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Forces Converge to Jolt Power Supplies by Bert Caldwell The Spokesman Review - December 17, 2000

Deregulation in California collides with dwindling generating capacity across the West

Fans of "The Perfect Storm" well know the climactic scene:

The fishing boat "Andrea Gail," caught in an unholy trinity of weather systems, backflips on the face of a mountainous wave and sinks with all aboard.

The forces that have swept up West Coast electricity markets are analogous to that tempest, say regional officials.

Low temperatures and stream flows, combined with an ill-considered deregulation scheme in California, have sucked the Northwest into a vortex of high prices and shortages not experienced since at least the 1930s.

Friday, the Federal Energy Regulatory Commission issued orders that may calm the waters, but most consumers in the Inland Northwest will open an electricity bill that reflects, in part, the storm's passage.

The fury crested last week.

For four days, regional power system managers maintained a warning that only close cooperation among themselves and concerted conservation efforts by consumers would avert electricity shortages that could lead to blackouts.

Conditions in California were worse. Alerts of shortages were issued every day for almost two weeks, with blackouts a real possibility on at least two days.

With demand so high and supplies so short, the wholesale price of a kilowatt-hour of electricity traded between utilities rocketed to $5. Most retail consumers in the Northwest pay about 5 cents.

For now.

Although the crisis eased by week's end, the relief may be short-lived. Winter, after all, does not start until Thursday.

Officials remember deep cold that overwhelmed the region in February 1989 and shiver.

John Harrison, spokesman for the Northwest Power Planning Commission, said the region's ability to withstand a similar blast is unknown.

"I don't think anybody can tell you," he said last week.

The council, composed of two members each from Washington, Idaho, Montana and Oregon, has been charged since 1980 with helping the region anticipate electricity needs and possible resources.

The council and Judi Johansen, then head of the Bonneville Power Administration, were among the first to warn that a long spell of energy surpluses in the Northwest was about to be broken.

During a visit to Spokane in 1998, Johansen said the region would be short 7,000 megawatts -- the generating capacity of Grand Coulee Dam -- given the right mix of frigid cold and poor stream flows.

A megawatt will energize about 600 homes.

Demand was growing, she said, but utilities were adding little new generation. Concerns about fish survival were eroding hydropower availability.

Harrison said the council responded to the warning from Johansen and Bonneville's planners by launching its own study of the problem.

Released in March, the council's report estimated the Northwest had an almost 1-in-4 chance of energy shortages during winter months through 2002.

Utilities must generate, or find a way to conserve, 3,000 megawatts of electricity, the report said, adding that prices then were too low to attract investment into new power plants.

Meanwhile, Harrison said high river flows kept hydro generators spinning, masking the potential menace.

"We were lulled into a state of complacency," he said.

Last spring, the unholy trinity of energy factors converged on the Northwest.

Hydropower usually abundant in May and June peaked earlier in the spring. Several coal- and natural gas-fired generators were down for routine maintenance. Unplanned outages idled others.

When high temperatures in California started setting records, consumers turned on their air conditioners. A deregulation plan enacted in 1998 started to hit home.

Private utilities had to sell some of their generating plants and deliver what power they did continue to produce to the California Power Exchange or the Independent System Operator.

They had to buy from the same source.

Stripped of their own resources and the authority to sign long-term power supply contracts, the utilities have been at the mercy of independent power generators that have demanded -- and gotten -- unheard of prices.

Companies like Southern California Edison and Pacific Gas & Electric said they faced bankruptcy if wholesale prices were not capped. Many suppliers -- Avista among them -- were allegedly demanding cash up front for power.

U.S. Energy Secretary Bill Richardson intervened, as did the FERC, which on Friday substantially reregulated California's electricity system.

The commission capped wholesale prices at $150 per megawatt, unless a supplier could show higher costs, and freed the investor-owned utilities from the requirement they sell power they generate into the power exchange.

They may also buy power from sources outside the exchange.

"The struggle there has had a direct effect on the Northwest," Avista Utilities Vice President Kelly Norwood said Thursday. "Something really has to be done to bring some sense to the market."

He proposed a price cap of $70 per megawatt, the equivalent of 7 cents per kilowatt-hour.

The price is modest compared with recent prices, but high enough to encourage investment in gas-fired turbines.

Even if natural gas is $8 per million British thermal units, about where long-term prices are today but three times the level of a year ago, generator operators could still make a profit, Norwood said.

Norwood's figure was close to that suggested Friday by FERC for five-year contracts California utilities might sign with out-of-state electricity suppliers.

Norwood said Avista Utilities has secured all the power it will need for the next year unless there is a breakdown at a generating plant.

Any surprises would push Avista Utilities back into the treacherous wholesale markets. Bad trades there last spring cost the company more than $100 million.

But the wholesale side of Avista, Avista Energy, so far has thrived in those markets.

Norwood said some of the price pressure will be relieved by new generating plants coming on line next year, including a joint project in Rathdrum between Avista and Cogentrix.

In 2002, the company's Coyote Springs 2 project in Oregon will be completed.

But no one is sure how much additional generation will restore the balance between supply and demand.

The power council's October study said demand for electricity in West Coast states increased by 12,000 megawatts between 1995 and 1999. But only 4,600 megawatts of generating capacity was added to the resource mix.

Peak demand on June 30 was 4,826 megawatts higher in those states than it was June 28, 1999. Both days were Wednesdays.

"Consumers are behaving as if there were a limitless supply," said Johansen, who left Bonneville in November to become executive vice president at Portland-based PacifiCorp.

She said electricity users must pay rates that better reflect the cost of the commodity.

What that rate or rates might be is unknown.

"At some point, we'll need to ask regulators to reflect some of these costs," Norwood said.

In August, the Washington Utilities and Transportation Commission allowed Avista Utilities to establish a special account for expenditures made to cover customer demand for power.

Most utilities that buy power from Bonneville also face increases when their new contracts kick in next Oct. 1.

The contracts allow the federal power marketing agency to pass along its higher power costs. The agency has already asked FERC to permit the use of a cost recovery adjustment clause that will raise rates to its customers 15 percent, if not more.

Those utilities, mostly cooperatives, public utility districts and municipalities, generally cut that percentage in half when they pass it along to ratepayers.

"There's going to be some rate shock," said Bonneville spokesman Ed Mosey.

Consumers served by Inland Power & Light Co. and Kootenai Electric Cooperative Inc. are exceptions. By signing contracts with Bonneville early, they are not subject to whatever increases the agency imposes until Oct. 1, 2006.

Johansen, who may have been the first to invoke the "Perfect Storm" analogy, said leadership within the Northwest must focus on the energy problem.

She praised the initiative shown so far by Washington Gov. Gary Locke and his Oregon counterpart, John Kitzhaber, who with Energy Secretary Richardson will host an energy summit this week.

Johansen said she hopes the search for a solution to the West's energy woes does not dissolve into a political fight between California and Northwest officials vying for federal hydropower.

Legislative action is also probable.

The Northwest Energy Coalition, for one, plans to push for a package that would require utilities to set aside at least 3 percent of revenues for conservation and related purposes.

The conservation group also backs state assistance to poor households overwhelmed by utility bills, and some generation, preferably from renewable sources like wind.

Utility dedication to conservation has slipped badly since a peak in 1993, said interim policy director Marc Sullivan.

State Rep. Larry Crouse, R-Spokane, has similar objectives, but a different approach.

He said he will reintroduce a bill that gives sales tax credits to those who build generating plants, as well as those -- even homeowners -- who adopt renewable technologies like solar, wind and fuel cells.

Crouse, who almost single-handedly blocked efforts to restructure Washington's electricity markets, would also give tax breaks to utilities that put in place programs to help low-income households.

"There are some solutions, but we're going to have some hard times the next couple of years," he said.

Don Badley, the Northwest Power Pool operations manager who spearheaded efforts to pilot the region through the recent shortages, said he's given up trying to estimate when the crisis will pass.

The resolution, whatever it is, will be a departure, he said.

"I don't think Humpty-Dumpty can be put back together again."