http://www.contracostatimes.com/partners/nf/summer_20010325.htm

Published Sunday, March 25, 2001

Experts predict summer outages -Some say conserving not enough

By Mike Taugher TIMES STAFF WRITER

For months, the brains guiding California's approach to resolving the state's energy crisis have been focused on getting through the summer. They now must be wondering if they will make it through the spring.

California was plunged deeper into crisis last week on a variety of fronts as authorities escalated their claims that hugely profitable power companies are largely to blame.

Two days of widespread rolling blackouts. Small generators shutting down because they have not been paid, and state legislators unable to agree on how to bring them back. Accusations that big generators have overcharged billions. State officials scrambling to protect a once-generous surplus that is hemorrhaging. The revelation that Gov. Gray Davis' efforts to secure long-term contracts for cheap electricity have so far fallen short of expectations.

All in all, one hell of a week.

And this is supposed to be the easy time of year.

The state's energy crisis is deepening. Positions are hardening, and the way out of this mess has never looked so difficult. But it is the coming summer months, when peak demand for electricity will be 50 percent higher than it is now, that is of greatest concern to policymakers and energy officials.

Most experts agree that there is a bona fide shortage of electricity; official state estimates are in the range of 5,000 to 7,000 megawatts in the summer, or enough to power 5 million to 7 million homes.The California Energy Commission says, however, that with strong conservation efforts and new power plants, blackouts can be averted.

Others are not so optimistic.

An influential East Coast energy consulting firm recently estimated the state will see 20 hours of outages in the coming months, but others fear it will be far worse. One industry representative said the number of blackouts would be in the dozens. And he said if high wholesale prices have shocked anyone, they could double again before summer is out.

"The prices are going to be more damaging than they are right now," said Gary Ackerman, director of the Western Power Trading Forum, an association of energy generators and traders. "I would say in the range of $500 to $600."

Consider this: A year ago one megawatt-hour was going for $30. Last summer, wholesale prices rose to nearly $150, and that was high enough to drive the state's two largest utilities to near-bankruptcy and force a state bailout. Today, as the state shells out $50 million a day to keep the lights on, prices are at about $300.

The reasons that experts give for the problems that California faces this summer are numerous and many are well-documented. No major new power plants built in a decade. A growing, technology-dependent population that is using more and more power. Drought in the Pacific Northwest. Growing Western states using the juice they used to sell to the Golden State. And now small generators are shutting down or threatening to sell out of state because they have not been paid.

But there is also growing evidence that many of the problems are caused by generators and traders unfairly taking advantage of a dysfunctional market, some analysts said.

"The other thing that makes this summer a little tenuous is last summer our experience with generators and traders timing the market to maximize their profit," said Claudia Chandler, spokeswoman for the California Energy Commission.

Because of mild weather last summer, the highest peak of demand for electricity was actually slightly less than it was in the summers of 1999 and 1998, when electric restructuring took effect.

And yet it was not until last year that the state's wholesale electricity market went haywire. In San Diego, the first part of the state where retail rates were deregulated, consumer bills doubled and in some cases tripled while the state's two largest utilities began their slide toward the brink of bankruptcy.

A growing number of experts now say generators and traders, beginning last summer, began exercising unfair influence over a market where the margin between supply and demand is razor thin. A dramatic example of how that influence is exercised would be where a power plant owner closes a unit to decrease supply and drive prices up high enough to make up for lost production with sales from other units. Earlier this month, federal regulators accused two companies of doing just that in Southern California during April and May of last year.

More common, experts say, is generators and traders offering for sale less than a full supply of electricity so that the state is thrown into a panic-buying situation to secure enough electricity to prevent blackouts.

"What they are doing is perfectly legal," Chandler said. "But what they are able to do is put just enough megawatts into the market to keep the prices high. "From the standpoint of supply and demand, there's enough supply in California to meet demand, assuming we get this new generation on line and increase energy efficiency," she added. "The unknown is whether the generators and traders are going to put electricity into the grid that is not being controlled by contracts. That's the unknown."

Industry representatives vehemently deny they are doing anything but producing all the electricity they can and putting it into the market. High prices and shortages, they say, are simply due to the tight margin between supply and demand, combined with the high cost of natural gas and pollution controls.

"In a market that's tight, if you have power chasing itself all over the western United States, you're going to have high prices," said Jan Smutny-Jones, director of the Independent Energy Producers Association. "We're getting tired of being the public policy piņata here."

Smutny-Jones and other energy officials say they are convinced they will be exonerated, and in the meantime they suggest investigating their activities could prove damaging. Blaming generators, he said, could lead generators to decide the political and regulatory atmospheres are too unstable.

"The supply that California needs to work its way out of this is not going to show up, or if it does show up, it will show up with a significant premium," Smutny-Jones said.

Still, accusations of unfair market practices escalated last week when the state's grid manager, the Independent System Operator, complained to federal regulators that generators and traders reaped $6.2 billion in excess profits.

Even the Federal Energy Regulatory Commission, which has been loathe to take a strong stance in California, has recently demanded that power companies refund tens of millions of dollars for prices the federal body says were excessive in December and January.

"I think the generators have gotten smarter about how to make money in the market," said Severin Borenstein, director of the University of California's Energy Institute. Borenstein is among those who believe generators are exercising market power. Although any given generator might own 5 percent or 6 percent of the state's generation capacity, when margins are so tight an individual company can spell the difference between keeping the lights on or forcing outages.

That gives those generators the power to force prices to go up artificially high, said Borenstein. But even some of the generators' harshest critics acknowledge that the problem is not confined to market behavior.

The shortage is real, experts say.

And drought in the Pacific Northwest is particularly worrisome, since Northern California relies heavily on hydroelectric dams in that region during the summer, and transmission constraints will make it difficult, if not impossible, to make up for that shortfall with power imports from the Southwest.

"Any time you have more rain in L.A. than in Seattle, you're going to have trouble," said Patrick Dorinson, a spokesman at the California Independent System Operator.

In response to worries about what the next several months will bring, the governor has launched an intense, multi-faceted plan designed to avert blackouts and prevent a financial catastrophe. Davis and other Californians also have urged federal regulators to cap wholesale prices before summer. But FERC commissioners and the Bush administration have been opposed to price caps, saying they don't work and would drive electricity out of the western market.

And to date, Davis' plans to minimize the damage this summer have not shown results. His drive to secure long-term contracts has so far come up short, and the keystone effort to buy the transmission lines of the utilities has stalled.

Still to be determined is the success of his efforts to bring more generation on line and encourage Californians to conserve electricity at unprecedented levels. Last year, San Diegans had the strongest incentive possible to conserve electricity. They were paying the real market cost of power, and that was doubling and in some cases tripling their electricity bills.

But San Diegans conserved only about 9 percent during that time, according to a source at the ISO. What's more, once lawmakers recapped their electric rates and removed their price incentive, customers of San Diego Gas & Electric immediately reverted to their old levels of electricity use, according to the ISO source.

Davis, meanwhile, is counting on Californians to heed his call for 10 percent voluntary reduction in usage with no price incentive at all, except that those who conserve an ambitious 20 percent during the entire summer will receive a rebate.

Borenstein said the ISO's information about San Diego's electricity use last summer is consistent with what he has seen, but he noted that the price incentive was not as clear as it might appear. As soon as electric bills soared, Borenstein said, politicians began agitating customers to not pay their bills.

So consumers never really thought they were going to be punished for high use. He thinks it would be good to raise rates because, he said, that will reduce consumption. "Rate increases, unfortunately, are not at all inevitable," he said. "We could pay for all of this through the state treasury."

Either way, he said, Californians will pay.

Mike Taugher covers the environment and energy. Reach him at 925-943-8324 or e-mail mtaugher@cctimes.com.

-- Swissrose (cellier3@mindspring.com), March 26, 2001