlike water - they are both lifebloods for the region. Similarly, San Diego has come together to create an environment that attracts competitive industries like high-tech, bio-tech, tourism and education. Yet, electricity policy has largely been left to a state agency that has reduced its role in shaping such policy. Just as in water policy, a community vision about power will create clarity of community objectives that can be communicated to state policymakers who were charged with setting rates and energy policies.
It will take the leadership of local elected officials, the business community and civic groups to develop this vision. Working with SDG&E is essential, but the participants will understand that much of SDG&E's view will be influenced by the economic interests of its parent company Sempra Energy.
The year 2000 should begin with local government agencies reconvening a process by which the region's stakeholders examine the region's energy options and takes action to promote energy innovation and low-cost solutions to the problems before it. This will be a multi-year process - but it must begin immediately before the region is locked into an expensive transmission-building fix to the power shortage problems.
The state ISO and SDG&E are currently engaged in a formal process to justify the building of a multi-million dollar transmission upgrade that would be charged to San Diego ratepayers. It is attempting to finalize its building plans by the end of 1999. Unfortunately, it is a process with a pre-ordained solution. Instead of trying to determine the best, lowest-cost and long-term fix for the region's energy problems, it is focused on how to build its way out of the problem.
What is currently underway is a poorly attended, little-known administrative process designed to build new transmission links. It is what SDG&E used to do 25 years ago before energy shortages and restructuring but without much public scrutiny. It is a process in which important information has been either withheld from public scrutiny or simply not developed.16
The San Diego community is in a position to insist that this planning process:
- Determine the actual cost of the proposed transmission projects
- Review distributed generation, micro-generation and demand-side strategies available as alternatives to transmission line construction. Those that are cost-effective relative to transmission fixes should be pursued. The RFP process deployed by PG&E is a reasonable model to use to pursue lower-cost options.
- Develop a market-based solution to reactive power problems where the cost of shoring up SDG&E's distribution system is made transparent to the market.
This process can begin by assembling the stakeholders in San Diego who are involved in or affected by energy policy. This list includes, but is not limited to:
- San Diego Association of Governments (SANDAG)
- San Diego Chamber of Commerce
- San Diego Regional Energy Office
- Federal Executive Agencies (Navy)
- San Diego Port District
- Sierra Club and other environmental groups
- UCAN and other consumer groups
- IBEW and other related union groups
- Community groups that represent seniors, minorities and regional groups
- County and City government representatives (including elected officials)
- San Diego Gas & Electric and Sempra Energy
- San Diego-based businesses involved in energy services.
- SDSU Center for Energy Studies and other academic institutions
- California Energy Commission
- California Public Utilities Commission
- California Energy Oversight Board
- San Diego County Water Authority
This is just a partial list of the region's stakeholders who have knowledge and concerns about these issues, but no organized forum in which they can draw upon their collective knowledge.
The key questions presented to this San Diego forum should include:
- What are some reasonable forecasts of San Diego's energy prices relative to other parts of the state?
- What are the factors that will influence electric rates in the coming decade?
- What are the policies that remain to be created or need to be changed that will affect these factors?
- What are some strategies and technologies that can keep the region's rates lower?
- What steps can be taken locally and by state government that can promote these strategies and technologies.
Most of the answers, once established, could take five years or more to develop. This inevitable lag puts San Diego square in a place where low-cost energy has been exhausted and a rate-increase spiral will have already begun.
Thus, San Diego is already late. Any further delay will ensure that this region and its businesses and residents will have untold millions of dollars siphoned from their pockets and involuntarily sent out of the region to pay for excessively priced power.
This is the future.
What remains to be seen is whether San Diego can prevent a problem from developing into a crisis. And turn it into a new growth industry for the region.
