California isn’t the only place bracing for electrical shocks

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Fair use for educational/research purposes only! California isn’t the only place bracing for electrical shocks Worries mounting about skyrocketing power prices By Rebecca Smith and John R. Emshwiller THE WALL STREET JOURNAL April 26 — From Manhattan to Montana, worries are mounting that a California-style electricity crisis could be on the way. The problem is rooted in the nation’s piecemeal, poorly thought-out utility-deregulation process, which planted time bombs that could continue to explode across the nation for years to come. Deregulation in the ’90s prodded many utilities to sell off power plants and then to sign long-term contracts to buy back the output. Now, those contracts are expiring. That will mean utilities are going to be buying electricity at much higher prices on the open market — at a time when ownership of power plants is increasingly concentrated in relatively few hands.

Another big problem: The transmission lines that carry electricity are growing old and overloaded. But in the chaotic world of deregulation, few have sufficient financial incentive to upgrade the lines. The result: In some parts of the country there may be no way to deliver enough power when and where it’s needed most. CURRENT AFFAIRS While the rest of the country is in better shape than California, some ominous clouds are already gathering. Supplies in several regions are tight. Prices are rising sharply, affecting not only consumers in the 24 states that have already been deregulated, but even some in states that haven’t. An ill-timed heat wave from Maine to Pennsylvania could plunge parts of the Northeast into a power crisis. The breakdown of a few big power plants in the West could reverberate through nearly a dozen states.

Whole chunks of the country, in other words, are balancing on “the knife’s edge” between scant sufficiency and outright shortage, says Douglas Logan, a principal at energy firm RDI Consulting in Boulder, Colo.

Concern about the power picture extends to the top levels of the Bush Administration as it attempts to hammer out a new national energy policy. A rash of supply and price problems is already breaking out in the upper Midwest, the Southeast and most of the region west of the Rockies. Almost everyone agrees that the most vulnerable area outside of California is New York City, where officials are scrambling to install emergency generators and put programs in place to reduce demand to forestall blackouts this summer.

Before deregulation, utilities owned the power plants and sold electricity to customers under heavy state regulation. In 1992, the federal government deregulated the wholesale power market and by 1996 states were throwing open their retail markets, as well. Old line utilities were pushed to sell their power plants and many ended up in the hands of a relatively small group of independent operators who were freed by deregulation from the traditional price controls and service obligations of the electric industry.

These producers use interstate transmission grids — still owned in a patchwork-fashion by the utilities — to sell their product to the highest bidder. The grids are vast collections of towers, electrical hardware and wires, both above and underground. One such grid serves 11 western states. Another serves the rest of the nation, with the exception of Texas, which maintains its own grid. FULL CIRCUIT Electricity can move long distances over each grid, allowing power-plant owners to seek out the best price for their product. If power is short and prices high in one spot, and electricity starts moving to that market, every other state on the grid can feel the effect, whether or not the state has deregulated its utility industry. So far, most consumers have been protected from the downside of the new marketplace. That’s because many utilities that sold their power plants as part of deregulation also entered into contracts, generally lasting three to 10 years, to buy back, at relatively low prices, the output of those facilities.

But those contracts are starting to expire this year. And as they do, many consumers may find themselves facing big price increases. Take Niagara Mohawk Holdings Corp., which serves a large area in upstate New York. Niagra Mohawk has been buying power from hydroelectric plants it owned for decades but sold in 1999 to Orion Power Holdings Inc. When the current contract expires in October, Niagara Mohawk will pay “substantially more” for a renewal, says Clem Nadeau, a vice president at the utility. Suppliers, he adds, are “unlikely to sell at below-market prices.” Orion says the price depends on how much hydroelectric power is available, but it expects prices to rise 16% to 33%

. A similar situation faces Montana Power Co., which sold its generating plants to PPL Corp. in 1999. As a condition of that sale, Montana Power got the right to buy back power at a low price. But the bargain ends in July 2002 along with a rate freeze for Montana consumers.

Montana Power recently reached an agreement with PPL on a new five-year contract that would supply about two-thirds of the utility’s needs at a price about 75% higher than the current level. The new PPL offer was also much lower than bids from other power suppliers. A Montana Power spokeswoman estimates that consumer rates could rise as much as 50% when the rate freeze ends.

Washington state hasn’t been deregulated, but its retail rates have already risen as much as 40% and are expected to climb further this summer. Because Washington is part of the same Western grid as California and nine other states, it is being forced to compete with its neighbors for scarce power. To make matters worse, a severe drought has sharply reduced output from the Northwest’s giant hydroelectric power system, which supplies much of the region’s electricity. In January, Washington Governor Gary Locke declared a statewide “energy supply alert” and put forth a package of measures aimed at increasing supply and reducing demand.

Deregulation was supposed to produce a very different result. Backers of the idea argued that injecting competition into the electrical business — the nation’s last great monopoly industry — would increase supply and drive down prices. BUILDING SPREE Part of the deregulation formula has worked as planned. Independent generators have embarked on a building spree, spurred in part by tight supplies and soaring prices in the Midwest and East Coast in the summer of 1998. From the beginning of last year to the end of next, additions of new capacity are expected to exceed the 85,000 megawatts that was added in the 1990s, according to a study by RDI, the Colorado consulting firm. In some regions — such as mid-Atlantic states Pennsylvania, New Jersey and Maryland — enough new capacity has come on line to help push prices down.

At the same time, the control of power plants is becoming more and more concentrated, according to the RDI study. This trend, predicted by many, has been welcomed by some as a way to put generating assets into the hands of the best operators. Others decry the concentration of ownership as an invitation to market manipulation. In California, for example, a debate is raging over what role half a dozen major power suppliers have played in that state’s woes.

Meanwhile, all the new power plants are taxing the networks of high-voltage power lines, towers and sub-stations that transport electrical power. In general, the networks are still owned by the utilities that built them, and the rate of return on them is regulated and modest, in the range of 9% to 12%. New power lines often attract local opposition. In Connecticut, for instance, residents have been fighting a new underwater line to Long Island, partly over fear about damage to local oyster beds. And with continuing uncertainty over who will eventually own the transmission grids under deregulation, the current utility owners have less incentive to make long-term investments.

Grid operators — which are increasingly quasi-public entities formed as part of deregulation — are being called upon to move power according to the dictates of daily energy auctions where offers by suppliers to sell power are matched with offers by utilities to purchase it for delivery to their retail customers. Once those deals are made, the grid operators have to send the power over the transmission network, trying to move the cheapest power first.

But given all the transactions, scheduling can be extremely complex. Since a given power line can only carry so much electricity at one time, trying to hew to the new economic priorities can cause physical bottlenecks if too much cheap electricity happens to be located in the wrong place.

“The grid is not keeping pace with the needs of the market,” says William Massey, a member of the Federal Energy Regulatory Commission, or FERC, which helps oversee the electricity business. Nor is there much prospect of significant upgrading or expansion of the grid in the next five years, says Tim Gallagher, manager of technical services for the North American Electric Reliability Council, a utility industry group that deals with transmission issues.

The result: numerous transmission logjams — with some of the most troublesome in Missouri, Nebraska, California, New York, Wisconsin and Minnesota — that obstruct power flows. Inadequate line capacity between Minnesota and Wisconsin, for instance, prevents inexpensive power from making its way to Chicago from other parts of the Midwest.

In New York’s Hudson River Valley, PG&E Corp. is building a 1,080 megawatt power plant. Its output is badly needed farther south in New York City. PG&E purposely located the plant to avoid a major congestion point to the north, where several power plants move power over the same transmission lines.

It now appears that on the hottest summer days, the facility will be able to operate at about 70% of capacity, though, because the transmission system will be clogged carrying power from other plants. “The reality is that transmission, under summer stress, can’t handle all the power we could put out,” says Steve Wolfgram, a vice president for the PG&E unit building the plant, which is scheduled to begin operating in about two years.

New York City already displays some of the early warning signs observed in California in the spring of 2000. New York needs to bring in power from other parts of the state since city generating plants can satisfy less than 80% of the need. But the transmission system serving New York City could become fully loaded before enough power arrives. New York’s grid operator estimates that this summer demand could outstrip supply by as much as 9%, raising the specter of blackouts. SPIKING PRICES Price increases are looming, as well. Consolidated Edison sold most of its power plants and, like California utilities, failed to lock in multi-year contracts with suppliers to protect its customers against rising wholesale prices. Under New York law, Con Ed can pass wholesale electricity price increases through to consumers. Last summer, a spike in wholesale prices briefly pushed ConEd electric rates up 43%. Con Ed Chairman Gene McGrath says electric prices this summer are expected to jump “about the same.” Con Ed “took the position, ‘We’re the milkman. We’re just the delivery guy. They set the prices at the dairy,’ ” says Gerry Norlander, executive director of the Public Utility Law Project in New York, a consumer group.

Mr. McGrath says he used the milkman analogy to make a point. “Our role has changed” since deregulation, he says. He adds that the utility doesn’t want to tie up all of its power needs under long-term contracts because “there would be no competitive market left.”

New Yorkers are scrambling for a quick power fix. Like California politicians, Mayor Rudolph Giuliani has been demanding lower price caps by federal regulators on the cost of wholesale power. State officials are trying to rapidly add 11 small power plants, owned by the state power authority, around the city and on Long Island. Residents and businesses, angry about the disruption, noise and possible environmental impact from the facilities, have gone to court to try to stop the projects. Those cases are still pending. ‘HARNESSING MICE’ Entrepreneur Bill Conway is taking another tack. He spends his days poking around basements and rooftops of Manhattan skyscrapers, looking for backup emergency generators that could supply whole buildings with power, relieving Con Ed of having to supply them with juice at critical times. His business, as he sees it, is “harnessing mice.”

Mr. Conway, co-founder of MetroGen Enterprises LLC, is working with the state’s grid operator, trying to enlist building owners who will be paid for shifting to their own diesel-powered generators. Mr. Conway, a former utility attorney, figures that if he can line up enough mini power plants, he can help “the lights stay on” in the Big

Clearly more could be done. Many New York City consumers still aren’t getting the kind of price information that would help them conserve energy. Bronx resident Paul Birnbaum, for instance, has seen his monthly rent climb to $738 from $619 over the past eighteen months, with energy costs cited as the main reason. Mr. Birnbaum doesn’t even know how much electricity he uses a month, though, since the building has only one meter for all its units. He has petitioned his building manager to install a meter for each apartment.

As things stand, Mr. Birnbaum says, “in the summer, I have no incentive to turn my air conditioning down.”

Copyright © 2001 Dow Jones & Company, Inc.

http://www.msnbc.com/news/564698.asp



-- Martin Thompson (mthom1927@aol.com), April 26, 2001

Answers

Response to California isnÂ’t the only place bracing for electrical shocks

Dick Mill's "medium case scenario" for the effects of the Y2K Computer Bugs on the electrical grid is correct: The grid didn't collapse at the stroke of midnight, and the grid is still able to perform its basic function. BUT: Bottlenecks and scarcities are emerging, and it is hardly "business as usual".

And the chain reaction, with the "sound" of dominoes falling, has just begun.

-- Robert Riggs (rxr.999@worldnet.att.net), April 26, 2001.


Response to California isnÂ’t the only place bracing for electrical shocks

Beyond the Hype: likely Y2K Impacts on
the U.S. Electricity Service

Power engineer and Y2K analyst Dick Mills
makes the following predictions regarding the
availability in the United States of electrical
power in the year 2000:

  1. Prepare for blackouts in the first days of January
    2000, lasting up to 72 hours.
  2. Prepare for shortages of power in the warm summer
    months of 2000.

Mills predicts that carefully regulated power
shortages eventually affecting most U.S electricity
customers is much more likely in the year 2000 than
uncontrolled localized power blackouts.
The
odds of power shortages are particularly high during
the summer of 2000, especially if the summer is hot
in most areas of the United States. Power shortages
result when power generation "margins" dip below
0%. Margins of 15-30% are standard for the industry
in the United States, meaning that generation capacity
is usually 15-30% larger than demand.

-- spider (spider0@usa.net), April 26, 2001.


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