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Power Crisis Was Long in the Making by Mike Lewis, Seattle P-I Reporter Seattle Post-Intelligencer, February 14, 2001

California deregulation just hastened reckoning

A decade ago, it seemed like a great idea: Lift regulations on electrical utilities so that competition could drive down prices.

Deregulating the generation and distribution of power, the theory went, would create competition among a new breed of power companies that would lower costs to consumers and unleash creativity, just like deregulation of the telephone utilities did a decade before.

California and more than dozen other states jumped in; Oregon made a small step in that direction. Washington took a pass. But now, all three states share the burden of out-of-control energy costs and the specter of blackouts.

Legislators from Sacramento to Olympia are scrambling to rein in a full-blown power crisis even as consumers scramble to pay ballooning power bills. There's little argument that existing deregulation has not only failed, but has failed so profoundly that politicians and regulators are not talking as much about fixing it as scuttling it whole.

"Deregulation has gotten to be such a bad word," said state Sen. Bill Finkbeiner a Kirkland Republican who in 1996 chaired the Legislature's Energy Committee, which rejected deregulation. "It's never going to happen now, at least not in the Western U.S."

How bad has the situation become? Over two weeks in late November and early December, the market price for a megawatt of power jumped five-fold, forcing King County to briefly shut down one of its two sewage treatment plants.

Some cities are turning off streetlights, and the state's multibillion-dollar aluminum industry has idled some plants --sometimes to sell power -- leaving hundreds of workers idle. In Seattle, the average monthly City Light bill has jumped 20 percent, to $45.

For all of us, the power crisis has become a lesson in how policies of individual states can be rendered meaningless when it comes to interstate and international commerce. Washington didn't deregulate. California did. Both states pay the price. As one Northwest corporate lobbyist put it dryly, the next time his company needs economic protection in Olympia, he'll contact Sacramento.

"Here's how it is," said Ed Mosey, a Bonneville Power Administration spokesman. "Everyone else is the tail; California is the dog."

Gov. Gary Locke, who is often reluctant to publicly criticize allies such as California Gov. Gray Davis, acknowledged in a recent interview that he finds it frustrating that his state decided against deregulation but still finds itself in a mess.

"We didn't make the same decision they did," Locke said. "But California's effect is impossible to avoid."

But blaming California isn't just simplistic, it also isn't entirely accurate. Those who buy, sell and move electricity and natural gas and the politicians who attempt to control the markets agree that Washington's rising power costs are a culmination of events that began to unfold a lifetime ago, in the depths of the Great Depression.

President Franklin D. Roosevelt's New Deal gave the Northwest the bargain of a lifetime. Hoping to lift the nation out of the Depression, the Roosevelt administration arranged an unprecedented series of public works projects, providing jobs building roads, bridges and dams, among other things, across the nation.

The Works Progress Administration built the Bonneville and Grand Coulee dams on the Columbia River, the vanguard of the 29 federal hydroelectric dams that now feed power to the Bonneville Power Administration, a self-supporting federal authority with headquarters near Portland.

The BPA is the powerhouse of a region the size of Texas, providing half of all electricity used in the Northwest. The remainder comes from a network of public and private utilities, including giants like Seattle City Light that pre-date Bonneville by decades.

All told, there are about 250 big and small hydroelectric dams in the Northwest, and a far smaller number of coal and gas-fired plants.

In the early days, the BPA dams generated so much more power than the Northwest could use that congressmen joked that even the jackrabbits could be wired up. During World War II, the government took advantage of the plentiful power by building aluminum production plants in Tacoma, Spokane and Vancouver to supply the needs of aircraft makers and shipbuilders such as The Boeing Co. in Seattle and Henry Kaiser's shipyard in Portland.

After the war, BPA officials and local politicians persuaded the aluminum producers to stay put, promising continued low-cost, subsidized power -- contracts recently renewed to run through 2006.

For local industry, cheap power has always been a selling point. No raw materials used in making aluminum are found in the Northwest, but shipping them here is cost-effective because smelting the ore takes a lot of juice. One aluminum plant consumes as much electricity as a small city.

In the 1960s, this newly powerful local industry secured its first major coup: a federal mandate that public utilities in the region, such as Seattle City Light, could buy power at the subsidized cost of production. Sixty percent of that "preference power" stays in Washington state. Oregon generally takes 25 percent. The balance goes to Idaho and Montana, and any surplus can be sold at market rate.

This combination of natural resources, federal investment and populist politics has allowed the Northwest to enjoy some of the cheapest electricity in the nation. A 1998 BPA survey showed that the average residential cost for power in the region was 5.4 cents per kilowatt hour, compared with a nationwide average of 8.3 cents, a rate that -- at least until now -- has continued to attract industry to the region. In 1999, when Seattle residents were paying $10 monthly electricity bills, the same amount of power on the East Coast sometimes cost as much as $40.

"Much of the high-tech relocation up here directly was linked to cheap power," said Intel's director of governmental relations, Richard Hall. Intel employs 2,000 people at its plant in DuPont.

While rates have gone up recently, power in the Northwest remains a good deal. City Light residential customers, for example, pay 3.23 cents per kilowatt hour for the first 16 kilowatt hours they use in a day, and 7.56 cents for each kilowatt hour afterward.

In 1968 and 1969, the BPA completed an 846-mile line called an intertie between The Dalles, Ore., and Los Angeles, allowing it to market what seemed like a never-ending surplus of power to utilities in fast-growing California.

In 1996, BPA sold about 127,000 megawatt-hours for use in California, or about 12 percent of all BPA power sales that year -- the most recent year Bonneville reported those numbers. It takes about 1,000 megawatts of generating capacity to serve 1 million homes.

Public utilities in California are small, but two giant private, investor-owned companies rival Bonneville in size. Monopolies regulated by the state, California giants Pacific Gas & Electric (PG&E) and Southern California Edison (CalEd) eventually grew to serve a combined 20 million customers, making them the nation's two largest private utilities.

During the summer, when air conditioners cause California power use to peak, utilities there supplement their needs by turning to the Northwest, which usually has electricity to spare. In winter, when furnaces cause demand to peak in the Northwest, California plants ship surplus power north. The relationship worked flawlessly for decades. In fact, it worked too well.

With the West Coast tied into one grid, the easy flow of power between regions allowed the states to avoid the politically difficult chore of siting and building new power plants that would allow each to become self-sufficient, even as the total population in the three states blossomed from 25.5 million in 1970 to 43.2 million today.

In the mid-1990s, California began climbing out of a recession brought on by deep defense cuts, high unemployment and energy prices that were among the highest in the nation, inadvertently driven up by state and federal regulators who feared that oil and natural gas prices would soar. These officials had pushed the utilities to diversify their generation methods. The Federal Energy Regulatory Commission required that they buy a portion of their power from what were then expensive alternative sources, such as wind and geothermal plants. CalEd estimates that the order has cost its customers $25 billion over two decades.

California business interests began to pressure their lawmakers to deregulate the power industry, allowing them to buy electricity on the open market and to force PG&E and CalEd to cut rates. Congress wrote the law in 1992, and the energy commission pressured the utilities to get moving in 1994.

In December 1995, the California Public Utilities Commission voted to open the state's electricity industry to competition. The Legislature followed with a law based on an agreement brokered with CalEd, its biggest industrial customers and an association of independent power producers.

But the deal was based on four colossal miscalculations. And those led to the current crisis:

• No one foresaw that California's economy would come roaring back from recession so strongly or so quickly, or that so much of the new economy would depend on energy-hungry computers and the plants that produce them. Both factors over-taxed a system that hadn't seen a new power plant come online for nearly a decade.

  California generates about 75 percent of the electricity it uses, relying on imports from the Southwest and the Northwest for the rest. Officials acknowledge that California has not added enough power plants to accommodate the roughly 2 percent annual growth in its demand for electricity. To meet that each year, the state has to add either 1,000 megawatts of generating capacity or conserve an equal amount.

• Regulators forced California utilities to sell their generation divisions without also requiring them to sign long-term power contracts at fixed -- and presumably lower -- rates. This put the utilities at a disadvantage, because they had to buy power on the open or "spot" market from operators such as Houston-based as Enron and Dynegy, which have reportedly seen revenues climb by 400 percent in the past two years while the utilities spiraled into debt.

• A combination of factors cut into the amount of power available on the spot market. Less power has been flowing into the grid because several major California power plants have been off-line for needed repairs; Northwest hydroelectric dams have been operating at lower capacity as they try to avoid draining reservoirs during the drought; and a failure to upgrade California's distribution system makes it hard to move surplus power to where it is needed.

  In fact that failure to upgrade the transmission system has proven to be a problem of the same scale as the lack of new power plants. California's first rolling blackout was caused not by a lack of power but by a lack of free lines to move it. Washington has missed blackouts because it has enough capacity to move power when needed.

  While attorneys general in all three states are investigating accusations that some power sellers have been withholding electricity to drive up prices, it's unclear whether they did, or whether any laws were broken.

  With deregulation, the spot market has taken on the trappings of a desperate auction. Every morning, the power marketers pay what they must for whatever surplus power they can find. Wholesale prices can swing wildly, climbing and falling hundreds of dollars per megawatt-hour over a day of trading.

  When California's demand began to outstrip its supply last summer, San Diego was hit first. The Northwest barely noticed. But as the problem spread, the power that Bonneville and Puget Sound Energy once bought for winter coverage wasn't there. Local prices began inching up.

• Finally, and some would say most important, California's deregulation scheme included a cap on rates for consumers. In fact, the Legislature there forced a 10 percent retail rate cut as part of the deal to win passage of deregulation. These errors and circumstances, combined with some corporate restructuring that shifted resources away from traditional lines of business, forced California's big utilities to amass a combined debt of $12.7 billion, severely limiting their ability to buy power and prompting the recent round of blackouts in Northern California.

  "Do you see the problem there?" asked Mosey, the BPA spokesman. "It didn't allow the market to function. It gave consumers zero incentive to conserve. If you had to devise a method whereby you shot yourself in both feet, you couldn't do a better job."

  California lawmakers are trying to undo the damage. They have appropriated billions of dollars in emergency funding to keep the utilities afloat while they consider a more expensive bailout and re-regulation scheme that might involve turning PG&E and CalEd into public utilities -- exactly the opposite of the intent of deregulation.

Deregulation was initially popular in Washington state, but it never had the same attraction in a region where most voters enjoyed cheap power, thanks to Bonneville and public utilities.

"At the time, most people wanted it," Finkbeiner recalled. "And I'd like to say we had the great foresight to pass on it, but that isn't true. We just couldn't agree on what to do, and it didn't go anywhere."

After two years of debate, Washington lawmakers saw there was no groundswell of support for deregulation, and they did what politicians do in such cases: They dropped it in 1997, moving on to the next big issue.

"Now, obviously I'm glad," Finkbeiner said.

But Finkbeiner is once again dealing with deregulation, this time as sponsor of pending legislation that asks California to drop its power rate cap -- a source of irritation for Northwesterners who have seen their bills zoom up while Californians' have not.

"I don't know how (Governor Davis) will react, but it is something they have to do," Finkbeiner said of his bill, which is an entirely symbolic act -- Washington cannot force California to do anything, even though it shares California's pain.

P-I SERIES

Wednesday: Power crisis was long in the making

Thursday: Summer blackouts possible

Friday: Energy conservation is the first step