Interruptions in power: A dark side of business

01/29/01

BY DAVID RESS STAR-LEDGER STAFF

TIPTON, Calif. -- Joe Pinheiro stepped into his barn, grabbed the bright blue, golf-ball-sized knob on top of the storage tank valve, shoved it to the left, and dumped 1,500 gallons of milk down the drain -- all because the lights were out someplace else.

As rolling blackouts swept through Northern California over the past week-and-a-half, the local creamery had lost its power.

Dumping milk was just one manifestation of an energy system in crisis and another sign, to people like Pinheiro, that California's experiment of letting people shop for electricity has been a bust.

"The cows have to be milked. If we don't, they get sick, they go dry," he said. "What are we going to do? If the creamery stops, the tanker trucks don't come. I got no choice."

Letting people shop for electricity was supposed to cut power bills in California -- and in New Jersey, which opened up its electricity market a year after California did.

The idea was that companies with power plants would compete with one another to sell people electricity. But generating companies upped their prices for power eightfold. The managers of California's electrical system have to scramble hour by hour to find enough electricity, paying top dollar. Sometimes, they can't buy enough. Then, the lights go out.

Part of what's going wrong, some economists say, is that everyone forgot markets have two sides: sellers and buyers.

And when prices bounce on the power market, most buyers can't do anything in response.

"You won't know you've bought $1,000-a-megawatt-hour electricity until you get your bill at the end of the month," said Frank Wolak, an economist at Stanford University.

If you don't know the price of something until after you've bought it, that makes it hard to do what economic theory says you should: respond to a high price by cutting your demand.

And that, some economists and energy experts say, means the electricity market will always be a seller's market.

In California, as the sellers marked up prices, the buyers kept on buying -- with the exception of about 1,200 big power users, including many of the dairy plants of Tulare County.

In exchange for a 15 percent discount, the big consumers agreed to accept up to 100 hours of forced power cuts a year. Until this month, that was more a threat than a fact. Then they ran though the 100 hours in 22 days.

When the power went out at the Land O' Lakes creamery in Tulare, it could not unload its refrigerated tanker trucks. That means the trucks couldn't make the second of their two daily runs to Tulare and Kings County dairy farms, including Pinheiro's. For Pinheiro, who has built a 2,500-cow dairy since he emigrated from Portugal in 1949, that means a lot of milk -- more than 9,000 gallons a day -- and no place to put it.

Most customers, though, don't pay as much attention to their power needs as the Tulare dairy plants.

If it weren't for the financial crisis faced by California's utilities -- they're paying billions more for electricity than they're charging -- consumers wouldn't notice any changes to their bills.

That's because people in California and New Jersey are protected by rate caps, for now.

Once the caps come off -- in 2003 in New Jersey -- consumers' bills will track the wholesale market.

In California, the gap between high wholesale prices and the capped rate of 6.5 cents utilities are allowed to charge has drained billions of dollars from Pacific Gas & Electric and Southern California Edison. The state is letting the utilities boost rates by up to 15 percent and is spending hundreds of millions of taxpayer funds to keep electricity flowing. One sign of what's to come: after San Diego Gas & Electric's rate cap ended last year, customers' bills doubled.

When New Jersey's rate caps come off, Morristown-based GPU, which serves 1 million people in western New Jersey and the Jersey Shore, will be allowed to boost rates to recoup any money it lost while the caps were in effect. In its latest financial report with the Securities and Exchange Commission, it reported those costs exceeded $199 million.

Newark-based Public Service Electric & Gas, which serves 2 million people in a territory stretching from Bergen County to the Philadelphia suburbs, won't be able to recoup such expenses, because it has a long-term contract to buy power from an affiliated company, PSEG Power, at 3.5 cents a kilowatt. That's about 2 cents less than current wholesale market prices.

PSEG Power executive vice president Tom Smith thinks electricity prices may come down when the cap comes off, because so many new power plants are on the drawing boards.

At Kraft Foods' cottage cheese and sour cream plant in Visalia, Calif., and its cheese factory just down Highway 99 in Tulare, everyone lost track of the blackouts this month, said spokeswoman Cathy Pernu.

"All I can say is we were interrupted repeatedly, sometimes back to back," she said. Normally, power is cut for no more than six hours, but this month's outages stretched for hours longer.

Kraft and other customers with the interruption contracts get 30 minutes' notice of a power cut.

"We have to keep people there, in case it's only for an hour or two. It gets pretty dark in there, with just emergency lighting usually, we bring everyone to the meeting rooms for training," Pernu said.

The cuts don't mean all the lights go off. Kraft has to keep the power on to keep the milk in its stockpile from spoiling. But it does it at a cost. While interruptible power customers get a 15 percent discount on rates, they must pay 100 times the normal rate for any power they use during an interruption, like the electricity for Kraft's milk refrigerators.

"I can say there's active discussion about not doing this again," Pernu said.

Cutting back on power can have a huge impact.

"If you've got 10 million customers, and each one turns off one 100-watt light bulb, that's 1,000 megawatts," said Kellan Fluckiger, chief operating officer of the California Independent System Operator, which runs the state's electric system.

That's enough electricity to power about 1 million homes, and it's been roughly the amount of power Fluckiger and his colleagues have had to scramble to find every day, to keep northern and central California from going dark.

Californians have been cooperating. Homeowners are turning down thermostats; San Francisco International Airport shut down a huge air conditioning unit, while the city of Walnut Creek doused every other streetlight along busy Ygnacio Boulevard.

But he thinks a lot more is needed. "In the long run, we've got to do something about demand-side management," he said. "We're going to have to think about lifestyle changes."

Few people seem very interested, said Jan Brown, owner of the Urban Forest candle shop, in the island town of Alameda, just outside of Oakland.

"You have to wonder," she added. "I see people leave their computers on all day. I flew into town last night and there were all these warehouses and parking lots lit up. It seems like we've been wasting so much, we've gotten spoiled."

David Ress covers energy. He may be reached at dress@starledger.com or (973) 392-1965.

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-- Martin Thompson (mthom1927@aol.com), January 29, 2001