As cooler-than-normal temperatures statewide reduced peak-powerdemand to winter levels, California last week was awash in proposedsolutions to its electricity price and supply problems, which arelikely 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 raterelief 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 theCalifornia Public Utilities Commission (CPUC) that anyunder-collections of its power costs – which totaled $1.97 billionat the end of August – existing after the current retail ratefreeze is lifted can be recovered in future charges to utilitycustomers. Pacific Gas and Electric Co., citing unrecovered costsexceeding $2 billion, made a similar filing the same day. Both areasking the CPUC for “expedited” action so the two utilities canmaintain their financial standing.
The CPUC will meet in a special session Tuesday (Oct. 10) todecide whether to grant the utilities expanded debt authority topay for the high wholesale power costs in the interim before thelarger under-collection issue is resolved.
In response to the utilities asking for eventual rate hikes tocover the costs, a coalition of consumer activists created anoverflow 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 seniorcitizens to avoid having to pay any higher utility bills in thefuture.
In the state capital, separate proposals for heading offblackouts next summer surfaced from the state independenttransmission grid operator, Cal-ISO, and the association of 30government-run utilities. The latter, the California MunicipalUtility Association (CMUA), unveiled a four-part “market reform”plan whose principal change would be to replace the Cal-ISO with agovernment agency that would own and operate the state’s entiregrid, with a move to eventually join a multi-state regionaltransmission organization (RTO).
ISO Expands into Generation
Cal-ISO’s 26-member board Oct. 4 expanded into the generationsector by authorizing its staff to line up 2,000 MW of temporarysummer peaking power for next year. At the same time, the boardrejected a consumer and utility-sponsored proposal for the gridoperator to establish wholesale price caps targeted at specificgenerators or demand levels.
A month-long Cal-ISO bidding program concluded Sept. 24 resultedin 79 proposals totaling almost 4,500 MW; the grid operator’s boarddecided to go after the most realistic 2,000 MW of that grouping,with the estimated total cost of the peak-demand power not toexceed $255 million ($125/kW).
The Cal-ISO would have the right to call on the peaking powerfor up to 500 hours each summer season (June 1-Oct. 31) in exchangefor 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 theWest and dwindling supplies from out of state make blackouts inCalifornia more likely next summer, the Cal-ISO CEO, Terry Winter,told the board before it took action. Even conservativestatistics cause Winter to think shortfalls will be much moresignificant next year in the face of summer peak demands, whichcould be up to 5,000 MW larger than this summer. Winter added thatthis year was not defined as a “hot” summer by traditionaldefinitions, despite a record number of Stage 1 and 2 power alertsby the Cal-ISO through August.
Under Winter’s scenario, the shortfall has to be made up fromthree sources: (1) out-of-state generation, (2) new generationin-state, and (3) voluntary curtailment of loads and demand-sidemanagement. At best-based on current growth throughout theWest-California can count on only about 4,000 MW from out-of-state,Winter said. Voluntary curtailments may bring as much as 2,000 MWand the new generating plants scheduled to come on line totalanother 1,000 MW.
The Utility Reform Network (TURN), with support of SouthernCalifornia Edison, proposed that Cal-ISO impose load differentiatedwholesale price caps based on the size of demand at various timesduring a 24-hour period. The board rejected the request, andPacific Gas and Electric Co., which was expected to recommend someform of cost-based wholesale price caps, decided not to present itsrecommendation.
In the public sector, CMUA hopes to influence plans now beingformulated by state policymakers, and it comes at a time when theCal-ISO is being criticized in some quarters for branching into thegeneration sector with its latest move to secure temporary summerpeaking power. As a second part of its proposal, CMUA filed lastThursday with the Federal Energy Regulatory Commission tore-regulate wholesale electricity prices on a cost-based basis bytargeting cost-based caps on specific generators.
CMUA Executive Director Jerry Jordan said the public sectorutilities think “it is time to take action to restore consumerconfidence” in California’s electricity market.
“California has a serious supply and demand problem caused byload growth, aging plants and the ability of even small power plantowners to exercise market power,” said Roger Fontes, assistantgeneral manager of the Northern California Power Agency, a group ofpublicly owned utilities, all of whom are part of CMUA. The head ofthe Sacramento Municipal Utility District (SMUD), Jan Schori, notedthat it paid an additional $66 million for purchased power thissummer as a result of wholesale price spikes.
The other two steps in CMUA’s four-part plan are: (1) assuringreasonably priced supplies for residential and small businesscustomers to buffer them from wholesale price volatility and (2)giving small consumers more options to control their electricitydemand through DSM, load management and distributed generationprograms.
CMUA is taking the position that both state and federal actionsare needed to correct market flaws, and that among thosecorrections 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 transmissionorganization (RTO).
“It is important that we get some organization with theresponsibility and authority to build transmission,” said S. DavidFreeman, general manager of the City of Los Angeles Department ofWater and Power (LADWP). “If you think about new generation as likecars and the transmission system as an electrical highway, we canmake all the cars in the world, but if we don’t have enough lanesfor 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 plantsiting laws is necessary, but insufficient in getting a balance ofsupply and demand.”
Fitch’s Steven Fetter, a former Michigan regulator and long-timecritic of California restructuring, said, “If the politicians tryto fix things in California, they cannot let the market gofull-speed ahead while they try to fix it. They will have to bringit into the pits to try to start working on it.”
Freeman suggested putting price controls back on until themarket is truly competitive. “I think we put the cart before thehorse. We thought we’d automatically have a competitive marketbecause of the religious faith of a bunch of economists. I assumedthe market would work, we all did, but it is time for a little meaculpa in facing up to the fact that it hasn’t worked. Therefore, weshould keep prices under control until we can find that the marketwill work.”
Because California’s municipals overall have generally faredvery well in the midst of the supply and price crunch faced by thethree major private sector utilities this summer, CMUA is proposingthat cost-based, closely regulated vertically integrated utilitiesbe considered as a “valid model, but not necessarily the only one,”Wilson said.
“We’re not saying to throw in the towel [on restructuring],” hesaid. “We’re saying it is seriously broken right now, and we needto get a hold of it and have a more thoughtful transition.”
Richard Nemec, Los Angeles
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