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California Power Crisis Could Cripple Country

Fri February 02, 2001 - National Edition
Pete Sigmund

The impact of the California power crisis could have nationwide ramifications since the state is a linchpin in the nation’s economy. The state’s power crisis, including rolling blackouts, and possible financial meltdown of utility companies, has been caused in large part by the failure to speed construction of new generating plants, according to industry experts interviewed by Construction Equipment Guide.

“The biggest problem is not enough generating capacity,” Douglas M. Logan, principal of Financial Times Energy/RDI Consulting in Boulder, CO, told CEG.

“It seems that the entire California [power industry] restructuring effort overlooked new power plants, which are the fundamental condition of a competitive price market. The seriousness of these delays hadn’t become apparent. In contrast, Texas has built a lot of new power plants because its regulatory environment has been favorable to new construction.”

Logan added that enough new generating plants had been in the pipeline to prevent the crisis but that “the pipeline has been pinched by regulatory problems, so that there’s not enough capacity.” He said that, while California could possibly have a slight surplus of generating capacity in 2002, “This will not be as much as expected and will be short-lived because demand will grow; it seems more likely that, if there is a slight surplus, it will be later, in 2003.” The California Energy Commission likewise said the state wouldn’t have enough capacity to meet peak capacity in summer until 2003.

Logan warned that some other power areas, including New York City, Massachusetts, Connecticut, and some states in the West also may experience power crises if current power plant construction projects fall behind.

“I would say it’s a potential crisis; it depends on how other states react to the situation in California,” he told CEG. “The lesson for other states from California is that there are dire consequences because of postponing construction of new power plants. More than 60 percent of capacity under construction has a scheduled on-line date of June. If significant slippage occurs due to construction delays, there would be more potential shortages in some regions, including Massachusetts, Connecticut, and particularly New York City, which needs to build more peaking capacity because of transmission constraints.”

How did the crisis happen, and where will it lead? These questions are so critical to the United States that they are high on the priority list of President George W. Bush.

When California deregulated its power industry under a law passed in 1996, investor-owned utilities like Pacific Gas & Electric Co. (PG&E) and Southern California Edison Co. (SCE) were forced to sell most of their generating plants. They now purchase electricity, through the California Power Exchange, from independent power producers, from other states like Oregon, Washington, Nevada, Arizona and New Mexico, or even unregulated subsidiaries that they formerly owned.

Deregulation, which some critics have called a “Frankenstein-like experiment,” allowed wholesale “wheeling” of electricity, encouraging market forces in order to lower rates for consumers. It took place when there was a surplus of capacity which has been gradually dissipated by rising demand as California’s population has grown (more than four million since 1990) and its economy has soared, led by a boom in technology.

The increasing need for more power has led to a boom in construction of new power plants nationwide. In California, however, new power plants haven’t come on-line as early as needed because of siting and permitting issues. Over the past decade, no major electric plant has been built in California, due in part to intense environmental and community opposition, and also because of the uncertainty about the effects of deregulation.

The California Energy Commission Web site lists 12 power facility projects as licensing cases that it is currently considering. At least nine generating plants, adding 6,723 megawatts of electricity, are now being built in Yuba City and other locations; 22 more are in the regulatory pipeline but none of these are on-line. Meanwhile, existing plants approach obsolescence amid increasing outages for maintenance.

The power generation shortage, plus high natural gas prices, has pushed up the cost of power. About half the power plants in California, and a quarter nationwide, are fueled by natural gas.

“It’s just basic Economics 101, the larger the demand and shorter the supply the higher the price,” observed Logan.

California is the world’s sixth-largest economy. Economists said a continuing power crisis, with sporadic power interruptions of 90 days or longer, could cut about one-half of one percent from the nation’s gross domestic product.

Recognizing potential national repercussions, federal, state and utility officials considered rescue efforts in emergency meetings in Washington, D.C., eyeing a new industry restructuring which might set the future price as low as 5.5 cents per kilowatt-hour, which California would pay to producers under five-year contracts and then turn over to utilities for distribution.

Exacerbating the problem, severe winter storms with high tides have lashed the California coast, reducing output of a key facility, the Diablo Canyon nuclear power plant in San Luis Obispo, by 80 percent. And the power capacity of Oregon and Washington, which supply much of California’s needs, has been hampered by a continuing hydroelectric shortage from lower reservoirs because of dry, cold weather.

The California Independent System Operator (ISO), which handles most of the state’s power grid, at first declared a Stage Two power alert, meaning it had a power reserve of 5 percent or less, and then a Stage Three alert, meaning it has less than 1.5 percent reserve.

Under its deregulation, California utilities can only charge retail customers a maximum rate cap set by the state but there are no limits on what they have to pay to suppliers. The wholesale prices that they pay have jumped tenfold and are running from $200 to $800 per megawatt/hour. The utilities aren’t allowed to pass on the full market rate to customers until March 2002.

Utilities have reportedly been charging consumers about 64 cents per megawatt-hour. The state did allow the utilities to raise prices 7 to 15 percent, but only as an emergency measure for a period of 90 days.

As they pay soaring wholesale prices for electricity, the utilities are falling deeper into debt, losing an estimated $12 billion thus far, defaulting on millions of dollars in payments, warning of impending bankruptcy, and laying off many workers. Credit rating agencies have downgraded their bonds to below investment grade, or into the status of junk bonds.

Meanwhile power producers such as Duke Energy Corp., Charlotte, NC, which owns four power generation plants in California, Reliant Energy, Houston, TX, and Dynegy, Inc., enjoy the fruits of rising wholesale prices. Stocks of these companies, which often act as intermediaries in supplying power, and of those who provide alternative forms of energy, have risen as PG&E’s and Edison’s have fallen.

The power crisis, focused on the central and northern half of California, has wounded the state’s economy, which affects the U.S. economy, and therefore threatens construction. Hundreds of thousands of homes were without power in rolling blackouts (controlled reductions) which the utilities were forced to impose. Most of the initial power generation shortages were concentrated around San Francisco Bay and Silicon Valley, impacting everyone from steel manufacturers to dairy farms and breweries.

Blackouts have cost industries at least $1.7-billion in lost wages, sales and productivity just in one week ending Jan. 20, according to one estimate.

Valero Energy Corp., which produces about 10 percent of California’s gasoline, has been unable to ship fuel to parts of the state because the power losses shut down pipelines.

California Steel Industries Inc., Fontana, the West Coast’s largest steel plant, told workers to stay home for a day, possibly longer. Some automatic teller machines and even traffic lights stopped working in San Francisco.

Internet networking centers in Silicon Valley were particularly at risk because they use much more energy. Many have used backup power in this area, where transmission is hindered by a limited number of available lines.

After two days of rolling blackouts on Jan. 17 and 18, Gov. Gray Davis signed emergency legislation allocating $400 million in state funds to buy power for use by the utilities, who missed $800 million in payments during the week. The state funds are enough for about one week of power. Davis has proposed using $1 billion of the state’s $5 billion surplus to help the utilities stave off bankruptcy. The emergency program reportedly costs California as much as $600,000 an hour.

The State Assembly approved a bill to replace the ISO board with a three-member panel, appointed by the governor, with no ties to the electricity industry.

The U.S. Department of Energy has used federal emergency power for several weeks, forcing all generating companies to sell electricity to the struggling utilities despite their own problems. (Normally states in the Northwest borrow from California in the winter cold weather, and provide it in the summer for California’s air conditioning needs.) The Federal Energy Regulatory Commission has initially refused, however, to impose a cap on wholesale prices of power in the West, and President Bush is not expected to pressure the commission to do so.

Rate increases on businesses and consumers also are now expected, with businesses bearing the brunt.

Logan told CEG that the situation in California “could be a temporary crisis.”

“Three factors, singly or in combination, could extend it,” he added. “These factors are further delays in permitting of new power plants; delays in building new power plants in the West, particularly Arizona, Oregon, and Washington; and a continuing hydro shortage in the Northwest. Power plants are getting built in Arizona, for instance, but there is always a risk that Arizona might limit construction of plants to serve Southern California.”

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