The effects of the western power crisis will prevail throughthis year and beyond — with the possibility of much more severeproblems and concurrent economic consequences this summer than havebeen seen so far — according to a western energy summit Friday,which included western state governors, top federal energyofficials, and the CEOs of energy producers and industrialconsumers.
Operating in an atmosphere of urgency that cut politicalrhetoric to the bone, participants in the one-day Energy Roundtablehosted by the Western Governors’ Association in Portland, OR,agreed the first focus should be on conservation and energyefficiency. But the group split on whether a region-wide,short-term, cost-based price cap should be imposed across thewestern states.
Former Sen. J. Bennett Johnston led the price cap proponents,saying incentives for new generation could be maintained ifcontracts in the forward market would be exempt from the cap. Toensure reliability of service, power suppliers without forwardcontracts would have to operate under must run, cost-pluscontracts. “I know it’s messy, but we’ll have worse than a mess ifsix months from now California has spent all its surplus anddoesn’t have a credit rating.”
Energy Secretary Spencer Abraham expressed the Bushadministration’s position against price caps. While not entirelyruling them out, he said “anything that puts disincentives in placewould have to be looked at very closely.” Abraham also pointed outthat 50% of western power comes from Canada or public agencies suchas the Bonneville Power Authority, which are not under FERCcontrol. “If you regulate part of the market, but not all of it,there could be significant price increases in the unregulatedsegment.” He acknowledged that a cap that did not apply to newpower sources would mitigate the incentives argument.
Abraham stressed the long term need to increase energy suppliesthrough a concerted energy policy. But while most at least gave lipservice to long term answers, it was clear their focus was on thissummer. Several governors railed against the “huge transfer ofwealth through monopolistic profits.”
California’s Gov. Gray Davis, arguing that “deregulation is nota goal, it’s not a religion,” pointed to 200% to 300% run-ups innatural gas bills in his state. “You need the consent of thegoverned” to impose that kind of price increase. “Whether you callthem consumers or voters, that is where the power lies.”
The Federal Energy Regulatory Commissioners were split on theprice cap issue. Chairman Curt Hebert, introducing three powermarket reports by agency staff members, labeled a regional pricecap an “impossibility,” especially since the region has no regionaltransmission organization through which to administer it.Commissioner William Massey strongly urged a price cap, sayingdoing nothing would be “unlawful” (see separate report, thisissue).
U.S. Rep. Jay Inslee, D-WA, said a coalition would be pushing toinject measures, including a call for a reasonable price cap, intotax cut legislation in the next two weeks.
Several western governors reiterated several times that the pleafor price caps was not unanimous, pointed out there is much roomfor conservation and efficiency. Americans have become “energyhogs,” using twice the amount per capita that is used by WesternEurope and Japan. “It’s time to discard the old vision of energysecurity — dig, drill and burn — and replace it with a 21stcentury solution,” that includes more stringent efficiencystandards and technology,” said Oregon Gov. John Kitzhaber.
“The man in the street does not understand energy markets. Getthe price signals out there to retail customers,” said PacifiCorpCEO Alan Richardson. “We have a severe hydropower shortage andnatural gas supplies are constrained. Those are two very importantcommodities. We have to identify the simple things and get themdone.” Richardson pointed out it is the peak hours of the day whenprices spike, that are the biggest problem. Load management, toreduce peak hour demand is critical. Since December, he saidPacifiCorp had identified 800 MW that could be added with loadmanagement and new generation. “If you go and look, you can findit. Conservation has gotten a huge response in the Northwest. We’vesaved 2% through load reduction this month.” He advised negotiatingwith large customers, paying them for power they don’t use. Thereis now a demand exchange working with 27 customers posting pricesfor demand reductions.
The PacifiCorp CEO also advised looking for new generation inunexpected places. Some industrials have generators that aren’trunning. There are idle power units in other parts of the worldthat can be transported and set up quickly. The Portland, OR-basedutility expects to have a 300 MW plant running by June from astanding start in December.
Steven Wright, Bonneville Power administrator, said BPA watersupplies were at 64% of normal volumes, and the agency would show afurther deficit in February if it does not rain or snow. FurtherBPA is now drawing down volumes it will need in the spring andsummer. “Our reservoirs are in jeopardy. Everyone with low waterlevels is now in the spot market. We are looking at further volumecurtailments and further load reductions.” Wright said because ofthe spot price increases and volatility, BPA might need a 60% rateincrease across the next five years, with the rates doubling in thenext two. “I challenge marketers to justify prices that go beyondreasonable 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 ofraising all prices. Raise the right prices.” He said there is aneed for real-time price signals since prices can vary by a factorof 10 in a single day. Before this summer utilities need to installtime-varying rates. “We’ll have a casual summer in California —short sleeves and no ties.” He warned against “driving the economyoff a cliff.”
Dan Richard, representing beleaguered PG&E Corp., argued fora price cap, saying Californiacould be between 1,500 and 2000 MWshort. “Although the cost of generation is about $55 MWh, pricescould run between $280 and $415 MWh.” While, in principle thecompany is opposed to price caps, it is supporting Johnston’sproposal to get through the current supply crisis. As forincentives, Richard noted on the unregulated power generation sideof its business, “we do not need 41 cents a kWh as a signal tobuild a power plant.”
Reporting on the natural gas situation, Tony Fountain,president, Gas and Power North America for BP, said a cold winterand lack of a storage build last summer in California is behind thehigh gas prices going into the state. “I’m hoping for relativelymild weather for the rest of the winter to get back to historicalstorage levels.” He urged government officials to “ensure thefinancial health of the utilities which are currently reducingstorage capacity, rather than increasing it.” BP recently doubledsupplies 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 to40 years old “as hard as we can, until they break and then we fixthem as fast as we can. We haven’t taken plants down; our peoplehaven’t had vacations.” Esposito suggested that emissionsallowances that have been further squeezed in 2001 are a good placeto start in the search for more generation. Going back to 2000allowances would free up an additional 6,000 to 7,000 MW.
Steve Kean, executive vice president of Enron, which trades inCalifornia, but owns no generation there, suggested a market indemand reductions is the way to go. “Blackouts are not voluntary.Make it a decision the consumer participates in.” Kean suggestedthe demand reductions be purchased for a term of months to reducethe ramp up, ramp down costs and minimize disruptions.
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