Why don't we have enough power?

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Why don't we have enough power? Filed: 12/18/2000

By VIC POLLARD

Californian Sacramento Bureau

e-mail: vpollard@bakersfield.com

Irma Gomez and her family are willing to switch off lamps and appliances they don't really need when officials warn that California is on the brink of rolling blackouts because of the electricity shortage.

But the outdoor Christmas lights at their Bakersfield home are something else.

They go on at dark.

The Gomez family is typical of millions of Californians who find it hard to understand why the state that sends unmanned missions to Mars no longer has enough electricity to welcome Santa Claus properly.

"The whole shortage thing, I'm not sure how much of it is made up by the companies," Gomez said.

She and other consumers are not alone in trying to find someone to blame for the current unprecedented wintertime energy crisis.

As the state's broken electrical supply system teeters on the brink of holiday season blackouts, everyone from Gov. Gray Davis on down is pointing fingers at someone or some segment of the energy industry as the culprit.

What none of them are doing, however, is proposing a solution that promises an end to the crisis any time soon with a minimum of cost and inconvenience to consumers.

"I believe we will be in this kind of crunch probably through the summer of 2002," said Kellan Fluckiger, chief operating officer for the Independent System Operator, the agency that oversees the flow of power throughout the state. "We have a serious situation that is ongoing."

It is a situation that promises not only periodic blackouts but skyrocketing electricity bills for most consumers before enough new power plants can come on line in 2003 to ease the shortage.

Not even a sweeping overhaul of the state's electricity market ordered Friday by the Federal Energy Regulatory Commission caused Fluckiger to shorten his estimate of the crisis.

Promises of cheaper power

How did California get itself into this mess?

Different people have different answers to that question, but it is clear that the problem began with the deregulation of the state's electricity industry under a law passed by the Legislature in 1996.

The wave of support for deregulation that began in the 1980s with industries like transportation, savings and loan, and telecommunications washed up on the electrical industry in the mid-1990s.

California had a special reason for joining the deregulation bandwagon. Its electricity prices were at least 30 percent higher than those in most of the rest of the nation. Electrical rates took a large share of the blame for making it hard to compete for new industries and causing the state to be so slow in recovering from the recession of the early 1990s.

Under the system at that time, 75 percent of California's electricity consumers were served entirely by three major investor-owned utility companies — Pacific Gas and Electric, Southern California Edison and San Diego Gas and Electric. The remaining 25 percent were, and still are, served by municipal utilities owned by local governments or special districts in Los Angeles, Riverside, Sacramento and other areas.

With strong support from Republican Gov. Pete Wilson, the state Public Utilities Commission in 1995 held hearings and drafted a deregulation proposal.

But utilities and big industrial electricity consumers were skeptical of a plan implemented by a regulatory agency, which could be changed with the election of a new governor.

As a result, the Democratic-controlled Legislature in 1996 began a marathon series of hearings and studies on what lawmakers agreed was the most complicated public policy issue they had ever dealt with.

The chief architect of the final legislative product was State Sen. Steve Peace, D-San Diego, widely regarded as one of the smartest members of the Legislature, if one of its quirkiest.

The result was a complete overhaul of the way electricity is supplied to homes and businesses.

Until deregulation went into full effect in 1998, most of the electricity used in California was generated by power plants owned by the utility companies.

Each of the companies had a government-granted monopoly to be the sole provider of electrical power in designated areas of the state. In exchange, the state Public Utilities Commission exercised tight control over the retail rates that could be charged to consumers.

This is the classic example of the regulated monopoly, which has been used in a number of industries in which officials believed consumers benefited by having one provider of goods or services.

It would cost consumers more money, the reasoning went, to have two or three utilities stringing separate wires — or water lines or television cables, to use other examples — throughout every city in order to compete with each other .

The theory behind deregulation was that consumers would benefit from lower prices if electrical generating plants were owned by a number of different companies and they all competed to sell electricity directly to businesses and homes or to the utilities.

That was easy to say, but not so easy to put into practice.

It required forcing the utilities to sell most of their power plants to a new class of entrepreneurs.

But the utilities insisted that deregulation wouldn't work economically unless rate payers were required to pay off the debts the utilities had incurred for nuclear power plants that cost far more than expected and other bad investments, referred to as "stranded costs."

The plan

The solution devised in negotiations among lawmakers, utilities and other groups was to retain a vestige of regulation for a time. It was in the form of a cap on the prices utilities could charge consumers for power — a somewhat higher price than the electricity would cost them.

The utilities were allowed to apply the difference between their power costs and the rates they were getting from customers to pay off their stranded costs.

That was almost certain to increase consumer costs right away, creating another problem for policy makers and electrical industry officials, who kept assuring the public that deregulation would bring down the cost of electricity through competition.

To sweeten the appeal to voters, lawmakers devised a plan to initially roll back the rates by 10 percent for the 27 million people served by the three big utilities. As compensation, the utilities were allowed to borrow $7 billion by issuing bonds. Those bonds are now being paid off by rate payers, making the real savings to consumers only about 3 percent.

The utilities retained their monopoly on the network of power lines that distribute electricity throughout the state, but they were required to transmit power generated by independent producers and sold directly to consumers.

The temporary rate cap imposed on the utilities was scheduled to be removed when they had paid off all their stranded costs. They could then charge consumers any price dictated by the market.

To make the market work, lawmakers created two new institutions.

One was the Power Exchange, which conducts a kind of computerized auction each day, with buyers and sellers making offers and bids on power to be delivered the next day or the next hour.

The other is the Independent System Operator, which monitors demand and supply throughout the state's entire power grid and makes last-minute purchases if necessary when utilities don't have enough power to keep the lights on. The Independent System Operator is what stands between California and power shortages that would require rolling blackouts.

The system worked well, by most accounts, through 1998 and 1999.

Failure exposed

But it's flaws were exposed in dramatic fashion early last summer when customers of the smallest of the three major utilities, San Diego Gas and Electric, saw their bills suddenly skyrocket, in some cases doubling and tripling. Some small businesses had to close down because they couldn't afford their electric bills.

What happened was that the San Diego utility was the first of the three to pay off its stranded costs and have its rate cap lifted. At the same time, the rapidly growing demand for electricity in California began to outstrip supply and the prices for natural gas, used for most electricity generation, went through the roof.

The shortage was partly due to the booming economy, especially in the electricity-dependent high-tech industry, and partly due to a number of power plants in California and nearby states that were taken off line for major repairs or maintenance.

San Diego Gas and Electric was forced to pay unprecedented prices for power in the Power Exchange market, and it passed those costs along to consumers.

Gov. Gray Davis and the Legislature responded by imposing a new temporary price cap for San Diego consumers, but that only masked a symptom of what was rapidly becoming an economic disaster, with potential blackouts threatening a possible public health and safety debacle.

PG&E and Southern California Edison were also paying the same high costs for power that San Diego was, but their price caps remained in place because they have not yet paid off their stranded costs.

The shortage eased somewhat in the fall, but returned with a vengeance this month for a variety of reasons, such as cold weather in the Northwest, where California buys much of its power, and a lack of rainfall to run hydroelectric plants.

All three utilities are currently borrowing money to buy power, which is stretching their credit to the limit, and causing worry about one or more of them going bankrupt.

The financial agencies have downgraded PG&E's credit rating. At one point last week, Northwest utilities refused to continue selling power to one or more California utilities on credit.

PG&E spokesman Ron Low said, "The cost that we've incurred to buy power for our customers since the beginning of last summer is $4.6 billion and it's growing at the rate of $1 million an hour. That shows you how dysfunctional and how broken the system is."

Few people mince words in describing how messed up the system is.

"It's the most costly public policy blunder ever made in California," said Mindy Spath, spokeswoman for the consumer group Toward Utility Rate Normalization.

"This is a crime for which nobody has yet been punished," said Harvey Rosenfield, director of another consumer and taxpayer advocacy group.

Even Gov. Davis has become irate at what he says are "pirate generators and power brokers who are gouging California consumers and businesses."

Whether the policy makers should have foreseen the problems when they deregulated the industry is a matter of often emotional debate. Many critics and even some fellow lawmakers blame Peace, the main author. Peace insists no one could have foreseen the shortage. He seldom returns calls from reporters now, and has made a video that exonerates himself and other architects of the legislation.

Indeed, few people raised objections to the legislation when it passed both houses of the Legislature without a dissenting vote, not even Rosenfield and other consumer advocates.

More power plants needed

What went wrong and what needs to be done to fix it?

Everyone agrees that the basic problem is a lack of enough generating plants to supply the rapidly growing demand. For a variety of reasons, few new plants were built in California over the last decade or more.

Regulators and power plant owners are scrambling to build plants as fast as they can — at least six are proposed or already under construction here in Kern County — but it will take two to three years to bring enough of them on line to ease the shortage.

In the meantime, there is widespread disagreement over what needs to be done.

The federal energy agency on Friday ordered changes in various aspects of the market, from imposing a "soft" cap on prices — above which generators would have to justify them on the basis of costs — to letting the major utilities keep the power they produce in their remaining generating plants, rather than being required to sell it.

But Davis said that would do very little to stem the high prices being charged by power generators.

Davis wants a system of firm caps on prices charged by generators.

Davis and key lawmakers also are demanding investigations into what they call gouging and price-fixing by generators, including the timing of repairs that have taken several major power plants out of production. Others are also calling for re-regulation of at least some of the California power market.

Some economists, such as Severin Borenstein of the University of California, say some consumer pain is inevitable, but a combination of conservation measures and a speedup in building new plants will minimize the suffering.

"There's blame enough to go around," said State Sen. Charles Poochigian, R-Fresno, who voted for deregulation in 1996.

"I believe that the free market system beats the alternatives," he added. "On the other hand, mistakes were obviously made in our efforts to get there."

http://www.bakersfield.com/oil/Story/259723p-244103c.html

-- Martin Thompson (mthom1927@aol.com), December 18, 2000


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