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California Electrical System Is on the Verge of Failure by Alex Berenson New York Times - August 3, 2000

Four years after it led the nation into a sweeping deregulation of the electric industry, California is at the brink of a breakdown in its power supply.

Yesterday, as a heat wave caused electric demand to soar across the West, the nation's most populous state nearly ran out of power for the third straight day. To reduce the strain on California's electric grid, regulators ordered utilities to curtail supplies to big commercial users that have agreed to cut their electric consumption in times of shortage.

Still, the state was on the verge of imposing rolling blackouts of homes and businesses. That step has been taken only eight times around the country in the last 17 years, usually because of extreme weather or power plant failures, says the North American Electric Reliability Council, which supervises the Canadian and American power grid.

What disturbs California utility executives and regulators is that this week's crisis has come even though none of the state's power plants or transmission lines have failed and temperatures around the state have been high but hardly extraordinary.

In the last decade, demand for power surged along with the California economy. But utilities, fearing they would be unable to recover their costs as the state moved away from regulations that guaranteed them profits, stopped building power plants, leaving the state's power supply simply no longer able to keep up with peak demand, they warn.

California's electric industry has reached the "ragged edge" of failure, said Robert D. Glynn Jr., the chairman and chief executive of the PG&E Corporation, whose Pacific Gas & Electric unit delivers electricity to more than 13 million people in Northern California. "There's just barely enough supply to go around."

So far this summer, the California Independent System Operator, a non-profit state-chartered agency that manages the electric grid, has scrounged enough power each day to meet demand. So the lights have stayed on, except for a blackout in San Francisco in June related more to local transmission problems than the statewide shortage.

But with supplies exceptionally tight, the wholesale price of power has soared in the state. That has caused electric bills in San Diego, where the retail price of power now fluctuates directly with the wholesale market, to more than double, stirring consumer anger and calls for the industry to be reregulated.

The supply of electricity is also tight in New York State and New England, which have had spot shortages this year. Nationally, power reserves have steadily decreased since 1992, with the electric industry in the midst of a transition from a network of local monopolies with fixed prices and guaranteed profits to a competitive marketplace with prices set by supply and demand.

But a surge in plant construction -- in response to soaring market prices and projections of growing demand -- seems likely to ensure that supplies and reserves will begin to increase next year in most of the nation.

"The system is tight around the country, but there's been an enormous supply response," said Jeffrey K. Skilling, president of Enron, the Houston company that is the world's leading trader of electricity and natural gas. "In the next year or two, in most parts of the country, there will be surplus capacity."

Mr. Skilling said he believed the market would provide the reliable power supply once assured by regulatory fiat, with higher prices encouraging both construction of plants and conservation by users.

In the early 1990's, with deregulation looming and Southern California stuck in a recession, utilities stopped building new plants; none have been built in the state for more than a decade.

California's economy has surged in the last five years, a boom led by Internet and high-technology companies, which are voracious power users. And growth is even more vigorous in the Pacific Northwest, Arizona and Nevada, making it harder for California to import the power on which it has relied.

The California Energy Commission, a state agency that licenses new power plants and predicts the state's energy demand, says California has a 10 percent reserve margin for this summer's expected peak electric demand, assuming all plants and transmission lines are working perfectly.

But plants and transmission lines often run at less than their theoretical capacity.

As a result, the state's reserve power margin has already fallen below 5 percent a half-dozen times on hot days this summer, prompting the Independent System Operator to declare a Stage 2 alert and begin cutting power to big customers like the state's big aerospace companies, that agree in advance in exchange for lower rates. On Tuesday, the tightest day this summer, the reserve margin fell to 3 percent at 3:30 p.m.

The state's reserve has remained above the critical 1.5 percent margin that would trigger a Stage 3 alert, in which the Independent System Operator orders utilities to begin rotating blackouts. How long the blackouts would last would depend on how much demand needed to be curtailed, said Ron Low, a spokesman for PG&E.

Mr. Low said the utility would try to keep blackouts to less than two hours. As a general rule, utilities try to avoid cutting power to essential public services like hospitals and police departments, and attempt to give warnings of any blackouts to people with medical needs that could be affected by a loss of electricity.

In the control room of the Independent System Operator, in a heavily secured building in Folsom, about 30 miles northeast of Sacramento, the atmosphere was businesslike yesterday as two dozen operators tapped at their workstations, regulating the flow of power around the state. Above giant computer screens on the walls of the room, a digital readout displayed the total megawatts being consumed on the grid from moment to moment. It hovered above 42,000 megawatts, just below yesterday's peak of 43,500.

But the apparent calm was misleading, said Terry Winter, the agency's president and chief executive. Mr. Winter said the state's supply crisis has caused generators to defer needed maintenance, increasing the chances that a plant would fail -- which could plunge the grid into chaos.

California's supply crisis will not ease anytime soon, says the California Energy Commission, the state agency that licenses new plants. Four new plants are under construction in the state, with two expected to be online by the end of next summer. Several more plants are in development.

But with peak electric demand predicted to rise at least 2 percent next year, the energy commission is predicting the situation will worsen before it improves.

"The squeaking gets tighter in 2001," said Daniel Nix, deputy director for energy information.

If next summer is even slightly hotter than normal, he added, "there is a good chance we would have inadequate resources."

Already, wholesale power prices have shot up in California this summer.

At the California Power Exchange, a nonprofit, state chartered company where utilities and power producers trade most of the state's electricity, prices this summer have regularly spiked above 40 cents per kilowatt-hour, more than 10 times normal.

Most power customers remain insulated from the price roller coaster. With retail rates fixed by regulators, the state's two biggest utilities, PG&E and Southern California Edison, which serves 11 million people in the Los Angeles area, have absorbed the summer price spikes, expecting to make up the difference when the wholesale price drops this fall.

But in just two years, California plans to deregulate retail prices for PG&E and Edison customers. And in San Diego, where retail prices have already been freed to match market rates, a doubling of electric bills this summer has prompted some politicians and consumer groups to call for price caps or reregulation of the industry.

John Bryson, chairman of Edison's parent company, Edison International, said that consumers and small businesses might never be ready for fully deregulated power prices. Electricity is such a vital part of modern life that most customers "are not going to order their lives and shouldn't be asked to order their lives looking at the meters all the time," Mr. Bryson said.

State Senator Steve Peace, an architect of deregulation who is calling for new controls on the industry, said tight price caps were necessary in the short run because electric generators had too much power to set prices. Producers "shouldn't be able to extort whatever price they can get at any moment," said Mr. Peace, a San Diego Democrat.

On Tuesday, the Independent System Operator, under pressure from Senator Peace and Gov. Gray Davis, voted to cut in half, to $250 per megawatt, the maximum price it can charge utilities for power purchased from the agency's pool.

But some experts warn that fiddling with a partly deregulated market can have unintended consequences. Because the agency's market has price caps, utilities in the state have leaned on it to meet demand, trimming their purchases from the much larger pool run by the Power Exchange, which has no price caps.

As a result, the agency's engineers have had to make a daily scramble for thousands of megawatts -- increasing the chance of a system collapse, said Camden Collins, who quit the agency's board last month to protest the caps.

"Manipulating the wholesale market, in my opinion, threatens the reliability of the entire western region," Ms. Collins wrote in a memorandum that accompanied her resignation.

Yesterday, Governor Davis asked the state's attorney general to investigate whether the wholesale market was being manipulated.

Other experts warn that price caps will discourage power generators from building the plants that California needs.

"We've started down this path of creating markets for this electricity, and if we stop, we'll be in the worst of all possible worlds," said Eric Hirst, a utility consultant in Oak Ridge, Tenn.

Meanwhile, with the threat of blackouts rising along with the temperature, there are shorter term fixes in the works.

In San Francisco, PG&E has asked regulators for permission to place a floating power station in San Francisco Bay with enough generating capacity to power 95,000 homes. Some environmental groups have posed objections to the plan; a decision by regulators is expected by the time the barge arrives in the bay next week.

If the station is rejected, PG&E has a Plan B for preventing power failures, the company's chief executive, Mr. Glynn, said, "Everyone will pray that the weather doesn't become extreme."