A powerful crisis in the region Analysis: Law of supply, demand is at the heart of energy shortage

Al Gibbs; The News Tribune

Steve Klein suggested the West Coast's energy crisis was akin to Martians landing at Tacoma's Cheney Stadium.

Mark Crisson pronounced himself "stunned" when he saw the potential financial impact on Tacoma Power's finances.

Tacoma's utility executives - Klein runs Tacoma Power, Crisson is utilities director - are not given to hyperbole.

But it's safe to say that every other power industry executive on the West Coast had about the same reaction as a deep power shortage and huge price spikes have taken the region into areas nobody had ever imagined.

Tacoma Power has proposed to double its revenues to pay for power over the next nine months with a surcharge that would increase residential bills by 86 percent.

San Diego residents have seen their power bills triple.

And two of California's biggest investor-owned utilities are facing bankruptcy and the possibility that they won't be able to keep the lights on. That's because power producers, fearing that they won't be paid, refuse to sell them electricity.

The path that brought utilities and their customers to this point contains a lot of seemingly unconnected forces and events, but at its heart is the immutable law of supply and demand.

It's Economics 101.

More than two years ago, the Bonneville Power Administration forecast a 3,000-megawatt shortage of electric generating capacity in the region; that is, there wouldn't be enough power to keep the lights on if several events - a major transmission line was knocked out, a couple of power stations were shut down for maintenance, an Arctic Express cold snap blew into the region - all hit at the same time.

The Northwest Power Planning Council this year said there was a one-in-four chance the region would suffer blackouts under those same circumstances.

The region, in effect, needed to build a lot more power plants.

Utilities were deregulated at the wholesale level and were facing deregulation at the retail level, however, and they wanted to stay away from the generating business, which has the most risk and lowest profit margins of any component of their business.

Independent power producers were even less interested in spending hundreds of millions of dollars to make a few pennies on each investment dollar.

So, little was done to begin construction of new plants, even though dozens had been sited and permits had been issued.

Only about 600 megawatts of new capacity will come on line from plants that should be completed in the next year or two.

The situation was the same, if slightly more threatening, in California.

Then came retail deregulation in California and the creation of a commodity market that proved to be dysfunctional at best.

Among other things, its market trading rules forced state utilities to buy power from it, but restricted advance contracts to just one day ahead of delivery.

Past practices of virtually all utilities had been to forge contracts to purchase power three to five years in the future - and that was the minimum.

Suddenly, traders who had power to sell were able to command high prices on a Friday, knowing that utilities would have to buy on an even more costly hourly market come Monday morning.

With short supplies and high demand, prices skyrocketed.

A year ago, a megawatt-hour of electricity cost $20 to $50. In late May, when high temperatures in California stretched that state's capacity to keep lights and air conditioners running, prices zoomed to $1,000 a megawatt-hour.

By the fall, prices had risen to $3,000 a megawatt-hour, even $5,000 at times. No utility executive had ever imagined such a thing.

But demand was high, supply was tight, prices shot up. That's how supply-and-demand commodity markets work.

There's a difference between electricity markets and other commodities, though.

It's called choice.

If the price of a commodity like pork bellies sails too high, consumers can choose to eat sausage with their eggs instead of bacon. Consumers can choose to not turn their air conditioners on, but it's pretty tough to turn the refrigerator off or wash clothes in the bathtub.

Residents in the Northwest can turn down their thermostats, but in winter, nobody expects to turn the heat completely off.

And manufacturing plants that use lots of power may close, as aluminum mills and paper plants have in this state.

The impact can spread even further.

Tacoma's Pioneer Chlor-Alkali makes chemicals that are used in petroleum refineries. It's one of the few plants on the West Coast that does.

If a refinery is forced to reduce production or even shut down because Pioneer can't produce enough chemicals, sooner or later jet fuel stops flowing to McChord Air Force Base or Sea-Tac Airport.

Much - but not necessarily all - of the Northwest region's energy heartburn will go away next Oct. 1 when new contracts for and access to the Bonneville Power Administration's far cheaper power kick in.

Tacoma Power's dependence on Bonneville will rise from about 10 percent of its load now to around 50 percent.

That will make Larry Landry a very happy man.

Landry is general manager of that Pioneer Chlor-Alkali plant.

"We're still struggling through," Landry said after he and other briefed Gov. Gary Locke on their problems. "Only 10 months to go."

Landry paused a moment.

"'Course, when I started saying that there was 15 months to go, and we're still hanging on."

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* Staff writer Al Gibbs covers regional energy issues. Reach him at 253-597-8650 or al.gibbs@mail.tribnet.com.

http://www.tribnet.com/frame.asp?/info/new.asp

-- Martin Thompson (mthom1927@aol.com), December 17, 2000