NGI The Weekly Gas Market Report / NGI All News Access

Californians Scramble for Solutions to Power Woes

Californians Scramble for Solutions to Power Woes

As cooler-than-normal temperatures statewide reduced peak-power demand to winter levels, California last week was awash in proposed solutions to its electricity price and supply problems, which are likely to be much more severe next summer.

The state's two biggest investor-owned utilities, as expected, asked state regulators last week for billions of dollars in rate relief from the summer's wholesale price spikes. In what it called "an extraordinary petition borne of extraordinary circumstances," Southern California Edison Co. Oct. 4 asked for assurances from the California Public Utilities Commission (CPUC) that any under-collections of its power costs - which totaled $1.97 billion at the end of August - existing after the current retail rate freeze is lifted can be recovered in future charges to utility customers. Pacific Gas and Electric Co., citing unrecovered costs exceeding $2 billion, made a similar filing the same day. Both are asking the CPUC for "expedited" action so the two utilities can maintain their financial standing.

The CPUC will meet in a special session Tuesday (Oct. 10) to decide whether to grant the utilities expanded debt authority to pay for the high wholesale power costs in the interim before the larger under-collection issue is resolved.

In response to the utilities asking for eventual rate hikes to cover the costs, a coalition of consumer activists created an overflow crowd at last Thursday's CPUC meeting in San Francisco, presenting the five-member regulatory panel with a 10-point "Marshall Plan" for energy that would allow low-income and senior citizens to avoid having to pay any higher utility bills in the future.

In the state capital, separate proposals for heading off blackouts next summer surfaced from the state independent transmission grid operator, Cal-ISO, and the association of 30 government-run utilities. The latter, the California Municipal Utility Association (CMUA), unveiled a four-part "market reform" plan whose principal change would be to replace the Cal-ISO with a government agency that would own and operate the state's entire grid, with a move to eventually join a multi-state regional transmission organization (RTO).

ISO Expands into Generation

Cal-ISO's 26-member board Oct. 4 expanded into the generation sector by authorizing its staff to line up 2,000 MW of temporary summer peaking power for next year. At the same time, the board rejected a consumer and utility-sponsored proposal for the grid operator to establish wholesale price caps targeted at specific generators or demand levels.

A month-long Cal-ISO bidding program concluded Sept. 24 resulted in 79 proposals totaling almost 4,500 MW; the grid operator's board decided to go after the most realistic 2,000 MW of that grouping, with the estimated total cost of the peak-demand power not to exceed $255 million ($125/kW).

The Cal-ISO would have the right to call on the peaking power for up to 500 hours each summer season (June 1-Oct. 31) in exchange for a capacity payment. Cal-ISO would require that the generation "be scheduled in the forward markets to the extent possible," according to the Cal-ISO public announcement on the board action.

A combination of continued robust economic growth throughout the West and dwindling supplies from out of state make blackouts in California more likely next summer, the Cal-ISO CEO, Terry Winter, told the board before it took action. Even conservative statistics cause Winter to think shortfalls will be much more significant next year in the face of summer peak demands, which could be up to 5,000 MW larger than this summer. Winter added that this year was not defined as a "hot" summer by traditional definitions, despite a record number of Stage 1 and 2 power alerts by the Cal-ISO through August.

Under Winter's scenario, the shortfall has to be made up from three sources: (1) out-of-state generation, (2) new generation in-state, and (3) voluntary curtailment of loads and demand-side management. At best-based on current growth throughout the West-California can count on only about 4,000 MW from out-of-state, Winter said. Voluntary curtailments may bring as much as 2,000 MW and the new generating plants scheduled to come on line total another 1,000 MW.

The Utility Reform Network (TURN), with support of Southern California Edison, proposed that Cal-ISO impose load differentiated wholesale price caps based on the size of demand at various times during a 24-hour period. The board rejected the request, and Pacific Gas and Electric Co., which was expected to recommend some form of cost-based wholesale price caps, decided not to present its recommendation.

In the public sector, CMUA hopes to influence plans now being formulated by state policymakers, and it comes at a time when the Cal-ISO is being criticized in some quarters for branching into the generation sector with its latest move to secure temporary summer peaking power. As a second part of its proposal, CMUA filed last Thursday with the Federal Energy Regulatory Commission to re-regulate wholesale electricity prices on a cost-based basis by targeting cost-based caps on specific generators.

CMUA Executive Director Jerry Jordan said the public sector utilities think "it is time to take action to restore consumer confidence" in California's electricity market.

"California has a serious supply and demand problem caused by load growth, aging plants and the ability of even small power plant owners to exercise market power," said Roger Fontes, assistant general manager of the Northern California Power Agency, a group of publicly owned utilities, all of whom are part of CMUA. The head of the Sacramento Municipal Utility District (SMUD), Jan Schori, noted that it paid an additional $66 million for purchased power this summer as a result of wholesale price spikes.

The other two steps in CMUA's four-part plan are: (1) assuring reasonably priced supplies for residential and small business customers to buffer them from wholesale price volatility and (2) giving small consumers more options to control their electricity demand through DSM, load management and distributed generation programs.

CMUA is taking the position that both state and federal actions are needed to correct market flaws, and that among those corrections is the need to replace the existing nonprofit, state-chartered grid operator (Cal-ISO) by a public agency "TRANSCO" that will evolve into a multi-state regional transmission organization (RTO).

"It is important that we get some organization with the responsibility and authority to build transmission," said S. David Freeman, general manager of the City of Los Angeles Department of Water and Power (LADWP). "If you think about new generation as like cars and the transmission system as an electrical highway, we can make all the cars in the world, but if we don't have enough lanes for them to move on, we are going to have a problem.

"Transmission is as much of an essential item as power plants. All the attention the legislature has given the generating plant siting laws is necessary, but insufficient in getting a balance of supply and demand."

Fitch's Steven Fetter, a former Michigan regulator and long-time critic of California restructuring, said, "If the politicians try to fix things in California, they cannot let the market go full-speed ahead while they try to fix it. They will have to bring it into the pits to try to start working on it."

Freeman suggested putting price controls back on until the market is truly competitive. "I think we put the cart before the horse. We thought we'd automatically have a competitive market because of the religious faith of a bunch of economists. I assumed the market would work, we all did, but it is time for a little mea culpa in facing up to the fact that it hasn't worked. Therefore, we should keep prices under control until we can find that the market will work."

Because California's municipals overall have generally fared very well in the midst of the supply and price crunch faced by the three major private sector utilities this summer, CMUA is proposing that cost-based, closely regulated vertically integrated utilities be considered as a "valid model, but not necessarily the only one," Wilson said.

"We're not saying to throw in the towel [on restructuring]," he said. "We're saying it is seriously broken right now, and we need to get a hold of it and have a more thoughtful transition."

Richard Nemec, Los Angeles

©Copyright 2000 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.