Energy Week

June 3-7, 2013 . . . only on NRO

Gold into Dross


In case you hadn’t heard, California is in trouble.

What was once truly the Golden State is now panning for every spare cent — and it will need a lot of them. State auditor Elaine Howle reports that the state’s net worth is negative $127 billion, and that does not include its $300 billion unfunded pension liability. Governor Jerry Brown is glowing about an anticipated $850 million surplus in the state’s budget by the end of the next fiscal year — the product of a $6 billion tax hike, part sales tax and part surcharge on the wealthy — but even if he can reduce the state’s “wall of debt” to the current goal of $5 billion by 2016–17, the state remains deeply mired in unemployment (9 percent as of April), rampant spending, and municipal crises (USA Today highlights ten California cities in danger of going bankrupt; Stockton became the largest city in the country — population 300,000 — to file for Chapter 9 when it went bust last summer).

The state has a way to seriously curb those problems, an energy renaissance within easy reach — if Sacramento will get out of the way. But the state’s extreme environmental policies are keeping California from using its abundance of untapped shale oil and its enormous nuclear-energy capacity.

Approximately 15 billion barrels of oil are locked in the Monterey Shale, a 1,700-square-mile rock formation several thousand feet below California’s Central Valley and southern coast. That’s two-thirds of the entire country’s shale-oil reserves, equivalent to five years of U.S. petroleum imports. Moreover, a study conducted by the University of Southern California indicates a potential increase of 512,000 to 2.8 million jobs, depending on how drilling operations develop, accompanied by “nontrivial” in-migration — people moving to California. That would be a change. And if all that isn’t incentive enough for lawmakers, the study predicts new state and local tax revenues totaling anywhere between $4.5 billion and $24.6 billion.

But California has the dubious distinction of being one of the country’s most aggressively “green” states. And when it comes to economic growth, that shows.

California’s crude-oil production has been creeping downward since 1980, as the state’s green lobby has become increasingly influential. A.B. 32, also known as the Global Warming Solutions Act, was signed by Governor Arnold Schwarzenegger in 2006. Its three-phrase cap-and-trade program, administered by the California Air Resources Board (CARB), aims to return to 1990 greenhouse-gas-emission levels by 2020, and for those affected (currently, businesses that emit more than 25,000 metric tons of carbon dioxide a year), the restrictions are costly, if not downright debilitating. The program’s second phase, which begins in 2015, will expand to include a host of other companies, among them gasoline, diesel, and natural-gas providers.

A study by Andrew Chang & Company for the California Manufacturers & Technology Association predicts that A.B. 32 will cost California residents $136 billion by 2020. The state’s annual economic output will be reduced by $153 billion, or 5.6 percent, it will have 262,000 fewer jobs than if the law had never passed, and total state and local tax revenues are likely to drop by more than $7.4 billion annually. And the study calls this the “optimistic” scenario. The pessimistic one has California families paying an extra $4,500 annually in total economic costs, and a $39 billion tax-revenue decrease by 2020.

John Kabateck, executive director of the National Federation of Independent Business/California, told Cal Watchdog, a government-oversight organization, that small businesses are likely to be the hardest hit: “Consumers will have less money to buy our products, employers will be forced to purchase more affordable products outside of California, and our own energy costs will make it nearly impossible to stay in business.”

A Boston Consulting Group study, conducted for the Western States Petroleum Association, predicts that in-state gas prices could rise by as much as $2.70. With gas in many areas of the state already at $4 per gallon, the state might want to channel some of the $3.7 billion that will flow from refineries and fuel suppliers to CARB into expanding its riot police.

Cal Watchdog’s website gets the headline right: “Studies predict AB 32 will crash Calif. economy.”

But California lawmakers are ignoring these warnings and doubling down. As of May 29, legislators in Sacramento had submitted ten anti-fracking bills to slow or halt activity in the Monterey Shale, and Democratic state senator Fran Pavley is calling for a moratorium on the practice. “We don’t know enough,” she says.

The flurry of anti-fracking bills exemplifies how a blinding environmentalism has taken hold in California. And it aims to stop more than the shale-oil industry.

San Onofre Nuclear Generating Station, opened in 1968, provided power to 1.4 million homes and businesses in southern California before its two generators were shut down in January 2012. Southern California Edison (SCE), the utility that runs San Onofre, halted operations when premature wear from replacement steam generators resulted in a leak of radioactive steam. The generators have been offline since, but Edison is awaiting a decision from the Nuclear Regulatory Commission about whether it can restart one generator at 70 percent power. The company has said that if it cannot get NRC approval soon, mounting costs (some $470 million) will force it to close the plant permanently.

And that means less energy at higher prices for the region. The U.S. Energy Information Administration reports that “after the shutdown of SONGS [San Onofre Nuclear Generating Station] in early 2012, the relatively inexpensive nuclear generation produced by SONGS had to be replaced with power from more expensive sources. Consequently, since April 2012 Southern California power prices have persistently exceeded Northern California prices.”

A 2010 study by the California Research Bureau concludes that nuclear-generated electricity prices are more stable than natural-gas and petroleum ones; nuclear energy is safer (in terms of accidents and deaths) than coal, oil, natural gas, or hydropower; and nuclear plants emit no carbon dioxide, sulfur dioxide, or nitrogen oxides, making them spectacularly “green.”

But San Onofre — like other now-defunct California nuclear plants — is suffering the slings and arrows of environmental aggression. California senator Barbara Boxer claims that Edison and Mitsubishi Heavy Industries, the Japan-based company that built the plant’s generators, were aware of design flaws before the equipment was installed and subsequently misled regulators about the scope of the steam-generator replacement that led to the plant’s problems. She says Edison misrepresented the nature of the replacement to avoid the costly, time-consuming relicensing process. Edison argues that they did not knowingly install faulty equipment and that they followed proper NRC procedure to obtain a licensing exemption. Boxer is calling for a Justice Department probe.

Of course, Boxer’s inquest likely has less to do with proper licensing than with an entrenched distaste for nuclear energy. San Onofre has long been a source of discontent among environmentalists and anti-nuclear activists, and since its shutdown it has been the Exhibit A of the supposed dangers of nuclear power. “I’ve been in the utility industry for 40 years,” wrote S. David Freeman, past head of the TVA and of the Los Angeles Department of Water and Power, “and I have come to realize that you have to be blind not to be an alarmist about nuclear power.”

In February California secretary of state Debra Bowen approved the “California Nuclear Initiative,” which, if passed, would shutter the state’s two remaining nuclear plants (San Onofre and Diablo Canyon, 275 miles up the coast). If supporters can collect 504,760 signatures, it will go on the 2014 ballot. Activist Ben Davis Jr., who is spearheading the measure, used the same strategy in 1989 to successfully close the Rancho Seco nuclear plant near Sacramento. If Davis’s initiative succeeds, it will be the effective end of California’s nuclear future. A 1976 state law prohibits construction of new nuclear plants in California until the state approves a means of disposing high-level nuclear waste. A bill to rescind that moratorium was voted down in 2007.

If the measure to close the two plants passes, it would be bad news for California residents, many of whom have not forgotten the rolling blackouts that struck the state (for unrelated reasons) in 2000 and 2001. Nuclear energy could be a buffer against that. “There are no technical barriers to large‐scale deployment of nuclear power in California,” concluded a 2011 study by the California Council on Science and Technology. “There are, however, legislative barriers and public acceptance barriers that have to be overcome to implement a scenario that includes a large number of new nuclear reactors.”

If Sacramento continues down its current path, those barriers will remain for a long time to come. California’s energy resources could make it possible for the Golden State to become golden once again. Its lawmakers, however, are dedicated to making sure that does not happen.

— Ian Tuttle is an intern at National Review.


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