Calif Grid Operator Forecasts Steep Summer Pwr Shortfall Updated: Monday, April 16, 2001 03:51 PM ET By Jason Leopold

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--California will face a substantial shortage of electricity this summer, which could produce statewide rolling blackouts at any time through September, said Terry Winter, chief executive of the state's grid operator.

Winter, whose statements were culled from an ISO summer reliability report, said the shortfall will total nearly 3,700 megwatts when demand peaks at an estimated 50,303 megawatts beginning in June and will decrease to about 600 megawatts in September, when new generation is expected to come on line.

"We expect an electricity shortage of unprecedented proportions," Winter, CEO of the California Independent System Operator, said last week in testimony before the House Committee on Government Reform in Sacramento. "The forecast deficiency suggests that California will experience rotating blackouts for periods this summer."

Winter said the shortfall is due in part to limited imports from the Northwest, limited in-state hydropower, above normal temperatures and increased demand.

The shortage underscores the fact that California will spend billions of dollars this summer buying power in the volatile spot market to keep the lights on. Traders said electricity contracts for June have topped a record $500 a megawatt-hour at the California Arizona border, compared with about $60/MWh a year ago. Prices are expected to head even higher as evidence of scarcity mounts.

The state Department of Water Resources, the agency responsible for meeting California's wholesale power needs on behalf of its cash-strapped utilities, has attempted to cover its needs with forward contracts. A recent report to the DWR, however, said contracts already negotiated cover only one-third of the power the department is responsible for, forcing it to buy 40 million megawatt-hours in the spot market this year. Moreover, most of the contracts don't kick in until well after the critical summer months, leaving the state vulnerable to soaring spot market prices. The DWR hasn't released details on the amount of summer power it expects to purchase.

Last summer the ISO, playing a role much like that the DWR will play this summer, typically covered as much as 10,000 megawatts on the spot market during peak periods. Despite occasional heatwaves, however, average temperatures in California were below normal last year.

This summer, much of the Western U.S. will see warmer-than-normal temperatures, with the abnormal heat letting up by mid-fall in all areas except southern California, southern Nevada, Arizona and southwestern New Mexico, according to the latest 90-day forecast by the National Weather Service's Climate Prediction Center.

California is expected to issue at least $10 billion in bonds in June to spread out its power costs and repay about $4 billion in general-fund money the state has already spent on wholesale electricity.

Conservation Could Help, Exports Could Hurt

A number of factors could limit the state's shortfall this summer.

"There are several important points to consider that suggest the summer may be less bleak," Winter said. "We have not included conservation opportunities or the impacts of retail rate increases on consumption."

California Gov. Gray Davis has said conservation will be critical if the state is to avoid major outages this summer. Last week, he signed legislation that earmarks nearly $1 billion for conservation programs aimed at reducing demand by providing incentive for residents and businesses to use more energy friendly electrical equipment and appliances. He said he's aiming for an overall 10% savings in consumption.

The 3,700 megawatt shortfall could narrow if the state manages to attract developers to install peaking units - power plants that are used during tight demand periods - and eases air-quality standards that limit power plants' ability to operate, Winter said.

The shortage could also be more severe, Winter said. Existing contracts to export power from California will reduce the power available in the state.

"The forecast assumes that all of the electricity generated in the ISO control area will be sold to meet the needs of consumers in the ISO control area," Winter said. "This almost certainly will not be the case, as some portion of this summer's generation capacity has already been contracted to out-of-state buyers."

The financial woes surrounding PG&E Corp. (PCG, news, msgs) unit Pacific Gas & Electric and Edison International (EIX, news, msgs) unit Southern California Edison could also worsen shortages if generators aren't paid or continue to have credit concerns, Winter said. PG&E filed for bankruptcy protection two weeks ago.

For example, many of the state's qualifying facilities - independent power producers that contract directly with the state's three main utilities - have shut down because they are owed more than $1.5 billion for past power purchases.

Both utilities said they would pay the QFs on a forward basis, but have yet to address past power purchases. Some of the QF owners, who collectively supply the state with about a third of its power supply, have said they won't bring their units back on line unless past payments are made, said Jan Smutny-Jones, executive director of the Independent Energy Producers Association, which represents some of the gas-fired QFs.

"There are a number of scenarios that could mean the actual situation this summer will be worse than forecast," Winter said.

-By Jason Leopold, Dow Jones Newswires; 323-658-3874; jason.leopold@dowjones.com

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

Answers

"We expect an electricity shortage of unprecedented proportions."

That says it all.

-- Wellesley (wellesley@freeport.com), April 17, 2001.