Energy Leaders Seek Answers for Western Power Crisis

The effects of the western power crisis will prevail through this year and beyond --- with the possibility of much more severe problems and concurrent economic consequences this summer than have been seen so far --- according to a western energy summit Friday, which included western state governors, top federal energy officials, and the CEOs of energy producers and industrial consumers.

Operating in an atmosphere of urgency that cut political rhetoric to the bone, participants in the one-day Energy Roundtable hosted by the Western Governors' Association in Portland, OR, agreed the first focus should be on conservation and energy efficiency. But the group split on whether a region-wide, short-term, cost-based price cap should be imposed across the western states.

Former Sen. J. Bennett Johnston led the price cap proponents, saying incentives for new generation could be maintained if contracts in the forward market would be exempt from the cap. To ensure reliability of service, power suppliers without forward contracts would have to operate under must run, cost-plus contracts. "I know it's messy, but we'll have worse than a mess if six months from now California has spent all its surplus and doesn't have a credit rating."

Energy Secretary Spencer Abraham expressed the Bush administration's position against price caps. While not entirely ruling them out, he said "anything that puts disincentives in place would have to be looked at very closely." Abraham also pointed out that 50% of western power comes from Canada or public agencies such as the Bonneville Power Authority, which are not under FERC control. "If you regulate part of the market, but not all of it, there could be significant price increases in the unregulated segment." He acknowledged that a cap that did not apply to new power sources would mitigate the incentives argument.

Abraham stressed the long term need to increase energy supplies through a concerted energy policy. But while most at least gave lip service to long term answers, it was clear their focus was on this summer. Several governors railed against the "huge transfer of wealth through monopolistic profits."

California's Gov. Gray Davis, arguing that "deregulation is not a goal, it's not a religion," pointed to 200% to 300% run-ups in natural gas bills in his state. "You need the consent of the governed" to impose that kind of price increase. "Whether you call them consumers or voters, that is where the power lies."

The Federal Energy Regulatory Commissioners were split on the price cap issue. Chairman Curt Hebert, introducing three power market reports by agency staff members, labeled a regional price cap an "impossibility," especially since the region has no regional transmission organization through which to administer it. Commissioner William Massey strongly urged a price cap, saying doing nothing would be "unlawful" (see separate report, this issue).

U.S. Rep. Jay Inslee, D-WA, said a coalition would be pushing to inject measures, including a call for a reasonable price cap, into tax cut legislation in the next two weeks.

Several western governors reiterated several times that the plea for price caps was not unanimous, pointed out there is much room for conservation and efficiency. Americans have become "energy hogs," using twice the amount per capita that is used by Western Europe and Japan. "It's time to discard the old vision of energy security --- dig, drill and burn --- and replace it with a 21st century solution," that includes more stringent efficiency standards and technology," said Oregon Gov. John Kitzhaber.

"The man in the street does not understand energy markets. Get the price signals out there to retail customers," said PacifiCorp CEO Alan Richardson. "We have a severe hydropower shortage and natural gas supplies are constrained. Those are two very important commodities. We have to identify the simple things and get them done." Richardson pointed out it is the peak hours of the day when prices spike, that are the biggest problem. Load management, to reduce peak hour demand is critical. Since December, he said PacifiCorp had identified 800 MW that could be added with load management and new generation. "If you go and look, you can find it. Conservation has gotten a huge response in the Northwest. We've saved 2% through load reduction this month." He advised negotiating with large customers, paying them for power they don't use. There is now a demand exchange working with 27 customers posting prices for demand reductions.

The PacifiCorp CEO also advised looking for new generation in unexpected places. Some industrials have generators that aren't running. There are idle power units in other parts of the world that can be transported and set up quickly. The Portland, OR-based utility expects to have a 300 MW plant running by June from a standing start in December.

Steven Wright, Bonneville Power administrator, said BPA water supplies were at 64% of normal volumes, and the agency would show a further deficit in February if it does not rain or snow. Further BPA is now drawing down volumes it will need in the spring and summer. "Our reservoirs are in jeopardy. Everyone with low water levels is now in the spot market. We are looking at further volume curtailments and further load reductions." Wright said because of the spot price increases and volatility, BPA might need a 60% rate increase across the next five years, with the rates doubling in the next two. "I challenge marketers to justify prices that go beyond reasonable costs."

The answer is on the retail side, said Severin Borenstein, director, University of California Energy Institute, through "raising rates right away. Don't go with the simple answer of raising all prices. Raise the right prices." He said there is a need for real-time price signals since prices can vary by a factor of 10 in a single day. Before this summer utilities need to install time-varying rates. "We'll have a casual summer in California --- short sleeves and no ties." He warned against "driving the economy off a cliff."

Dan Richard, representing beleaguered PG&E Corp., argued for a price cap, saying California could be between 1,500 and 2000 MW short. "Although the cost of generation is about $55 MWh, prices could run between $280 and $415 MWh." While, in principle the company is opposed to price caps, it is supporting Johnston's proposal to get through the current supply crisis. As for incentives, Richard noted on the unregulated power generation side of its business, "we do not need 41 cents a kWh as a signal to build a power plant."

Reporting on the natural gas situation, Tony Fountain, president, Gas and Power North America for BP, said a cold winter and lack of a storage build last summer in California is behind the high gas prices going into the state. "I'm hoping for relatively mild weather for the rest of the winter to get back to historical storage levels." He urged government officials to "ensure the financial health of the utilities which are currently reducing storage capacity, rather than increasing it." BP recently doubled supplies going to Pacific Gas & Electric, Fountain said.

Peter Esposito, vice president of regulatory affairs for Dynegy, said the company was running its California plants which are 30 to 40 years old "as hard as we can, until they break and then we fix them as fast as we can. We haven't taken plants down; our people haven't had vacations." Esposito suggested that emissions allowances that have been further squeezed in 2001 are a good place to start in the search for more generation. Going back to 2000 allowances would free up an additional 6,000 to 7,000 MW.

Steve Kean, executive vice president of Enron, which trades in California, but owns no generation there, suggested a market in demand reductions is the way to go. "Blackouts are not voluntary. Make it a decision the consumer participates in." Kean suggested the demand reductions be purchased for a term of months to reduce the ramp up, ramp down costs and minimize disruptions.

Ellen Beswick

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