 or excess generating supply. However, as a result of the very poor hydroelectric conditions in the Northwestern United States, and the fact that no material amount of electricity generating capacity has been added in California over the last 10 years, a shortage of supply has developed, and wholesale electricity prices have materially exceeded retail electricity prices.
This has caused a financial crisis for the incumbent electric utilities in California, and caused retail electricity prices to rise by 40 percent.
The long-term solution to this problem is the addition of new generating supply. The recent high wholesale prices of electricity have caused generators to announce almost 25,000 megawatts of new electricity generating capacity in California between now and 2006.
This is a 45 percent addition to existing generating capacity in the State and clearly indicates that the competitive wholesale markets for electricity are working.
More than half of this capacity will be available by 2003. Nationally, including California, electricity generation developers have announced the addition of 370,000 megawatts of new capacity over the next 5 years, a 49 percent addition to the existing capacity.
Although some economic impact of rising electricity prices is unavoidable, we believe that the focus should be on managing the impact in the short-term, but encouraging supply additions in the long-term.
This is an extremely precarious balance, though. The short-term desire to control prices could derail the new supply additions in certain areas of the United States. This could support higher electricity prices in the intermediate term.
In our opinion, the most critical action State and Federal legislators and regulators can take is to ensure the development of a competitive market for electricity. Avoid the temptation to cap electricity prices in the near term.
Actions to ensure the enforcement of current law should be more than adequate to control price spikes.
Importantly, avoiding the near-term temptation to cap electricity prices will deliver a much larger and longer term benefit to consumers. The economic benefit associated with the development of excess generating capacity in the United States will drive electricity prices sustainably lower.
Further, as many of the new generating resources are significantly cleaner and more efficient than existing electricity generating capacity in the United States, an environmental benefit will accrue to consumers and the Nation in conjunction with lower prices.
California is among the more than 20 States in the United States that have legislatively deregulated the electric power industry. However, California is different in several critical ways and the problems with deregulation appear most acute here.
We would point to the States of Pennsylvania and Massachusetts, among others, as examples of where deregulation of electricity markets has worked. The successes, coupled with the prospect of declining electricity prices and more efficient electricity-generating supply should keep the United States on the road to fully deregulated electricity supply markets.
Consumers do not want many of the risks the previous regulated electricity markets provided. The transition process to a deregulated market has provided its own risks, as evidenced in California.
However, full deregulation of the electricity markets will allow the wholesale and retail markets to develop remedies to these problems. The generators proposed addition of 370,000 megawatts of new generating supply in the United States over the next 5 years convinces me of this.
In summary, we believe the Federal and State legislators and regulators should continue to encourage the development of a competitive electricity market and the addition of new capital to the electricity industry. New electricity generating capacity, as well as new electricity transmission capacity will go a long way to delivering to consumers the benefit originally promised to them in electricity deregulation; significantly lower electric prices.
Thank you again for the opportunity to testify before you on this critical energy issue.
Chairman OXLEY. Thank you, and thank you all, gentlemen.
Let me ask all of you, from a layman's standpoint, I've had some background in energy in the other committee I served on for several years. And was involved in the Clean Air Act and other energy issues and environmental issues at that time.
Let me start with you, Dr. Wolak. It's my understanding that in the last several years, California's supply of electric energy has actually decreased by 5 percent; at the same time there's been a 24 percent increase in demand.
Mr. WOLAK. No. At most, demand has increased probably over the past 3 years about 10 percent, and there have been some supply additions coming online in the last 2 to 3 years. True, no new large facilities, but certainly a lot of smaller facilities have been coming on line.
Chairman OXLEY. And how would you quantify that? What kind of an increase have we seen in California in terms of electric energy supply?
Mr. WOLAK. The difficult part in California is the fact that we are an integrated system and effectively historically rely on between 20 and 25 percent of our consumption is imports. So there's roughly a carrying capacity into the State of on the order of 12,000 megawatts into the State, and so a lot of the energy comes in through imports.
Chairman OXLEY. Is that a policy decision made by the political leaders of California?
Mr. WOLAK. Well, it actually is just a good economic decision in the sense that if you look in the surrounding areas of California, California pays an average retail price, say in 1998, of on the order of 10 cents per kilowatt hour.
People to the North of us pay an average price of about 4 1/2 cents. The Southwest pays an average price at that time of about 7 1/2 cents. So you live around cheap power and they've got lots of it, so it makes sense to essentially buy what you can from them.
Now the bad news is that when they grow, for example, like Nevada on the order of 50 percent in a 10-year period, or Arizona on the order of 20 percent in a 10-year period in population, they tend to consume all the power and leave very little for you to consume.
So in that sense, that's what got California into the position that it was in, very few imports available to sell into the State.
Chairman OXLEY. Do any of the other panelists have a different view of that discussion I just had with Dr. Wolak?
Mr. ELLIG. I think part of the reason you hear somewhat different figures is people are quoting different start years and different end years, whether it's the past 3 years or the past 10 years, but that's—I think we all pretty much agree on the trend.
Chairman OXLEY. Let me ask you, beginning with Mr. Dobson, what would be the economic impact on investment if the Congress were to enact price caps on energy costs in the State of California?
Mr. DOBSON. It would have a very negative impact. As I pointed out in my testimony and my comments, about 25,000 megawatts of new additions have been announced. Now, as you pointed out in some of your comments, these have not been sited yet, and that remains the challenge. However, I would expect more than half of that to be abandoned if, in fact, price caps were legislated by the Congress.
Chairman OXLEY. More than half would be abandoned?
Mr. DOBSON. More than half would be abandoned.
Chairman OXLEY. Dr. Smith.
Mr. SMITH. There's not only the impact on investment, but the price caps also are not going to help with the problem of conservation at the consumer level. And that's why it's very important, I think, to pass through the wholesale prices and also allow retail competition, so that you'll get an adjustment not only on the supply side, but also on the demand side.
Chairman OXLEY. Dr. Ellig.
Mr. ELLIG. Well, I know the last time we tried to do wholesale price controls in the energy industry on the Federal level, when I wasn't sitting on a department store floor trying to go to school, I was sitting in my car waiting for gas at a gas station. And in both cases, the regulated price was too low.
You know, in theory, maybe you can find some price that's lower than the current price, but high enough that it doesn't discourage investment, but I'm not convinced we know enough to figure out where that price is.
Chairman OXLEY. And so you would suggest that the market mechanism is the best way to determine that?
Mr. ELLIG. Well, I think rather than focusing on the level of prices and talking about how to cap them, we ought to be asking what is it about the way the structure of the market is set up that's led to these high prices, and then fix the market structure rather than trying to overlay price controls on top of a market structure that's messed up.
Chairman OXLEY. Dr. Wolak.
Mr. WOLAK. I guess there are several layers of the answer to the question. But the first is that during the first 2 years of the market, there was a price cap on the energy market on the order of $250 per megawatt hour, and during that time, roughly all the capacity that is alluded to came to the State of California, and was wanting to be built.
So I think that a price cap set at a high level has almost no effect whatsoever on investment behavior.
Then the next is that this sort of capping prices is in the form of saying that I'm going to put you back to cost-of-service regulation. I think it's also important to bear in mind that under cost-of-service regulation, we have a long history of gold-plating by utilities subject to cost-of-service regulation. So if anything, there's an incentive to over-invest, because of cost-of-service