Press Briefing by Karl Rove, Senior Advisor to the President, Robert Mcnally, Special Assistant to the President for Economic Policy, and Gerald Parsky, Former California Bush Campaign Chairman

Century Plaza Hotel

Los Angeles, California

3:45 P.M. PDT

MS. BUCHAN: Good afternoon. We'll begin our briefing on the meeting between President Bush and Governor Davis. Joining us will be Karl Rove, who is the Senior Advisor to the President; Robert McNally, who is Special Assistant to the President for Economic Policy; and Gerald Parsky, who is a Californian and the former Chairman of the Bush Campaign here in California.

MR. ROVE: The President and the Governor had a very friendly and constructive series of meetings this afternoon. The President invited the Governor to join him at a meeting with high-tech and business leaders to discuss energy conservation and energy efficiency and technology programs. And then they continued on in a very friendly and very constructive and positive meeting that went well beyond its appointed time.

The President reaffirmed his commitment to helping California in every reasonable way. He reaffirmed his commitment to seeing that federal agencies -- FERC and other agencies, the Federal Trade Commission -- carefully examine questions of illegal price-gouging. And he also discussed briefly the FERC efforts begun several weeks ago to look into the significant and sustained price differentials in transmitting natural gas to California. It's costing significantly more on a sustained basis to transmit, to transfer that gas to California than it is to other locales, some of them even further away.

As I said, it was friendly and positive. They did disagree on one thing -- first of all, I want to say -- agreed on one thing, that California is entitled to price relief. The President believes that it's entitled to price relief in cases of illegal price-gouging by getting refunds and it believes that Californians are entitled to the price relief that will come by having a comprehensive energy policy that encourages more competition, creates more power plants from which power can be drawn, fixes the problems in the transmission network and the transmission grid that are causing some price inefficiencies in the system -- that Californians are entitled to the price relief that we'll get through increased technology, conservation and energy efficiency, and by increased use of alternative energy sources.

Where they disagree is on the question of whether or not California is entitled to a price cap. The President continues his very strong belief that price caps will not add to the supply; in fact, it will diminish the supply. You only need to look at the experience that California had last summer where they had a price cap in place, lowered that price cap, and saw 3,000 megawatts of power flee the state to Arizona and other states where it could be sold. California cannot afford to see 3,000 or 4,000 megawatts of power disappear from the state and be sold outside the state.

But I repeat, the President reiterated his strong commitment to seeing that California gets rate relief, and the way to get rate relief is competition, energy conservation, efficiency, new plants, new sources, alternatives, and very careful oversight by the federal government on these two significant questions of price-gouging and transmission costs.

You saw a little bit of the response that Californians who have been looking at this issue had to the President's position on price caps today in the speech before the LA World Affairs Council and in the meeting with tech and business leaders. They very clearly talked about their desire to avoid the shortages that price caps would bring. Some of the high-tech officials talked about how it would take literally days for them if a plant were set down mid-production line, it would take, literally, days to power the plant back up in an appropriate way. And it would cost them, literally, tens of millions of dollars if that were to happen.

Q:The Governor said moments ago that he's still dissatisfied with what the federal government has done so far -- to go through with the procedures when they find out of price- gouging and things like that. Did this come up in the meeting?

MR. ROVE: It came up apparently at the end in an offhand comment by the Governor as the meeting was breaking up. And, of course, California is entitled to do what California wants to do. We think it would be more constructive to focus on those things that will increase the supply and lower the cost. And those are to look at the specific instances of price-gouging, like FERC is committed to doing and is doing, and looking at this transmission issue, and then working on all the fronts to bring on line the power supplies that California needs.

Q:Did the President have any reaction to that --

MR. ROVE: Literally, it was, as I understand it, in a remark as they were breaking up.

Q:You gentlemen obviously positions and made those well-known. Can you point to one or two tangible things that came out of this meeting, something that you've done at this moment that did not -- when they walked in the room a couple of hours ago?

MR. ROVE: Well, the request by the Governor to meet with Pat Wood to see if this would provide them a steady line of communication, which I thought a very constructive thing. I think the Governor appreciated -- I hope he appreciated -- the President's strong commitment to making certain that in instances of illegal price-gauging, FERC and other federal agencies would be aggressively pursuing this, and also that the federal government would be looking into the issues of transmission costs for natural gas.

But I do think there was a lot of agreement on the essentials. And the essentials are, we're going to overcome this problem by focusing on conservation, efficiency, technology, new supplies, improvements in the power grid -- we announced earlier today, for example, or yesterday, announced that a special federal effort to clear this bottleneck in Path 15, which keeps power from flowing from Southern California, parts of Southern California where there are a surplus of power, to Northern California, where there is a clear deficit.

Q: On that Path 15, the statement made by Secretary Abraham suggested that you wanted to -- for the private sector -- problems -- Is the President prepared to have the Governor go ahead and --

MR. ROVE: We're confident that with proper conditions, that the market would respond. And I defer to my two energy experts here, one Californian and one from Washington, to further expound on that.

MR. MCNALLY: At this time, the Secretary of Energy believes, and the President believes that non-federal investment will be sufficient to expand Path 15. And we hope that within two to three years, that could free up some 1,500 megawatts to move from the south to the north of the state. So at this time, we're not considering a federal investment.

Q:If it's been so many years, if there -- why hasn't there been already?

MR. MCNALLY: That's a very good question. We think that there has been a reluctance on both the federal authorities -- the side of the federal authorities and state authorities, because, really, there are two entities that could have expanded Path 15. One is WAPA, the Western Area Power Administration, and the other is PG&E. And we haven't spent a lot of time figuring out why that wasn't done in the past. We're more interested in making sure that it gets done in the future and as soon as possible.

MR. PARSKY: The only comment I would make, just one comment about Californians -- I think a number of us would reiterate the fact that we don't believe that price caps are the answer. We do think that price relief can come the way Karl described it. One thing that we're -- we understand that the Governor has promised that in February, that by July, there would be 5,000 megawatts of new power, and we look forward to that. If that can happen, then I think that's about the amount that's needed in order to close the shortfall. That would be a very positive development.

Q:Could you address the Governor's issue, basically having to do with potential FERC lawsuits? Specifically, step through -- number one, does the President believe that the prices so far have been just and reasonable? If not, does the President -- what, then, does he see FERC's possibility if they are not just and reasonable?

MR. PARSKY: Well, I think the President's made clear that he's asked FERC to take whatever action is appropriate within the regulatory framework of FERC to deal with the issue of the reasonableness of prices. There's a whole set of procedures that FERC needs to go through, and they are in the process of doing that. And I do think that the President has made clear that if there are evidences of abuse under the FERC regulations, they should take action. And he has every anticipation that they will.

Q:How does he square that with the unjust -- the findings that prices were not just and reasonable from the fall?

MR. PARSKY: I'm not quite sure I follow. Within the category of just and reasonable pricing, there is a whole regulatory apparatus in place. Testimony needs to be taken, the FERC needs to go through a process. And the FERC has been instructed to do that. So that a determination can be made if there's any gauging that has taken place, or if the pricing is unfair and unreasonable.

Q:Why has that not happened -- since that finding was made in the fall, why has that process not started?

MR. PARSKY: Well, to some extent, there has been some action taken by the FERC, and that's an ongoing process for them.

Q:The Governor maintains that following the finding in November, that prices were unjust and unreasonable by FERC, that the Federal Power Act had -- there's no ambivalence. It doesn't matter what your particular philosophy is on whether price caps work or don't, but the law says the FERC must set the price. How do you get around that allegation that FERC is not upholding the law as it exists right now?

MR. PARSKY: I would refer you to FERC for a full answer on that. But after FERC made that determination, FERC began a process of price mitigation, which has resulted in refunds. Refunds for overcharges were ordered in January, February and March. I'm not sure if they've done April or May.

Today, FERC has toughened and expanded that price mitigation framework they are using, which followed as a result from their determination, I believe it was in November and December. So, really, the winter -- that prices were questionable in California.

So the question is not whether FERC has acted or not, it has acted, it has ordered refunds for overcharges. It continues to do that. What we're focused on is measures to increase supply and reduce demand.

Q: What was the President's response to the Governor's assertion that without price caps, the state may have to spend $50 billion in power, and that could trigger a recession and drag down the entire nation into a recession?

MR. ROVE: Well, the President believes that price caps will make the problem in California worse, not better, that it will make the California economy weaker, not stronger. And that the way that we ought to go about seeking relief and increasing supply is to do what we are suggesting in the comprehensive energy program, which will have an effect almost immediately. It already has begun to have an effect. When you begin to talk about, for example, fixing transmission problems, it helps stabilize prices and stabilize the market.

So we believe very strongly that the way to do this is not to make the problem worse for the California economy. These chip manufacturers were sitting there talking about how, literally, literally, hundreds of millions of dollars' worth of sales are dependent upon having uninterruptable power supplies, and how power supplies that have got interrupted would cause them the loss not only of sales, but start-up -- to restart their lines would cost them literally $10 million, $12 million a pop. So price caps, like they did last summer, will simply drive way from supply in a situation where supply is an urgent need.

Q:Does your answer mean that the administration rejects the warning from the Governor?

MR. ROVE: No, it means that we believe that the better way to assure a strong California economy and to keep people working is to give them the power to keep working, and the way you get the power to keep working is by emphasizing conservation technology, alternative sources, new supply and fixing the problems in the transmission lines.

Those five approaches stand a better chance of keeping people at their jobs, getting paychecks and keeping this economy working, than a price cap which, last summer -- I repeat -- when the cap was lowered by this administration in California, what happened was, 3,000 megawatts of power disappeared from the state and was sold elsewhere. And that isn't going to help California when people are going to face the tough summer that they're going to face. We understand the human cost of this problem. We want to keep the California economy strong, we want to keep the California economy humming, we want to keep people employed and we want to minimize the disruptions that people are going to feel in their lives.

Q:Last year, you came here pretty often, and you made some fairly optimistic claims about how you would do in the fall. In the end, they didn't quite come true, and now you've been to 29 other states before coming here. I guess either for you are Jerry, I think even some California Republicans have -- in recent weeks about what took you so long. So at the risk of being a skunk to the party here, what did take you so long?

MR. ROVE: We did have plans to be here in early April, and events intervened that kept the President in Washington, namely the issue with China. But we'll be back in California plenty of times, give you plenty of opportunities to come and cover us when we do.

Q:Mr. Parsky, what do you think the effect upon California's economy is going to be with the run-up in electricity prices? I mean, are businesses -- what's the effect?

MR. PARSKY: The vast majority of the businesses that we talked to today and that we've been talking to over the course of the last few weeks have emphasized the disruption as a major short-term -- having the most economic impact. Today the blackouts and brownouts are -- were emphasized as having the most direct negative economic impact on the state.

So these policies that we've been outlinimg are really aimed at trying to minimize that. And if the Governor brings on his stream what he has promised, then I think those blackouts and brownouts can be minimized, and the economic impact, as a result, will be less.

Q:You don't think the price is going to have an impact on the state's economy?

MR. PARSKY: Well, again, the think that is going to have the most impact on this economy is not having the supply and demand equation come into balance. Price caps have not worked in the past --

Q:I'm not asking about price caps. I'm just asking, do you think that the run-up in price is going to have an effect on California's economy?

MR. PARSKY: The question is the best way to address it. And the best way to address it is by moving forward on conservation technology, energy efficiency, new supply and fixing the transmission problems, not price caps. That's the best way that will guarantee additional new supplies so people compete for California's business, and prices will be going down.

Q:Thank you.

END 4:01 P.M. PDT