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Published Sunday, February 4, 2001

New plants won't solve energy crisis

California's power grid and transmission lines also must be upgraded to meet the state's rising energy needs, according to analyses

By Rick Jurgens TIMES STAFF WRITER

Even with new generation plants under construction and passage of a $10 billion plan to finance electricity purchases, California's "deregulated" energy market still is likely to be visited by power shortages and their familiar companions, rolling blackouts and higher prices.

That's because the state's power grid remains vulnerable to summer days that are too hot, winter nights that are too cold and weather patterns that deliver too little snow and rainfall to fill the reservoirs that supply water to Western hydroelectric plants. And California's network of transmission lines that move electrons from region to region also needs an expensive upgrade.

That's the view of the state's restructured electricity industry that emerges from studies by analysts, including some from the California Energy Commission, a state agency that monitors the energy markets and issues power plant permits. In the brave new world of electricity, problems defy obvious explanations -- too many computers, for example -- and easy solutions.

With the passage of a 1996 law, California set out to dismantle an electric industry legal framework first established in 1912, one in which regulated monopolies generated, transmitted and distributed power. The new system relies on private power generators to make profit-driven decisions about operations and whether to invest in new plants or upgrade existing ones.

Restructuring promised a more efficient, more innovative and less costly electricity system. But the promised benefits came with risks to the nation's most populous state and the world's sixth-largest economy. Already the changed system has threatened the budgets of residential users, raised operating costs for industry and chilled the state's business climate.

"Electric reliability in Western countries is the hallmark of the economy," said Doug Stevenson, a Boston consultant who worked in Ukraine in 1995 and 1996 as that country tried to upgrade its electricity system and end its reliance on the dangerous Chernobyl nuclear plant.

"When you lose reliability of electricity, you lose much more than a few minutes (of work) on your computer."

'Deep trouble' in summer

Things still look grim in the near term. "We are in deep trouble this summer," said Severin Borenstein, director of the Energy Institute at UC-Berkeley. Expected peak demands for electricity will be 50 percent higher than those that have recently pushed the state into daily Stage 3 alerts. In Stage 3 alerts, total generating capacity exceeds expected peak demand by less than 1.5 percent.

The Energy Commission expects there to be enough power for peak demands during the hot summer months, when air conditioners soak up electricity. The commission estimates that about 50,000 megawatts of generating capacity will be available to the California Independent System Operator's grid, while peak demand will be 47,000 megawatts to 50,000 megawatts, depending on the weather.

So far this winter, the weather gods have not been kind to West Coast electricity users dependent on the region's hydroelectric dams to help meet summer peak demands.

"The Columbia River Basin (is) snow-starved," said John Harrison, spokesman for Northwest Power Supply Council in Portland, Ore. "We are worried about having enough power to meet our own needs, let alone have a surplus" of power to send to California, he said.

Reservoirs are near the lowest levels in 60 years, and some of the stored water will be released to support the salmon and steelhead migrations, which begin in mid-April, he said.

Higher electricity prices and dry reservoirs in Oregon and other hydropower-reliant neighboring states that historically have exported power to California won't put them in a generous mood if power runs short, Borenstein said. "We are the ones who are going to eat the shortage," he said.

New generating capacity won't end the crunch right away. "California's energy crisis, absent mild summer and winter weather, likely will not go away until 2003," said Michael Schaal of Energy Venture Analysis in Arlington, Va.

But Karen Griffin, the Energy Commission's electricity analysis manager, said existing hydroelectric capacity should be available to meet peak demand on the summer's hottest days, as long as water is conserved by relying on other generators on non-peak days. Still, power will get to California only if generators and wholesalers sell it here, she said.

Market power

In 2000, rising prices sparked criticism of the new California markets, where wholesalers sell electricity to utilities. Generators and traders were accused of withholding electricity, using "market power" to force up prices.

Many observers saw evidence of such withholding in the loudly ringing cash registers of power suppliers to the ISO grid, where most California power flows. Total wholesale revenue for 2000 rose 276 percent, to $28 billion, from $7.4 billion in 1999 -- even as total consumption rose only 5 percent. Spot market prices reached $4,000 per megawatt/hour, far above the 1999 average price of $33..

An investigation by the Federal Energy Regulatory Commission, which oversees wholesale power markets, concluded that rising fuel and environmental costs, scarce supply, defective market rules and "some attempted exercise of market power" were all factors in summer price spikes. A follow-up study issued Friday found no evidence "inherently suggestive of a pattern of withholding" in November and December.

Borenstein said the market needs firm price caps to prevent future price surges. Such caps can be set high enough to avoid discouraging new investment, he said.

But a FERC staff report issued Friday said price caps would interfere with market operations and could be implemented only after "time-consuming and contentious" proceedings.

Supply and demand

Some observers say California's booming high technology economy caused the recent crisis. For example, Matthew White, a Stanford professor and utilities expert, said there was plenty of generating capacity as recently as 1996 and that the current crunch came after "dramatic and largely unanticipated growth in electricity demand."

But Energy Commission analysts say that electricity demand in the past year hasn't exceeded forecasts. "Current 'unexpected growth in energy use' from all sources was actually anticipated and foretold as long ago as 1988," a commission release said in December. Spokeswoman Claudia Chandler said that tracing the current crisis back to high tech users is an "urban myth."

In 2000, electricity consumption grew 4 percent, only about half of the 8 percent rate in 1984, which was the highest in the past 20 years, according to the Energy Commission. Industrial usage was up only 2 percent last year, half of the 4 percent increase in use by residential customers. The 2000 peak demand of 53,300 megawatts was below the 1998 peak of 54,700 megawatts and within the range of forecasts, the commission said.

Still, power plants weren't built to meet the growing demand. Only about 1,000 megawatts of additional capacity came on line in California in the past decade.

No single culprit holds the smoking gun of responsibility for the lack of investment in new generators. The state's sagging economy during the mid-1990s discouraged new investment. More popular scapegoats, especially for power developers and conservatives, include the state's strict environmental standards and a permit process that takes longer than that in other states.

But Borenstein said that since 1996, when the restructuring law passed, a bigger factor has been uncertainty about what rules would govern electricity competition.

At last, new power plants are coming. Including six plants already under construction, nine plants with 6,300 megawatts of new capacity have been approved and are scheduled to be on line by the end of 2003. Permit applications have been filed for another 12 plants with 7,600 megawatts, although that includes some upgrades of existing capacity.

Calpine Corp. of San Jose expects to open two new 500-megawatt plants, including the Los Medanos facility in Pittsburg, as early as the beginning of July, said Bill Highlander, a company spokesman.

The company remains "bullish" on California, where it eventually hopes to own at least 8,000 megawatts of generating capacity, although it would like to see the permit approval process shortened, he said.

All in all, the Energy Commission sees relief coming. "If 11 large power plants are put into service between 2001 and 2003, there would be more generation available than load growth requires over most of the ensuing decade," a February 2000 study concluded.

But commission analysts worry about a boom-and-bust cycle, in which high electricity prices attract surges of investment, then resulting excess capacity drives down prices and discourages any new investment.

"Future generation resource additions will not occur in a smooth, even pattern, but will more likely occur in a cyclical pattern, resulting in periods of excess and lean generation capacity," according to the February 2000 study.

But after years of stagnation, California's electricity developers don't see much near-term danger of overbuilding. All the approved capacity would increase in-state generating capacity by only 13 percent.

New power plants alone won't cure the state's electricity ills. Avoiding a power crisis in a restructured market will require investment in new transmission lines that can be used to send electricity throughout California and the West as demand rises and falls in different regions.

Limited capacity on the Path 15 line connecting Northern and Southern California has contributed to recent shortages here, and a 1996 outage on lines connecting California to the Northwest caused major problems. Public Utility Commission President Loretta Lynch estimated that new transmission lines will cost at least $1 billion in California, and she said it isn't clear where that money will come from.

Lower reserve margins

One likely side effect of restructuring is a long-term loss of operating reserves -- generating capacity that can be fired up when there are unexpected increases in demand or reductions in supply.

"Reserves will be lower in a competitive market as compared to a regulated market because of economic pressure to use resources more efficiently," the February 2000 Energy Commission study warned.

Reserves protect the power grid against damage that can occur almost instantly if total electricity load exceeds the power generated. A gradual increase in load beyond capacity causes a brownout that damages electric motors, such as refrigerators, and electronic equipment, such as computers, White said. A sudden loss of generation triggers circuit breakers throughout the grid, causing widespread blackouts that are costly and time-consuming to restore.

Chandler, the Energy Commission spokeswoman, noted that the cost of plants to provide reserves has historically been borne by ratepayers.

"With all the privatization of the generators, what entity will absorb the cost of this insurance policy?" she asked. As a regulated monopoly, the reserve margin -- the proportion of extra generating capacity available over peak demand -- in the California grid typically ranged from 15 to 20 percent, according to the Energy Commission. But commission analysts project that private investors will aim for a reserve margin of 7 percent.

Borenstein said the physical grid can be protected with reserve margins that low, but Schaal said a margin of as much as 18 to 20 percent might be needed to prevent price gouging.

"Declining reserve margins have opened the door, at least to some degree, to manipulation of the power markets," he said.

Restructuring payoff

Restructuring advocates promised a more efficient electricity system with lower costs. Maybe those promises will be kept, but not without some pain.

"Regulated investor-owned utilities in the United States have done a reasonable job of efficiently generating power, given their portfolio of generating assets," said Borenstein and James Bushnell, another UC-Berkeley professor, in a 2000 paper. "The prospects for short-run efficiency gains on the supply side of this industry are quite modest."

But the pre-restructuring utility rates reflected the costs of running expensive nuclear and alternate-fuel generating facilities built by utilities with the approval of state regulators. "What is 'broke' in this industry is the process that produced those poor investment decisions," said Borenstein and Bushnell.

And once the financial mess is cleared up and a functioning market system is put in place, a restructured electricity system could be made reliable, said Griffin of the Energy Commission: "Physically, it's a solvable problem."

Rick Jurgens covers economic developments and trends. Reach him at 925-943-8088 or at rjurgens@cctimes.com.

-- Swissrose (cellier@azstarnet.com), February 04, 2001