Conservation and New Power Plants Needed to Meet Growing Power Demand

Bob, it's been a over a year since MIR last interviewed you. Has California's energy picture changed for the better? Is supply short and long term sufficient to meet expected demand?

David, Californians are in better shape both in terms of the confidence that the financial community has in our power system and the credibility that the state has built over the last few years in it's commitment to fixing our regulatory system. Unfortunately, we still are in for a tight summer regarding supply in 2005, and potentially in 2006.

This is the result of two factors. First, it is the result of a lack of investment over the last couple of years in power plants. We simply don't have enough power plants built or under construction. Second, and equally as important, the electrical demand in the state has dramatically increased. A few years ago, the demand for electricity was increasing at 1 to 1.5 percent a year. We are now experiencing annual increases in electricity demand that are over 4 percent a year. That is a significant increase in electrical demand by Southern California consumers.

Why isn't the increase in demand being met with greater supply?

First let me say that we need to do everything we can to improve efficiency and load management. We really have not exhausted all our initiatives in terms of urging customers to conserve energy by using energy saving devices, or to shift loads away from peak periods. We're doing a lot of that, but I think more can be done.

But even with more efficiency and conservation measures, we still have to build new and more efficient power plants in this state. The reason why that hasn't occurred is that there has not been a framework in place that would provide sufficient assurances to utilities or other investors that they will recover their investments.

Let me explain. There is uncertainty in the state today relative to the status of direct access. Direct access means that the consumer can buy services from any provider. Currently, direct access has been suspended in California until the year 2012. That sounds like it is a long way off but imagine if we, or any other utility in the state, or any other energy service provider (ESP), signs a contract for 10 years (and it takes long-term contracts to get plants constructed, because no one will build a plant for an imaginary market) for the construction of a 500 megawatt power plant. If that plant becomes operational in 2008, four years into its operation the suspension of direct access will sunset. At that point, customers for whom you have contracted to build the plant may choose another provider. That means that there are still six years worth of costs for that plant that may not be recouped. What will happen? That is a fundamental problem that every potential entity signing an agreement is going to have. As a result, everybody selling retail energy these days tends to stay in the short-term market, which means five years or less. That won't get a facility built. It is not a long enough contract with enough insurance of a payment stream, to allow an independent power plant provider to build a facility. We tried to solve this problem last year with AB 2006, but the bill was vetoed. The state still has that problem. That is the one piece of the puzzle that is missing in the state framework to bring stability back. And we are doing things to try to correct that and I would be happy to talk about that.

What is Edison's financial condition today? How healthy is the company's balance sheet?

The good news is that Edison has been restored to financial health. It is not just a measure of our stock price; it really is a measure of our credit ratings. We now are an investment grade company. That is not just something that we feel good about; it has real customer benefits. We now have access to capital markets. We have access to lower cost capital and we have a greater breadth of access to the capital markets. This will allow us to invest $9 billion over the next five years in our wire system. Most of the utilities' systems in the country were built just after WWII. They are aging, and they are declining in performance. With access to capital markets, we have the ability to make investments in new transformers, poles, wires, and capacitors. The entire system infrastructure needs to be enhanced, and we have a 20-year time frame to make those enhancements. The good news is that we now have access to that capital at reasonable rates. We also are going to need good credit to be able to finance some of these contracts for the construction of new power plants.

In short, we are in good financial health. We are able to invest in reliability, in terms of both maintaining the infrastructure and building new plants. We will be able to meet the requirements that Southern California is going to place on the system. We know our customers demand reliability; we have to provide it.

Bob, the reorganization and/or consolidation of the state Energy Department and the Public Utilities Commission has been debated since the election of the Governor more than two years ago. Could you address the capacity of the state to deal with the state's energy challenges? Is the State properly organized to ensure that our present and future energy supply needs will be cost effectively met?

I think the governance that we have has made tremendous strides in restoring credibility and restoring confidence in the electric system. Are there improvements that could be made? Yes, there are. I think there are too many agencies involved in energy, either in program development or regulation.

The Governor, as you know, has proposed a reorganization that would create the Department of Energy, with a secretary of energy to oversee it. We think that this move is in the right direction. We believe that the programmatic activities need to be separated from the regulatory activities. Those entities that operate and initiate new programs should not be the same entities that hear litigation and make decisions among competing interests.

The Governor's idea is a good one. The problem is that it comes at a time when we lack the framework that will provide enough stability to induce people to make the necessary investments in future power supply. So while the reorganization is a step in the right direction and a good program, the first priority should be to solve the policy problem. Let's move forward on that, and let's have the organizational structure flow from the policy. I think it may be a little premature to move forward on reorganization, until we can get the policy. The danger is that after having made the organizational changes, everyone will feel that we somehow have solved the energy problems. The truth is that we are still a very divided state with regard to whether we want to take a regulatory approach or a free market approach to energy policy. In fact, there will be an initiative on the ballot this November on that very subject. We have to resolve the policy issue in order to move forward.

Both the Governor, in a statement this past month, and the new Mayor of LA, Antonio Villaraigosa, have spoken forcefully about the role of California and Los Angeles in terms of green energy. What are the real prospects for more green power?

We are very proud of what we have done at Southern California Edison with regard to green power. We embarked on a program in the early eighties, to convert a sizable portion of our portfolio to renewable resources like wind, solar, biomass, and geothermal power. Southern California Edison now purchases one-sixth of the nation's renewable power. About 19 percent of the energy we purchase is now renewable energy, and we fully intend to meet the new goal of 20 percent by 2010, called for in the state's energy action plan. We have had two solicitations for additional renewable power, and we purchased more renewable power than the other utilities in the state combined. We have more renewable power than any state in the union. We think in a state that is very dependant on natural gas, renewable resources are a particularly good way to be able to hedge natural gas costs and provide more balance in the portfolio.

Having said that, there are limitations. Electricity is interesting. It has to be used instantaneously. You cannot store it in any appreciable amount. So the system has certain physical requirements that are determined by the laws of physics. One of those is that power be dispatchable. In other words, our power plants have to provide power on demand. Some renewable power sources are not dispatchable. For example, if the wind is not blowing, you won't get any energy from a wind farm. So traditional power sources are required to produce power under some circumstances. This doesn't mean that we you shouldn't use renewables. They have a place in the system, and they can be a significant help in terms of displacing natural gas and balancing the energy portfolio to protect customers from being too dependant on any one resource.

Bob, let's move to your personal plans for the future. You have taken out papers to run for mayor of Long Beach. Elaborate on your aspirations and plans and why you're running for public office.

I'm considering running for mayor of Long Beach. As you know, years ago I began my career in public service, eventually becoming the chief of staff on the State Senate Energy Committee. I was very committed to energy conservation and efficiency and renewable resources, and I loved that work. In the last 12 years, I have been at the forefront of almost every major issue, every major crisis that our company has faced, and they have been substantial, including energy deregulation and the city of Long Beach's 1998 bid to have Enron run its energy system. During the energy crisis of 2000 and 2001, I spent 115 nights in Sacramento trying to help solve the problem and bring stability back to the system. As a result, I have acquired a substantial amount of experience, knowledge and skills that I would like to now put to use solving problems for the people of Long Beach. I would like to help the City of Long Beach to solve some of its very big problems. Long Beach currently has a structural budget deficit and a public safety problem. For the last ten years I have brought people together to develop common solutions. I want to do that for Long Beach, a city I have grown to love.