Why doesn't California have enough power?

greenspun.com : LUSENET : Unk's Wild Wild West : One Thread

http://www.bakersfield.com/oil/Story/259723p-244103c.html

Why don't we have enough power?

Filed: 12/18/2000

By VIC POLLARD

Californian Sacramento Bureau

e-mail: vpollard@bakersfield.com

Irma Gomez and her family are willing to switch off lamps and appliances they don't really need when officials warn that California is on the brink of rolling blackouts because of the electricity shortage.

But the outdoor Christmas lights at their Bakersfield home are something else.

They go on at dark.

The Gomez family is typical of millions of Californians who find it hard to understand why the state that sends unmanned missions to Mars no longer has enough electricity to welcome Santa Claus properly.

"The whole shortage thing, I'm not sure how much of it is made up by the companies," Gomez said.

She and other consumers are not alone in trying to find someone to blame for the current unprecedented wintertime energy crisis.

As the state's broken electrical supply system teeters on the brink of holiday season blackouts, everyone from Gov. Gray Davis on down is pointing fingers at someone or some segment of the energy industry as the culprit.

What none of them are doing, however, is proposing a solution that promises an end to the crisis any time soon with a minimum of cost and inconvenience to consumers.

"I believe we will be in this kind of crunch probably through the summer of 2002," said Kellan Fluckiger, chief operating officer for the Independent System Operator, the agency that oversees the flow of power throughout the state. "We have a serious situation that is ongoing."

It is a situation that promises not only periodic blackouts but skyrocketing electricity bills for most consumers before enough new power plants can come on line in 2003 to ease the shortage.

Not even a sweeping overhaul of the state's electricity market ordered Friday by the Federal Energy Regulatory Commission caused Fluckiger to shorten his estimate of the crisis.

Promises of cheaper power

How did California get itself into this mess?

Different people have different answers to that question, but it is clear that the problem began with the deregulation of the state's electricity industry under a law passed by the Legislature in 1996.

The wave of support for deregulation that began in the 1980s with industries like transportation, savings and loan, and telecommunications washed up on the electrical industry in the mid-1990s.

California had a special reason for joining the deregulation bandwagon. Its electricity prices were at least 30 percent higher than those in most of the rest of the nation. Electrical rates took a large share of the blame for making it hard to compete for new industries and causing the state to be so slow in recovering from the recession of the early 1990s.

Under the system at that time, 75 percent of California's electricity consumers were served entirely by three major investor-owned utility companies — Pacific Gas and Electric, Southern California Edison and San Diego Gas and Electric. The remaining 25 percent were, and still are, served by municipal utilities owned by local governments or special districts in Los Angeles, Riverside, Sacramento and other areas.

With strong support from Republican Gov. Pete Wilson, the state Public Utilities Commission in 1995 held hearings and drafted a deregulation proposal.

But utilities and big industrial electricity consumers were skeptical of a plan implemented by a regulatory agency, which could be changed with the election of a new governor.

As a result, the Democratic-controlled Legislature in 1996 began a marathon series of hearings and studies on what lawmakers agreed was the most complicated public policy issue they had ever dealt with.

The chief architect of the final legislative product was State Sen. Steve Peace, D-San Diego, widely regarded as one of the smartest members of the Legislature, if one of its quirkiest.

The result was a complete overhaul of the way electricity is supplied to homes and businesses.

Until deregulation went into full effect in 1998, most of the electricity used in California was generated by power plants owned by the utility companies.

Each of the companies had a government-granted monopoly to be the sole provider of electrical power in designated areas of the state. In exchange, the state Public Utilities Commission exercised tight control over the retail rates that could be charged to consumers.

This is the classic example of the regulated monopoly, which has been used in a number of industries in which officials believed consumers benefited by having one provider of goods or services.

It would cost consumers more money, the reasoning went, to have two or three utilities stringing separate wires -- or water lines or television cables, to use other examples -- throughout every city in order to compete with each other.

The theory behind deregulation was that consumers would benefit from lower prices if electrical generating plants were owned by a number of different companies and they all competed to sell electricity directly to businesses and homes or to the utilities.

That was easy to say, but not so easy to put into practice.

It required forcing the utilities to sell most of their power plants to a new class of entrepreneurs.

But the utilities insisted that deregulation wouldn't work economically unless rate payers were required to pay off the debts the utilities had incurred for nuclear power plants that cost far more than expected and other bad investments, referred to as "stranded costs."

The plan

The solution devised in negotiations among lawmakers, utilities and other groups was to retain a vestige of regulation for a time. It was in the form of a cap on the prices utilities could charge consumers for power -- a somewhat higher price than the electricity would cost them.

The utilities were allowed to apply the difference between their power costs and the rates they were getting from customers to pay off their stranded costs.

That was almost certain to increase consumer costs right away, creating another problem for policy makers and electrical industry officials, who kept assuring the public that deregulation would bring down the cost of electricity through competition.

To sweeten the appeal to voters, lawmakers devised a plan to initially roll back the rates by 10 percent for the 27 million people served by the three big utilities. As compensation, the utilities were allowed to borrow $7 billion by issuing bonds. Those bonds are now being paid off by rate payers, making the real savings to consumers only about 3 percent.

The utilities retained their monopoly on the network of power lines that distribute electricity throughout the state, but they were required to transmit power generated by independent producers and sold directly to consumers.

The temporary rate cap imposed on the utilities was scheduled to be removed when they had paid off all their stranded costs. They could then charge consumers any price dictated by the market.

To make the market work, lawmakers created two new institutions.

One was the Power Exchange, which conducts a kind of computerized auction each day, with buyers and sellers making offers and bids on power to be delivered the next day or the next hour.

The other is the Independent System Operator, which monitors demand and supply throughout the state's entire power grid and makes last-minute purchases if necessary when utilities don't have enough power to keep the lights on. The Independent System Operator is what stands between California and power shortages that would require rolling blackouts.

The system worked well, by most accounts, through 1998 and 1999.

Failure exposed

But it's flaws were exposed in dramatic fashion early last summer when customers of the smallest of the three major utilities, San Diego Gas and Electric, saw their bills suddenly skyrocket, in some cases doubling and tripling. Some small businesses had to close down because they couldn't afford their electric bills.

What happened was that the San Diego utility was the first of the three to pay off its stranded costs and have its rate cap lifted. At the same time, the rapidly growing demand for electricity in California began to outstrip supply and the prices for natural gas, used for most electricity generation, went through the roof.

The shortage was partly due to the booming economy, especially in the electricity-dependent high-tech industry, and partly due to a number of power plants in California and nearby states that were taken off line for major repairs or maintenance.

San Diego Gas and Electric was forced to pay unprecedented prices for power in the Power Exchange market, and it passed those costs along to consumers.

Gov. Gray Davis and the Legislature responded by imposing a new temporary price cap for San Diego consumers, but that only masked a symptom of what was rapidly becoming an economic disaster, with potential blackouts threatening a possible public health and safety debacle.

PG&E and Southern California Edison were also paying the same high costs for power that San Diego was, but their price caps remained in place because they have not yet paid off their stranded costs.

The shortage eased somewhat in the fall, but returned with a vengeance this month for a variety of reasons, such as cold weather in the Northwest, where California buys much of its power, and a lack of rainfall to run hydroelectric plants.

All three utilities are currently borrowing money to buy power, which is stretching their credit to the limit, and causing worry about one or more of them going bankrupt.

The financial agencies have downgraded PG&E's credit rating. At one point last week, Northwest utilities refused to continue selling power to one or more California utilities on credit.

PG&E spokesman Ron Low said, "The cost that we've incurred to buy power for our customers since the beginning of last summer is $4.6 billion and it's growing at the rate of $1 million an hour. That shows you how dysfunctional and how broken the system is."

Few people mince words in describing how messed up the system is.

"It's the most costly public policy blunder ever made in California," said Mindy Spath, spokeswoman for the consumer group Toward Utility Rate Normalization.

"This is a crime for which nobody has yet been punished," said Harvey Rosenfield, director of another consumer and taxpayer advocacy group.

Even Gov. Davis has become irate at what he says are "pirate generators and power brokers who are gouging California consumers and businesses."

Whether the policy makers should have foreseen the problems when they deregulated the industry is a matter of often emotional debate. Many critics and even some fellow lawmakers blame Peace, the main author. Peace insists no one could have foreseen the shortage. He seldom returns calls from reporters now, and has made a video that exonerates himself and other architects of the legislation.

Indeed, few people raised objections to the legislation when it passed both houses of the Legislature without a dissenting vote, not even Rosenfield and other consumer advocates.

More power plants needed

What went wrong and what needs to be done to fix it?

Everyone agrees that the basic problem is a lack of enough generating plants to supply the rapidly growing demand. For a variety of reasons, few new plants were built in California over the last decade or more.

Regulators and power plant owners are scrambling to build plants as fast as they can -- at least six are proposed or already under construction here in Kern County -- but it will take two to three years to bring enough of them on line to ease the shortage.

In the meantime, there is widespread disagreement over what needs to be done.

The federal energy agency on Friday ordered changes in various aspects of the market, from imposing a "soft" cap on prices -- above which generators would have to justify them on the basis of costs -- to letting the major utilities keep the power they produce in their remaining generating plants, rather than being required to sell it.

But Davis said that would do very little to stem the high prices being charged by power generators.

Davis wants a system of firm caps on prices charged by generators.

Davis and key lawmakers also are demanding investigations into what they call gouging and price-fixing by generators, including the timing of repairs that have taken several major power plants out of production. Others are also calling for re-regulation of at least some of the California power market.

Some economists, such as Severin Borenstein of the University of California, say some consumer pain is inevitable, but a combination of conservation measures and a speedup in building new plants will minimize the suffering.

"There's blame enough to go around," said State Sen. Charles Poochigian, R-Fresno, who voted for deregulation in 1996.

"I believe that the free market system beats the alternatives," he added. "On the other hand, mistakes were obviously made in our efforts to get there."



-- (in@energy.news), December 18, 2000

Answers

Or perhaps there is another reason. The following is Reposted from John Daly's site, and also open for discussion at Global Warming.

What Happens When You Run Out of Emissions Credits? (16 Dec 2000)

The `Competitive Enterprise Institute' reports in their latest economic report that California electricity shortages became much worse this week. High demand and cold weather combined with supply problems to threaten the state's power grid with massive blackouts. For over a decade, environmentalists have persuaded regulators to prevent the construction of any large power plants.

The problem has been made more severe by the fact that up to one third of the state's generating capacity has been shut down in recent days. Not all of these shutdowns are due to breakdowns or needed maintenance. Some plants were forced to shut down because they ran out of state `emissions credits'.

A December 9 article in the Washington Post noted that, "About 17 power generation plants - which together produce about 2,500 megawatts of electricity, enough to power 2.5 million homes - were idle because they had reached their pollution limits."

The Oakland Tribune (December 8, 2000), explained that, "The units not operating Thursday were under repair or had exhausted their annual allotment for emissions under air pollution standards, imposed on industries of all types by regional air quality management boards, according to government and industry officials."

Once this news became public, regulators quickly declared an emergency' and allowed the closed utilities to resume production. The next day the Tribune (December 9, 2000) reported, "More than half the electricity generation plants shut down because they reached annual air pollution limits were back in operation... easing the unexpected pre-winter supply crises."

As expected, environmental groups decried the hasty arrangements as a sacrifice of environmental protections. Companies still holding emissions credits may also complain that the value of those credits have been reduced by this action.

If this is the result of imposing an emission credits regime in only one U.S. state, the problems which would arise from a similar regime operated internationally would be magnified a thousand-fold. The California experience will weigh heavily on the minds of Bush administration negotiators when the next climate conference convenes, expected to be in Bonn, Germany during the middle of next year.

-- Malcolm Taylor (taylorm@es.co.nz), December 18, 2000.


They predicted this problem way back in the fall of 1999.

They called it Y2K or something like that......

-- ... (...@...com), December 18, 2000.


next up: planes falling from the sky

-- (im@getting.sleepy), December 18, 2000.

http://www.heraldnet.com/Stories/00/12/17/13270205.cfm

Published: Sunday, December 17, 2000

Who's to blame for power rate rise?

Snohomish PUD chief answers that and other questions

Herald staff

Herald writer Kathy Day talked extensively last week with Paul Elias, general manager of the Snohomish County PUD, about the crisis that prompted the district to raise electricity rates 33 percent for residential customers and more for commercial and industrial users.

Here are some of his answers:

Q How did we get into this situation?

A We had anticipated a rate hike in the next year and had planned to use our rate stabilization fund to offset the impact of the increase that we were looking at over the next few years, probably 4, 5 and 3 percent for three years. What happened was that the run-up in wholesale power costs in November and December consumed pretty much all of that money, so we don't have that buffer to put into the rate increase next year.

All of the circumstances came together in "The Perfect Storm" analogy. At this time of year, we're usually getting a lot of generation from California, and California is not providing that. I think they have about 33,000 megawatt hours of generation, and about 11,000 is off for maintenance or air quality (reasons). The point is that they just don't have the generation to send us. ...(Secretary of Energy Bill) Richardson ordered power sent to California, and people should see that as a very big problem. We have low rainfall so far, so the facilities we depend on for generating power, like our Jackson plant, aren't producing as much. Fundamentally, the supply is very thin, so especially with the run-up and at a time when demand is high, I think there's a certain amount of hysteria in the prices.

We find ourselves counting on prices in our rate proposals, but they're not going to come down so far as they were before. They will be higher, but as part of our current rate strategy, we're counting on them coming down.

Q Who's to blame? Is it deregulation?

A I guess it's because the wholesale market is in disarray. You have to point to what's going on in California, how that's really distorted the market.

One of my big concerns is that before deregulation, utilities always had an obligation to serve. While they tried to help adjust or improve economics, sometimes they had to do uneconomic things. ...You have to buy that last megawatt hour; you always had to do that no matter what the cost.

Prior to deregulation, particularly in California, utilities were vertically integrated. They had generation, transmission and distribution that were all coordinated. At the end, they always knew they'd have enough generation. Now they've broken the model up and California utilities have sold off about 50 percent of their generation -- and, I hear, are planning to get rid of it all. They've sold to merchant generators who run their plants to make money, to optimize their shareholders' investments. They don't have an obligation to serve.

Q Is there a solution?

A We've written to James Hoecker, chairman of the Federal Energy Regulatory Commission, to President Clinton and to President-elect Bush, saying that wholesale rates should be cost-based. Those prices need to reflect the cost of producing the electricity.

We also need to consider adding generation as well as renewables and conservation.

Q Is deregulation dead?

A It's working in some areas. In Pennsylvania, for example, they have a mechanism that controls a run-up in prices. It's a more cooperative effort between the utilities and the generators. Nobody really wins when prices run up. We will see significant restrictions on the producers as a result of what's happened.

Q Is deregulation on the horizon in Washington?

A I think it's off the table. My guess is that they've looked at California and decided not to try it.

Q Is there any way to predict how long the current situation will last?

A (Laugh) No.

One of my concerns is we know we need resources. We know we've had to rerate Bonneville (Power Administration) for the (protection of the) fisheries, so we've lost some there. When we began to think we might have a supply problem in the past few weeks and began to prepare for that, one of my concerns, knowing that we need additional resources, was not to be to appear to be crying wolf.

The worst thing that could happen is that we'd get through the winter without big problems and everybody would say, "Well, we thought you had this big crisis." ... We have to be careful about how we give the message about the need for creating new generation. It's not a question of building somewhere else. We need it in Washington ... we need it someplace in the greater Puget Sound area.

Q What are options for new sources in Washington? What's viable?

A We'll have some wind stuff that's starting to come up that's looking pretty economic. With the rise in prices on conventional generation, it's starting to look better. As you get closer to their production costs, it gets more economic. It's valuable and it's a resource, but it only happens when the wind blows.

Generation of choice today is gas-fired, combined-cycle combustion turbines. With rising natural gas prices, what'll happen is you manage your gas supply portfolio in some way. Does it isolate you from swings in the market? No, but it does isolate you from panic run- ups.

Q Are old sources new again?

A On solar and so forth, the changes are to the plus side as they get more economic. ... Unless there's some sort of technology we don't know about, nuclear power is dead. ... There's money in the budget for next year to look at fuel cells and see how they are applicable to use, partly to understand them.

Q Has the Northwest been spoiled by low rates and become complacent?

A I guess my answer would be no, because we've had people conserve. We've had tremendous results from our conservation programs. ... There is some economic incentive. Why would you conserve if you have low rates? ... I don't think people waste energy. I think they're very respectful.

Q If people are already conserving, what can they do to lessen the impact of this rate hike?

A All of us, when we're not watching, get a little lax about rules, which rooms we heat, turning off lights. I know I've started looking at the house again, saying, "We don't really need to heat this room. We don't use it very much." Be after the kids, turn off the lights, cut the long showers.

Q Where does the PUD buy its power and why does it have to buy outside of Bonneville Power Administration?

A: Currently, we buy about half from Bonneville and the other -- about 40 percent -- is under long-term contracts. We get our own generation from Jackson (hydroelectric plant) and some from Kimberly- Clark. We have some market exposure for buying energy. We try and close our future positions. We're closed out for January; we're covered at a reasonable price, compared to today's rates.

The problem is how do you do longer-term planning on what historically you expected to have. As you get closer, you're buying to close that position in any one month. You look at the weather and, typically, our risk management calls for us to be no more than 25 megawatts short and 50 megawatts long in the same month. So you get to that month, you're in that month and you get a weather report like we did (two weeks ago) that it's going to be abnormally cold, and that puts you out of what you had and into the market, and the market is spiking, so we found ourselves buying in that market. It could just turn the other way and be unseasonably warm. We'd have been long and selling. You're talking 25 or 50 megawatts on 1,100 megawatts (average usage at this time of year).

If you're selling now, you would sell at market rates. That's it, fundamentally, up until November, particularly through the summer. We were selling; we were buying. Essentially, we were in balance.

Q: Where does the district buy power?

A: Avista, Portland General Electric - those are the two long-term contracts. We buy from Chelan or Grant PUDs, lots of people.

Q What can the district do to plan for the future?

A Short term, we can control our costs. We've done a good job. Our costs break down as two-thirds wholesale power and about one-third actual operating expenses. We've been driving operations down and for the next five years have plans to continue to drive that down. That takes some rate pressure away from customers. We also have to balance that with our liabilities and debts.

We need to be very good about watching the market. We're going to get to (our new Bonneville contract) in October. That will afford some market protection, at least as we understand it today. ... To get to Bonneville, the road's going to be bumpy over the next nine months until we get there. When we get there, it will be less bumpy, more predictable.

Long term, it goes back to what the commission decided when they decided to go with Bonneville. ... we are going to continue to have some exposure to the market. How do we best mitigate that? Do we enter into long-term contracts, hedges, whatever you want to call it? It will take the fluctuation out that we're experiencing. We won't be actively in the market, but we'll still be there.

We need to continue to press conservation ... look at building resources. There's a lot of interest in building resources today. Perhaps we need to find a partner in some sort of resource development. We need to look at other alternatives, like possible additional transmission. Are there resources available in Canada or someplace like that? I don't know, but we need to leave no stone unturned in looking out how to mitigate our exposure to the market.

Q Is there anything you would you like to say to customers?

A How do you tell the customers we're trying to do a very good job here? As a public entity -- they own it -- the reason we're more successful in terms of the market is that we don't have any margins. Well, that's not quite true, but it's so close to being true ... we do try and collect a little money to buffer rates and so we're not deciding where the break's going to be next month. At times, we have a little more money that's collected and that's turned back to customers. We act in their best interests.

-- (in@energy.news), December 18, 2000.


California has plenty of power. The corporations are just playing games to get the price up higher, just like they did with oil.

-- Not a conspiracy (just@plain.greed), December 19, 2000.


I don't think anyone has called this a 'conspiracy,' which is what it would be if it was the result of corporate game playing in California.

It isn't limited to just California or to the West Coast. Parts of Canada are having problems, too.

Alberta: Cold snap puts heat on power use

http://www.greenspun.com/bboard/q-and-a-fetch- msg.tcl?msg_id=004GFL

-- More (than@just.California), December 19, 2000.


Moderation questions? read the FAQ