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Feature Story
California Illuminates the World
Page 3

In January 2001, when blackouts began to roll through California and Governor Davis declared a state of emergency, he turned to his cabinet secretary, Susan Kennedy, to take charge of damage control. (Although a Democrat, she now serves as chief of staff for Republican Governor Schwarzenegger -- testimony to her political skills in the Sacramento trenches.) "It was the most successful statewide energy-conservation campaign ever conducted," says Ralph Cavanagh, codirector with David Goldstein of NRDC's energy program. "And Kennedy was the field general."

She mobilized a host of dueling factions -- shell-shocked utility companies, both parties in the legislature, corporations, consumer groups, the California Energy Commission and its regulatory cousin, the Public Utilities Commission -- to cooperate in the fight against the common enemy of more and bigger blackouts. The state poured $1 billion in emergency funding into a newly invigorated set of incentive programs dubbed "Flex Your Power." And Californians flexed, big-time. In short order, they replaced nearly eight million lightbulbs with CFLs in their homes. Cities and towns installed thousands of light-emitting diode (LED) traffic lights, which use less than half as much electricity as the incandescent lamps they replaced. Factories swapped out thousands of old motors for more-efficient new ones.

In utility lingo, strategies for cutting electricity demand are known as demand-side management (DSM). This "saved California from massive economic harm," Kennedy said recently. "Through DSM we were able to reduce our demand by nearly 5,000 megawatts -- equivalent to the output of 10 large power plants." Nearly enough electricity, in other words, to supply the average daily needs of Los Angeles.

Not all of the savings lasted. The efficiency hardware installed during the crisis stayed in place, of course, and continued to reduce Californians' electricity bills year after year. But half of the energy savings disappeared in 2002 as the sense of urgency ebbed. What remained were the smoking ruins of a coherent state energy policy.

The crisis, in tandem with a recession in the state's economy after the dot-com bubble burst, was Davis's Waterloo. He went down to defeat in 2003 in the first gubernatorial recall election in California history. Before leaving office, however, he appointed Susan Kennedy to the public utilities commission. She was assigned to head up all official proceedings involving energy efficiency, and brought to this task an uncanny ability to cut through hardened layers of conflicting viewpoints, find an "Aha!" solution, and then forge consensus around it.

During the early years of energy conservation in California, utility companies were compelled to run efficiency programs. They had to spend a modest percentage of their revenues to field small armies of energy auditors, hand out blankets for hot-water heaters, provide rebates for energy-efficient appliances, and offer inducements to customers to unplug and recycle those ancient second refrigerators -- the beer coolers -- in their garages and basements. The utilities needed prodding to do these things, because even though saving energy was beneficial to ratepayers and society in general, it was against their own financial interests. They made money by selling kilowatt-hours. The more they sold, the more they made. They had a far greater economic incentive to hand out free hair dryers (which some actually did) than to subsidize setback thermostats and CFLs for their customers.

In the 1980s, as the energy-efficiency movement gathered steam, people like Art Rosenfeld, Amory Lovins, and NRDC's Ralph Cavanagh began looking for ways to realign utilities' financial incentives so as to encourage them to invest in efficiency. The idea that gained the most momentum was known as decoupling. Traditionally, utilities' financial health had been tied directly to increases in electricity sales. Decoupling broke this link. Here's how it works: Every few years, state regulators determine how much revenue utilities need to cover certain authorized costs. They then set electricity rates at a level that allows utilities to recover these costs, based on a forecast of sales. If actual sales are above or below this forecast, then revenues are "trued up." Over-collections are given back to consumers in the form of reduced rates, and under-collections are eliminated with modest rate increases (typically pennies a month for the average household).

In 1982 California became the first state to adopt decoupling. The utility companies liked it, because it helped stabilize their financial health. In due course, regulators in a number of other states, including Oregon, Washington, New York, and Maine, adopted decoupling mechanisms of their own.

The decoupling trend came to an abrupt halt when deregulation fever struck in the 1990s. In this new economic wonderland, utility companies sold off many of their generating assets to independent power producers. The utilities became mere middlemen, buying electricity on the wholesale spot market and reselling it to their customers. They no longer had the responsibility to plan for meeting their customers' future electricity needs by combining supply-side investments (new power plants) and demand-side investments (energy efficiency) in a diversified portfolio of resources -- a process known as integrated resource planning. The invisible hand of the market would take care of all of that. Or so ran the theory.

But things didn't work out as planned. Some analysts believe that California's electricity shortages in 2000 and 2001 were the result of too little deregulation, too late. Others say the deregulatory wrecking ball swung too far. In any case, when Susan Kennedy took her seat on the utilities commission in 2003, the sense of immediate crisis had passed but the underlying damage had not been repaired. The commission was, by that point, designing and administering efficiency programs itself, since neither the utilities nor the restructured marketplace could be trusted to do the job. Funding for these programs came from a Public Goods Charge -- a 1 percent tax added to utility bills. This tax generated about $250 million annually -- less than half of what California utilities had been investing in efficiency under decoupling.

Kennedy faced the task of bringing the drifting ship of efficiency policy under control. "I was extremely fortunate to know some of the best minds in the world in energy efficiency," she says. In the spring of 2003, she invited a half-dozen experts, including Art Rosenfeld and Ralph Cavanagh, to dinner in San Francisco for a strategy session.

"It was a pivotal discussion for me," Kennedy recalls, "because we laid the groundwork for thinking big. I said, 'Tell me what is possible with energy efficiency -- think about this as if funding was not a limiting factor.' The sparkle in Art Rosenfeld's eye got brighter as he talked about all the possibilities. Pouring out of this little man was decades of research and experience and passion about what is possible if we have the collective will to get it done.

"It was an experience I will never forget," Kennedy continues. "And I believe we proved that if you approach energy efficiency in a holistic, integrated way -- as a tangible resource -- you can achieve great things and actually save consumers and businesses tons of money."

A return to decoupling and integrated resource planning was a necessary first step, Kennedy decided. But where would the money come from to support the "think big" approach? She proposed adding another source of funding: the utilities' procurement budgets, deep reservoirs of cash that had previously been earmarked for buying wholesale blocks of power from existing power plants, or for building new ones. Added to the Public Goods Charge, this source of investment capital could at least begin to do justice to Art Rosenfeld's bag of efficiency tricks.

It took nearly two years, but Kennedy finally managed to turn this vision into California law. The groundbreaking energy-efficiency campaign that the utilities commission adopted last September, with its $2 billion of approved investments in efficiency from 2006 through 2008, brings funding beyond the historic levels unleashed by decoupling in the early 1980s and again in the early 1990s. Every dollar the utilities invest in efficiency measures will generate more than two dollars in savings for customers. That's not just hopeful speculation: $100 million will go toward monitoring and verification to make sure the investments are producing cost-effective results. "If we're going to say energy efficiency is a dependable resource, then we've got to make sure that it's actually producing savings," Kennedy says. The new mantra of the public utilities commission is "Trust -- but verify."

California's recommitment to energy efficiency is partly a return to the past, but with a significant new wrinkle. Now, when utilities plan for long-term growth in electricity demand, efficiency is the resource of first resort, with renewable energy sources next in line. Utilities and regulators call this the "loading order." What it means, in Kennedy's words, is that "before our electric utilities spend a dollar to buy power in the market or build a new generation plant, they will first invest in ways to help us use energy more efficiently." If efficiency measures don't free up enough generating capacity to meet the growth in demand, the next resource in the loading order is renewable sources. Only then can utility companies turn to fossil-generated power (whether bought or built), and even then any new plants that are constructed must be no dirtier than a state-of-the-art natural-gas generating plant.

Kennedy's term on the utility commission was cut short on December 1, 2005, when Governor Schwarzenegger recruited her back to ward heeling in Sacramento as his chief of staff. But the momentum from her tenure as an efficiency crusader continues. This year, California regulators are expected to hammer out stronger financial incentives for utilities to invest even more in demand-side management. If that happens, watch for yet another California trend to turbocharge energy-efficiency programs soon in a state near you.

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The California-China Syndrome

China's breakneck economic growth is fueled mostly by dirty and inefficient coal-burning power plants. The consequences are painfully evident in the sulfurous pall that fouls the air and the power outages that plague China's industrial centers. It was not hard for Chinese officials to see a reflection of their own dilemma in the rolling blackouts that hit California in 2000 and 2001.

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Charts: Geoffrey McCormack

OnEarth. Spring 2006
Copyright 2006 by the Natural Resources Defense Council