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Saturday March 17 8:24 AM ET Calif. Power Grid Purchase Questionable

By Nigel Hunt

LOS ANGELES (Reuters) - California, willing to spend billions of dollars to take control of the power grid as a step toward ending its energy crisis, is buying a rickety system itself in desperate need of costly upgrades, industry analysts warn.

Most of the system is 40 to 50 years old and needs to be upgraded or replaced to support soaring demand for electricity from California's expanding economy and growing population.

``It (the state's power grid) could be a very significant part of the problem this summer,'' said Severin Borenstein, Director of the University of California Energy Institute.

Calif. Gov. Gray Davis last month announced a tentative accord with Southern California Edison (SoCal Edison) to buy its transmission lines for an estimated $2.76 billion.

He is still in talks with two other utilities, Pacific Gas & Electric (PG&E) and San Diego Gas & Electric, to buy their high voltage lines as part of an emergency plan to avoid a blackouts like the ones that struck California for two days in January.

Many expect far more widespread blackouts this summer when air conditioning pushes electricity demand to its annual peak.

Borenstein said buying transmission lines was a key step in tackling the state's chronic power shortage largely because of its impact on the financial health of the utilities.

The financial woes of Edison International (NYSE:EIX - news) unit Southern California Edison and PG&E Corp (NYSE:PCG - news) subsidiary Pacific Gas and Electric have cut deeply into their payments to some independent energy generators.

Non-payment has prompted some suppliers to halt sales of much-needed energy from their in-state plants, Borenstein said.

But Borenstein warned it was not clear whether state ownership would resolve the problems that have dogged the transmission grid following California's disastrous 1996 deregulation law.

Under deregulation, the state's investor-owned utilities sold off most of their power plants, leading to much wider ownership of generating facilities that, in turn, created more winners and losers behind every effort to update the grid.

``There is a political fight over every transmission upgrade,'' he said.

The worst transmission bottleneck -- Path 15 -- is a cluster of high-voltage power lines through the Central Valley that shuttles power between the southern and northern halves of the state.

The January blackouts were confined to Northern California because Path 15 could not carry enough of Southern California's surplus electrons to the northern end of the state.

The Power Grid

California is seeking to buy the utilities' transmission assets, a vast network of high voltage lines carrying electrons from power plants to substations where the voltage is reduced to safer, more manageable levels and fed into neighborhood distribution lines.

Ownership and maintenance of the distribution assets would remain with the utilities.

PG&E owns about 19,000 miles (30,580 km) of transmission lines, Southern California Edison has about 12,000 miles (19,310 km) and Sempra Energy (NYSE:SRE - news) unit San Diego Gas & Electric about 1,800 miles (2,897 km).

In comparison, PG&E's distribution system totals 112,000 miles (180,200 km) of lines, SoCal Edison's has 88,000 miles (141,600 km) and San Diego Gas & Electric's is 19,000 miles (30,580 km).

Karl Stahlkopf, vice president of power delivery at the Electric Power Research Institute, said the California transmission grid was probably ``no better and no worse'' than grids serving other parts of the country.

``It is a little newer than the east coast (grid),'' he said.

Stahlkopf noted the transmission system can be upgraded by either running new lines or boosting capacity on existing ones.

The former option has traditionally been a slow, arduous process, often lasting many years amid prolonged fights with local residents over rights of way.

EPRI's Stahlkopf said, however, new technology has made it possible to step up capacity on existing lines.

``It is possible to significantly upgrade capacity by 30 to 40 percent,'' he said.

Semiconductor-based technology can make lines more stable, allowing increased power to flow through them, while a video based device can cut the risk that as they heat up and sag the lines will come into contact with a tree and short circuit.

Return On Investment

Experts said the main reason the lines were not upgraded long ago stems from a poor return on investment, typically limited by regulators to 9.0 to 9.5 percent.

``They (the upgrades) have to compete with other company projects for capital which often have a 15 to 18 percent return on investment,'' Stahlkopf said.

State ownership would change the dynamics of such decision making, possibly making upgrades more likely.

Meanwhile, a debate is brewing over whether returns from California's own multibillion dollar investment in the grid will be controlled by federal regulators, whose jurisdiction traditionally only extends to investor-owned utilities.

Borenstein, however, said federal regulators appear to believe they will retain jurisdiction over the assets.

This could thwart state plans to use its ownership of power lines to help control generators, who Davis has accused of exploiting the energy crisis to gouge the market.

``I don't think it really puts them in a better position to deal with the market,'' Borenstein said.

http://dailynews.yahoo.com/htx/nm/20010317/bs/utilities_california_dc_2.html

-- Martin Thompson (mthom1927@aol.com), March 17, 2001