Leonard Letter Articles on Energy – 2003-2007

 

“What Power Crisis?” – June 2, 2003

In the middle of a Board meeting last week, we lost power in the headquarters building for the second time in two weeks. The culprit I am told was a bad transformer that governed our grid in downtown Sacramento. However, our utility also admitted that we had a Stage 1 power alert because of unexpected high temperatures. This is somewhat ominous since we had only two of these alerts last year. I now find myself making contingency plans with my staff for working without power this summer.

Coincidentally, last week was also the first time that the state has ever assessed privately owned electric generating plants. For those who wanted the state to take over the property tax assessment of power stations in order to punish them, they will be disappointed by the results.

What is really needed are incentives to build more electric generation facilities. The high peak of consumption this summer could go as high as 50,000 MW, while the total California Energy Commission rating of the active stations is only around 20,000 MW, at full capacity. This does not count nuclear, hydro, alternative, and the power that we import from other states --- but the mainstay of our power supply is still our natural gas fired plants and for this reason the situation is worrisome.

 

“Time For Nuclear” – October 24, 2005

The Los Angeles Department of Water & Power Manager was quoted as saying that using natural gas to make electricity instead of nuclear power increased the cost by five times.  This a very powerful argument to build nuclear power stations.  It is now very cost effective to make the switch to nuclear.

 

“Lumps of Coal” – December 12, 2005
If you have lived in California for the past few years, you understand the electricity problems we have.  If you have lived here for many years, you understand how concerns about the environment and air quality can impact our public policy decisions.  I am a huge advocate for clean air and worked for years in the legislature to improve it.  I also worked hard to increase our state’s production and supply of electricity.  We are woefully short of having enough power plants to be self-sufficient.  But since those environmental concerns—many of them more drama than substance —have prevented enough power plants from being built in California, we are forced to contract with power plants in other state to meet our demand.  Wyoming does not have California’s population and demand challenges and they have lots of coal, thus they are willing to sell their extra electricity to us.  

 

Seems logical, right?  Which only means that California’s government must step in and demand the practice cease.  Last week’s decision by the state Energy Commission to reduce “greenhouse gas” emissions results in a ban on coal-generated electricity, even if it is generated in Wyoming.   Again, if you have lived in California long enough you may be nodding your head just a little, thinking this is a good thing to help Wyoming be cleaner, too. But consider this: Wyoming’s coal power plants are not in violation of federal air quality standards.  And the people in Wyoming have not passed stricter standards; they are fine with having coal-generated plants, perhaps since the new generation of coal plants are even cleaner than the old ones.  But we know better in California, do we not?  I propose lumps of coal in the Christmas stocking of each California Energy Commissioner.

 

“Energy Crisis” – July 17, 2006
Many have forgotten the blackouts and brownouts of the Governor Davis years, but the problem is far from over.  We are still not building enough power plants for our future, and we are still overly dependent upon imported power, which in turn is dependent on long-distance power transmission lines.  We are not giving any real consideration to the only real alternative: nuclear power energy stations. So, with the heat of summer on us the calls for conservation crop up as it is the only short term way to manage the supply and demand.

 

On Friday the California Independent System Operator ordered all the state’s power plants to suspend any maintenance work so that the plants will keep running.  The risk of this is that the plants may breakdown altogether due to lack of maintenance. If you want to track the energy supply and demand for California the CaISO still has their web site of actual and forecasts.  You can check it out at:

 

 http://www.caiso.com/outlook/SystemStatus.html

“BP/Alaska Oil Shutdown Lessons” – August 14, 2006
Reason Magazine Online has an excellent analysis by Ronald Baily of the implications of the partial pipeline shutdown at Prudhoe Bay in Alaska: 
http://www.reason.com/links/links080806.shtml
 
The Prudhoe Bay shutdown takes 400,000 barrels a day out of domestic production.  That is 8% of domestic production and about 2.5% of domestic consumption.  The immediate reaction to this news was another spike in the price of oil worldwide.  But we have been told repeatedly that a potential new million barrel a day production in Alaska would have no effect on the price of oil.  Clearly, this is not true.
 
Oil prices are still subject to the laws of supply and demand.  Unfortunately, more than almost any other product, oil is subject to rumormongers and political extortionists.
 
Baily writes:  “Oil markets and prices will settle down as soon as: peace comes to Iraq; Iran's ayatollahs halt uranium enrichment; the demands of Nigerian separatists are satisfied; and Venezuela's Hugo Chavez and Russia's Vladimir Putin boost investment in production. In other words, it may be a while.”
 
But if America wanted to move away from buying from these hot spots, Reason points out two places we can boost domestic production to levels well above what is being lost today from Prudhoe Bay.  The Cuban government has given permission to Sinopec, China's state owned oil company to drill for oil 45 miles of the coast of Florida.  On America's side of Florida, the Gulf of Mexico is estimated to have more than 4.5 billion barrels of oil that can be extracted.  Production there could double by 2016 to over two million barrels a day from just over one million today.   And let's not forget that the rest of Alaska's north slope could have over 10 billion barrels that can be extracted at a rate of a million barrels a day.  
 
In short, given the market's reaction to the partial shutdown at Prudhoe Bay, America can do something about oil prices by developing its own oil fields to provide real competition in oil pricing.

“Feedback On My Oil Musings” – August 28, 2006
In a recent article, I asserted that those who say that drilling for oil in ANWR is a waste of time because the amount of oil from there is inconsequential have been proven wrong by recent events.  I say that because the loss of oil from the BP pipeline closure at Prudhoe Bay caused world oil markets to panic to the upside shows that just about any oil production is significant.  
 
A reader asked that in light of the potential of emerging technologies like coal conversion to oil, “Why do we need to drill for more oil?”  Good question.  There are indeed some promising technologies.  In the 1980’s I authored a bill that would have outlawed the internal combustion engine – I knew it would not pass – because at that time I did not think enough was being done to develop alternatives and I wanted to advance the discussion.  Much has been done since then.

 

However, while I support the policy goal of decreasing foreign oil reliance, it does not yet make economic sense for us to mandate a switch to these alternatives exclusively.  We could probably stop importing oil if we are willing to pay something like $8 a gallon for gasoline.  But the damage this would have to the economy and the quality of life, especially for those with low incomes, far outweighs the negatives of importing oil – at least for now.

The most basic reason we should be increasing domestic production is that the United States imports roughly 57% of its oil.  According to the U.S. Department of Energy, if we do not increase our domestic production, we will be importing 67% of our oil by 2020.

 

Another reader chimed in with additional benefits:

 

“Oil underground has no value to anyone, so leaving it there serves no purpose.  The foreigners who seek to control the world price of oil find it much more difficult to do so when America produces more of its own oil. The taxes and fees paid for the extraction of domestic oil would reduce the deficit and reduce the pressure for tax increases. The use of American oil is better for the environment because American producers have the best safety record in the world and the most environmental restrictions.”

“Time To Go Nuclear” – September 5, 2006
You have to hand it to Governor Schwarzenegger.  If he signs the global warming bill to force a 25% reduction in greenhouse gas emissions, it will be the greatest inducement to switch to nuclear power since the technology was invented.  Not only is nuclear power the most friendly to air pollution, in a rare double benefit, but it is also the most beneficial to greenhouse gas reduction.  Governor, California needs you to jump-start our conversion to electricity from nuclear energy now!  By the way, if you do force a 25% reduction in greenhouse gases without a switch to nuclear, California’s economy is going to pay a steep price. 

 

We could try to soften the blow by first addressing the natural contributors to global warming.  Forest fires (man-made and natural) would certainly have to be made illegal. Clamping down on the various exhalations of warm-blooded mammals would help a lot.  But neither deporting all the illegal aliens, nor requiring hard-core environmentalists to leave the state gets us where we have to be under the bill, notwithstanding other positive effects.  Culling the populations of whales, sea lions, and other large, gas producing animals living near the coast through “fair-chase” hunting I doubt would be popular even if it were done by Macah Indians.  I suppose we could banish cows, but life would be unbearable without reasonably priced steaks, hamburgers, roasts, half-and-half, ice cream, cheese, and the like. 

 

The devil is in the details of the new law -- but still, the point is that absent a nuclear conversion we will almost certainly not be able to reduce emissions fast enough.  The only alternative left will be to produce less heat, because heat causes carbon atoms to join with oxygen atoms creating carbon dioxide, the main greenhouse gas.  A partial list of the things to give up might include our barbecues, stoves, ovens, dishwashers, vacuums, computers, servers, televisions, video games, DVRs, DVD players, engines (including hybrids), spas, saunas, and “irresponsible amounts” of paving.  This would be a very modest start.  Any volunteers? 

 

“California’s Electricity Rates” – September 18, 2006
According to the latest published data by the Federal Department of Energy, California’s electricity is close to being the most expensive in the nation.  2003 is that latest year where statistics are available.  California consumers paid 12 cents per kilowatt/hour.  This is behind only Hawaii’s 16.73 cents and Vermont’s 12.8 cents.  The only states that paid above 10.2 cents are California, Alaska, Hawaii, and the New England states.  At the other end of the spectrum, residents of Kentucky paid just 5.81 cents, Idaho 6.2 cents.  To be fair, let’s take a look at a state that is comparable to California in its needs and economic dynamism -- like Florida.  Floridians paid 8.55 cents compared to our 12.  Texans paid just 9.16.  The chart can be found here (scroll down):

http://www.eia.doe.gov/neic/brochure/electricity/electricity.html

 

The point is we are way above average.  What is disturbing about this is that among the top tier of electricity cost, California is the only high-growth state.  It is very simple; since the demand for power is increasing the downside is going to be much higher prices unless more power sources are built.

 

“Kudos PG&E” – January 22, 2007

Just when I conclude that PG&E is so bad that it even gives monopolies a bad name, its Chairman does something right. Chairman Peter Darbee accepted an environmental award, then announced to the environmental community that if they really want to fight air pollution, global warming and dependence on oil, then they really should want to build nuclear power plants.

Common sense, what a concept!

 

To read the Sacramento Bee story about the award and Darbee’s comments, go to:

http://www.sacbee.com/111/story/109695.html

 

“Oil – The Market Works” – February 5, 2007
The International Energy Association published a remarkable finding that I only saw in the Wall Street Journal.  In 2006, for the first time in 20 years, the demand for oil from developed nations (OECD members) dropped from the previous year.

http://omrpublic.iea.org/currentissues/full.pdf

 

At somewhere along the way to $77 per barrel, a tipping point was reached where reduced consumption and perhaps interest in fossil alternatives brought the price of crude down. The Wall Street Journal reported anecdotally on the effects: “Saudi Arabia began to quietly cut back its output in April because it couldn't find buyers for all its crude.  Iran, OPEC's second largest producer after Saudi Arabia, was forced to store unsold oil in tankers last summer.”

 

I say more than anything this shows the market does work.  Not only does $70-a-barrel oil spur oil companies to explore new areas, it also encourages inventors and capital investors to accelerate their search for alternative fuels and give consumers more choices, all at the same time.  This is what markets -- not governments -- do best.  And, if an alternative really catches on, like when coal displaced whale oil in the 19th Century, so too the value of petroleum will fall like a rock.  It is notable that already the IEA projects that biofuel output will triple over the next five years.

 

This comes at a time when everybody wants to talk about our addiction to oil and what new laws we need to force people off of it.  While an interdiction from Governor Schwarzenegger or President Bush may have some short-term effect, the real catalyst for lower consumption of oil is the market.

“How Much Gasoline Does It Take to Run a Bicycle Race?” – February 26, 2007

It was fun to watch the Tour of California bicycle race speed by under my window on Capitol Mall.  A colorful and quick passing of the racers was followed by several minutes of chase cars, passenger vans, cargo vans, ambulances, CHP patrol cars, city police, and many motorcycles plus 5 helicopters circling overhead.  The racers themselves may be environmentally correct but their support teams are burning fossil fuels at a rapid rate.

“Higher Fuel Prices Not a Big Blessing for State Treasury” – April 2, 2007
I was struck by a March 26 story in the Sacramento Business Journal, “Higher gas prices help pump up state’s taxable sales.”  The piece looked at recently released data for first quarter 2006 that showed that total taxable sales were up 7.9 percent from the fourth quarter of 2005.  A big part of this was that higher gas prices sent fuel tax revenue soaring a whopping 18.5 percent to $9.5 billion (out of $129 billion in total taxable sales). 

 

According to a March 2007 paper by the American Petroleum Institute, Californians are paying about 58 cents in tax per gallon of gasoline.  This is second only to New York (60.8) and Hawaii (60.4)

http://www.api.org/statistics/fueltaxes/upload/March_2007_gasoline_and_diesel_summary_pages_2.pdf

This means that when gas prices go up, fuel revenues spike a lot because people seem to use about the same amount of gas regardless of price.  In fact, during the price hike from first quarter 2005 to 2006 total gallons consumed increased by 1.7%.

 

But is it true that higher gas prices are good for revenues overall?  Suspicious of this, I asked BoE researchers to recalculate the figures, hypothetically only allowing gasoline to rise at the rate of inflation.  After doing this, BoE staff concluded that the huge increase in the price of gasoline in 2005-06 only contributed an extra $18 million to the state.  Why?  Because when gas prices rise, 75% of the increase in taxable sales is simply taking away from taxable sales on other items that were never purchased.  Lower and middle income individuals and households are more likely to face budget constraints, thus they cannot increase their total spending when they have to spend more for necessary driving.

 

Researchers in New York State came up with this theory, which makes sense to me.  They use some fairly intricate math, but in general they are looking at aggregate behavior of individuals and households rather than specific products.  The paper can be found here:

http://www.taxadmin.org/fta/meet/05rev_est/casey_stevens.pdf

 

I make this point because some may regard high gas prices as a good insofar as they help increase revenues to the state.  Not only do high gas prices harm the economy, their usefulness as a celebrated revenue stream is highly exaggerated.

“Garamendi and Chiang Vote Against Inexpensive Power” – April 16, 2007
What if one of the world’s premier energy companies was offering to spend billions of their own capital to provide California with the fuel needed to generate inexpensive and almost zero emission electricity for the whole state?  Sounds like a pretty good deal, does it not?  In one of the most stupefying votes ever, the state Lands Commission voted last Monday to deny a state land lease to BHP Billiton for establishing a facility for liquefied natural gas 14 miles offshore from Port Hueneme.
 
The two members who opposed the project are Lt. Governor John Garamendi, and State Controller John Chiang who both apparently vote against the proposal due to environmental concerns.  Almost by definition anything built by mankind causes pollution.  The real questions are:  (1) what are the alternatives, and (2) do the benefits outweigh the costs?

Garamendi alternatives are energy conservation, wind power, solar power, and expanding a Mexican natural gas plant to serve more Californians.  Californians already do a better job of conserving energy than any other state in the union.  The costs to do more are becoming prohibitive.  Environmental groups are opposing wind and solar projects so I am not sure what new projects of these types he would ever favor.  And then the idea that California should become more dependent on Mexico for its energy needs is self-inflicted economic impairment that would make energy even more expensive. 

The so-called alternatives will not work.  If Garamendi and Chiang were to be forthright in admitting that and recommending nuclear power as the alternative to this offshore natural gas plant, then at least we would have a real debate over real alternatives.

The second question is easier to answer because the costs of the do-nothing option would literally kill the elderly and infirm who will be the victims of power blackouts.  Unreliable energy will curb economic development as businesses migrate to areas where they can count on the power always being on.  This failure to plan ahead and expand our energy infrastructure amounts to a tax increase on every Californian when electric and gas prices spike as individuals and companies compete with each other to buy a resource that has been made intentionally scarce.

The last round of power outages was called Gray-Outs in recognition of the then-Governor's bad decisions.  The next round should be called Johns Without Gas in recognition of Chiang and Garamendi's creation of the energy crisis.  P.S.:  Thanks to the Governor's representative Anne Sheehan for making a good decision on behalf of all Californians.

“True Believers Take Out Nuclear Power’s Competition” – June 4, 2007
In case you missed it, a couple weeks ago the California Energy Commission unanimously approved rules that will forbid municipal utilities, including the Los Angeles Department of Water and Power, from buying electricity made from coal.  Identical regulations were imposed on private utilities in January.  This implements SB 1368 (Perata), which prohibits the state's publicly owned utilities from entering into long-term financial commitments with plants that exceed 1,100 pounds of carbon dioxide (CO2) per megawatt hour.  This also follows AB 32 (Nunez) that requires California to reduce emissions of carbon dioxide and other gases by 25 percent by 2020.

 

On one hand this policy is a short-sighted price penalty on consumers.  America has lots of coal and the industry is rapidly making coal-to- electricity conversion cleaner and more efficient. But coal is not a zero emission fuel source.  True believers of the need to drastically cut back on emissions that cause global warming have no choice but to ban coal everywhere they can.  And, we learned last month they do not care for liquefied natural gas either. On the other hand, by going after cheap and available fuel sources the environmentalists accelerate the need for nuclear power with every victory.

 

Let me offer an inconvenient truth: California has a growing population and growing economy. California consumers will consequently demand more electricity.  This demand will be reflected in the market and in the political arena.  

 

This is a dangerous game for our political leaders.  If they think Californians are going to casually bake in 100-degree summer heat with no air conditioning, they will be surprised by the push-back from a public more concerned with how warm they are now than how warm the world might become in a hundred years -- maybe.

 

“Perata and Nunez Should Back PUC Decision” – June 4, 2007

 The Public Utilities Commission voted 4-1 to examine whether to allow consumers “direct access” to electricity providers.  The Democrat leaders of the Legislature have sent a letter to the commission questioning the PUC’s authority.  I say they should reconsider their position.  The benefits of direct access are such that the Democrats have an opportunity to be public heroes rather than obstructionists.

 

First of all, direct access is not deregulation.  Deregulation is ending monopolies, but nobody is proposing to end monopolies.  Second, why should a producer of electricity be forced to sell to only one customer, namely the local monopoly utility?  Direct access would allow the producer to sell directly to an end user like a manufacturing company or your home.  By providing choices, competition is enhanced; by sharpening competition, the consumer benefits in pricing.  It is called free enterprise.  Utilities have a government pass that shields them from competition. This is corporate socialism and we should all be against it.