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Analyst Downplays Likelihood of Southern California Outages

The buzz out West that Southern California could be facing power outages, perhaps as soon as this summer, was called into question by a Fitch Ratings analyst last Wednesday, who noted that such an outcome depends on a lot of things going wrong at the same time.

"There's been a lot of talk about the possibility of outages in Southern California and while I would expect to see periods of pronounced price volatility due to conditions in the West going forward, I think that it's fair to say that outages in Southern California are a very, very low probability event," said Philip Smyth, a Fitch analyst who participated in a conference call with other analysts from the ratings agency on Wednesday.

The conference call was sponsored by Fitch as a follow up to its recently issued 2005 wholesale power market update report.

Smyth said that "a lot of the concerns that have been voiced" by the California Independent System Operator (CAISO) and others "is under the assumptions of a one-in-10 load day, as well as other kind of one-time events -- low water and assuming a transmission line or a nuclear generator goes out." While such events can lead to forced outages, Smith said that "under more normal -- or less benign -- circumstances, we wouldn't expect that."

A draft report recently issued by staff at the California Energy Commission (CEC) on the state's summer 2005 electricity supply and demand concludes that in Southern California there should be sufficient electricity reserves under normal weather conditions (1-in-2 or 50% probability). Peak electricity demand in Southern California usually occurs in September, the draft report notes.

At the same time, CEC staff said that it is concerned that a transmission segment known as Path 26 (SP26) will not have sufficient resources to meet electricity demands and maintain a 7% reserve during very hot weather (1-in-10 or 10% probability) this summer, if additional actions are not taken.

The report said that nearly 1,800 MW of demand reductions or additional resources are needed to maintain a 7% operating reserve under this scenario. This concern is focused on those portions of Southern California served by the CAISO including the Southern California Edison (SCE), San Diego Gas and Electric (SDG&E) and CAISO participating municipal utilities in Southern California.

Areas served by the independent municipal utilities, including Los Angeles Department of Water and Power (LADWP), Burbank Water and Power, Glendale Water and Power and Imperial Irrigation District, appear to have adequate resources, the draft report said. "The LADWP, in particular, should be able to make surplus power available to the rest of the region."

"While constraints limiting the amount of imported electricity on the transmission system are the primary reason for these regional differences, more generation has been constructed, and has come on line in Northern California compared to Southern California, during the last several years while demand growth has been greater in the south compared to the north," CEC staff said.

Inadequate electricity reserves will become an increasingly greater concern in future years unless additional generation is built, retirements of generating units are delayed, the transmission system improved, and additional energy efficiency measures are implemented, the draft report went on to say.

The office of California Gov. Arnold Schwarzenegger has been working with the CEC, the California Public Utilities Commission, CAISO and several other agencies to develop and implement a plan of action to ensure there are sufficient electricity resources available this summer in Southern California, CEC staff noted. "These resources will come from a menu of options including voluntary conservation, new demand reduction programs, accelerated construction of permitted power plants, delaying retirements, and other measures."

Meanwhile, the Fitch report touches upon Fall 2004 hydro conditions in the West and the region's outlook for this year.

Fitch noted that the Western Electric Coordinating Council (WECC) is heavily reliant on highly variable hydro-generation energy resources (approximately 34% of capacity).

"Drought has gripped the entire WECC region for the past several years, resulting in five years of below average hydropower and depleted reservoirs," the ratings agency said. "Sparse precipitation during autumn gave way, in late December 2004, to record rains across the Western United States and snowfall in the Sierra Nevada region. As a result, snowpack in the Sierra Nevada stands at 160% of normal, and key storage reservoirs for California hydropower supplies are close to average levels."

On the other hand, snowpack in the Pacific Northwest is currently running at approximately 40% of normal, due to mild weather, Fitch noted. "Despite the significant rains late last year, hydroelectric conditions are tracking at approximately 80%-90% of normal in the Pacific Northwest, which accounts for approximately 55% of the WECC's hydrogeneration output...and is a crucial component of the region's supply/demand equation."

If the Northwest does not receive substantial snowfall in the first quarter of 2005, hydropower production in 2005 will be below-average, the ratings agency said. While below-normal hydropower conditions in the Pacific Northwest may lead to isolated bouts of price volatility in the WECC, Fitch believes that ample capacity exists to meet the region's supply needs due to the overbuild of natural gas generation in recent years.

"With natural gas-fired generation setting prices for many hours on the day in the WECC region, the potential combination of below-normal hydropower output in the Pacific Northwest and high natural gas prices will drive up supply costs for LSEs [load-serving entities] in the Northwest that are short on capacity and energy and dependent on hydrogeneration to meet a significant portion of their load requirements." LSEs expected to be affected include Avista Corp., Idaho Power Co., PacifiCorp and Portland General Electric Co., among others.

"Most public power LSEs are generally long on capacity and energy, so the main effect would be on their surplus sales revenue," Fitch added. "Despite continued high wholesale electricity prices, oversupply conditions are likely to continue to result in low spark spreads for merchant energy providers in the region."

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