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San Mateo County Times (San Mateo, CA)
May 29, 2004 - 01:00 AM

by Steve Geissinger, SACRAMENTO BUREAU

New threat on the horizon

THEY TOLD YOU IT ENDED
California's electricity cost and supply crisis of 2000-01 that threatened everything from public safety in the nation's most populous state to the economy, the sixth-largest in the world.

Voters even booted the governor blamed for it.

But in reality, experts say, the power crisis really only slipped from public view, like some creature at the end of a horror flick, virtually certain to return -- scarier than ever -- if not this year, next year or very soon.

Even though elected officials are largely preoccupied with higher-profilematters, politicians and major stakeholders are quietly wrestling each other over how best to head off a return to a full-blown energy crisis.

Everyone from the new Republican governor, Arnold Schwarzenegger, to Democratic Attorney General Bill Lockyer are pushing toward political showdowns at the state and federal levels -- efforts that will determine whether the lights really stay on reliably and at an affordable cost.

Attention has turned away from electricity over the past two years for a number of reasons.

California electricity rates may be among the nation's highest but they're currently stable, thanks to the long-term energy contracts signed in 2001 by former Gov. Gray Davis.

There's been a modest amount of power plant construction -- a counterattack of sorts on the rampant profiteering that helped trigger the crisis -- and patchwork bandages applied to flaws in government energy regulation.

The state's largest utility, Pacific Gas & Electric Co., which serves Northern California, is emerging from a costly bankruptcy.

And many Californians who adopted conservation measures during the energy crisis are continuing them.

Authorities are assuring the public of adequate supplies, at least for the short term. But -- ominously -- any little bobble in the system triggers emergency conservation alerts.

Experts say it's because the underlying causes of the energy crisis remain -- energy needs are increasing, supplies are tightening and transmission lines are aging and inadequate.

Precarious footing

If there's any doubt as to the fragile nature of California's electrical generation and distribution system, they say, look at what happened recently when it got unseasonably hot in Southern California -- and then, coincidentally, a plant that produces 770 megawatts of power fell out of operation. Just one megawatt is enough to supply 750 to 1,000 homes.

The California Independent System Operator -- or Cal-ISO, which manages the state's open-market wholesale power grid -- was forced to declare a "Stage 1 electrical emergency."

The move gave Cal-ISO, a nonprofit public corporation that oversees the flow of power through 25,000 miles of "electron highways," additional authority to require generation plants and transmission line owners to respond to its commands.

"When outages coincide with high loads, we can quickly run out of options," said Jim Detmers, vice president for Cal-ISO operations. "The Stage 1 emergency declaration gives us some more alternatives to draw from."

In a Stage 1 alert, the public also is asked to help by avoiding use of heavy electrical appliances and keeping the thermostat no lower than 78 degrees in the late afternoon and early evening.

There are higher emergency alerts, which can even force rolling blackouts to thwart a complete collapse of the grid.

State power grid operators insist California will have enough electricity for the summer, but the cushion of supplies will be thin, especially in August, when demand peaks.

Gregg Fishman, a Cal-ISO spokesman, said he is "cautiously optimistic" but added that there's not nearly the "margin for safety or error that would make us feel comfortable."

During the summer, considered to be May through October, Cal-ISO expects the state to use a peak of 44,422 megawatts of power. That's up 4 percent over last summer's peak.

The state's power reserve this summer will be highest in early summer, at a comfortable 26 percent above expected demands. But that excess will decrease to just 16 percent -- or 1,615 megawatts -- by August.

A heat wave, wildfires burning transmission lines, a shortage of power imports or major generators tripping off line -- such as a nuclear power plant, which can produce more than 1,000 megawatts -- could swiftly plunge California in to emergency shortage alerts or even rotating blackouts.

To help, Cal-ISO President Terry Winter said his agency is testing a variety of high-tech tools that, among other things, give them early information about developing instability on the grid and adjacent power systems.

One of the new software systems being tested takes the pulse of the power grid 30 times a second as opposed to every four seconds, so operators will have more time to take the necessary steps to stop a cascading outage.

"It's akin to giving us a telescope to see problems at a distance, along with a microscope to magnify situations at close range," Winter said.

Even so, the head of the Federal Energy Regulatory Commission said he is concerned about California's electricity market and warned of a possible repeat of the state's 2000-01 energy shortage.

'Troublesome conditions'

"There are some very troublesome conditions out there," FERC Chairman Pat Wood said from Washington. "We're monitoring that."

He pointed to two factors in particular -- low hydropower supplies on the West Coast and potential above-normal temperatures -- that could threaten the state's wholesale electricity supply. In particular, an early snow melt in the Sierra Nevada could crimp supplies of hydroelectricity, which provides about a fifth of California's power.

Meanwhile, California regulators, armed with new rules, are pledging to prevent generators from creating electricity shortages and boosting prices this summer through bogus plant shutdowns -- a tactic used by several firms during the energy crisis.

The state Public Utilities Commission has adopted rules that power plant operators must abide by state standards for maintenance, operations and recordkeeping. State officials can conduct audits, investigations and surprise inspections to enforce the new rules, and the PUC says it can impose penalties for violations.

PUC commissioner Carl Wood said the new rules are handy tools.

"On paper, we have plenty of power [for the summer], but if some of that generation isn't available when we need it, then we're going to get in trouble again," Wood said. "I didn't want to go into the summer without having anything with which to hold the generators accountable."

But many of the firms accused of profiteering during the energy crisis have denied the charges and said they may challenge the new PUC rules if they become obtrusive.

An alarming outlook

Despite concerns about worst-case scenarios this year, independent experts, consumer groups, officials and others are even more worried about the years to come. They said there aren't enough new power plants under construction to replace the closure of aging generation facilities and meet growth demands.

The incentive to build plants is linked to the political question of how to regulate the flow of electricity generated in the state and imported from elsewhere.

State government deregulation of the industry was blamed for the 2000-01 electricity crisis.

It began in May 2000, when wholesale prices in the newly deregulated electricity market rose sharply due to a shortage of hydroelectric power, market manipulation by energy traders and a booming economy that demanded more power.

California's utilities then ran up huge debts because the deregulation scheme barred them from charging customers the true price of power. The unstable market also led to six days of rolling blackouts in 2001, the bankruptcy of PG&E and billions in state money spent on power purchases.

The political question since has been whether to return to the days of heavily regulated utilities generating and selling power at government-controlled rates or again attempt deregulation. So far, most proposals are toying with reattempting deregulation.

In the meantime, California labors under a tangle of state and federal rules and emergency regulations that makes none of the major stakeholders happy.

Political analysts are betting the prevailing plan comes from Schwarzenegger, who replaced the Democratic Davis, in a recall election triggered last year, partially by the energy crisis.

The new Republican governor has vowed that, after passage of a budget for the fiscal year that starts July 1, he will make energy his next priority. He already has logged a series of political victories.

His still-vague energy plan has been termed "deregulation light" -- a combination of limited regulation and free-market strategies.

The governor has tapped Joe Desmond of San Ramon-based Infotility Inc., an advocate of loosening regulation, as his top energy adviser.

Schwarzenegger, who recently communicated aspects of his overall proposal to the PUC, said they would "encourage investment in California's energy infrastructure, ensure long-term electricity reliability and reduce the likelihood of blackouts."

But reaction to Schwarzenegger's call for direct access, which lets consumers shop around for electricity, has been mixed. Everyone from the PUC to legislators to consumer groups are divided over the idea.

On the other hand, big business likes direct access. Representatives of corporations said freeing more big buyers would boost market competition, drive prices down and force utilities to be more cost-efficient.

State lawmakers halted direct access, a cornerstone of the flawed deregulation law that led to the energy crisis, in September 2001. They wanted to stop customers from fleeing utilities for lower-priced competitors and leaving the remaining customers to repay the billions in energy debt in the form of higher rates for years.

Allowing large customers to shop around is going in the wrong direction, said Mike Florio, an attorney with The Utility Reform Network, a Bay Area-based consumer group.

"It creates more chaos when what we need is stability," Florio said. "Worry about the frills later."

Likewise, Assembly Speaker Fabian Nunez, D-Los Angeles, was critical of the first glimpses of the governor's plan. Nunez is among the lawmakers who have authored a patchwork of bills addressing electricity, triggering a political crossfire in the Legislature.

Nunez, who has his own bill on electricity deregulation, said the governor's initial proposal "trusts the so-called 'invisible hand' of the marketplace that in the past has picked the pockets of California consumers and businesses alike. I think he has been ill-advised."

Nunez's plan for direct access would let large customers leave utility service, but once they leave, they couldn't return for five years. That would give utilities a more stable customer base, he said. The measure also sets rules for which companies could leave.

But some consumer groups aren't happy with Nunez's plan, either.

"Under this proposal, the biggest businesses in the state will have access to the cheapest power while average consumers pay higher rates," said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights.

There are other key issues to settle, as well. One of the biggest is the policy determining how utilities and companies will compete to build generation.

For instance, a measure co-authored by Assemblyman Joe Canciamilla, D-Pittsburg, would require utilities to prove their ownership of a plant is the cheapest way to provide consumers with electricity.

'Never again'

As lawmakers and Schwarzenegger appear to be moving toward another experiment with deregulation in general, a potential Democratic candidate in the 2006 gubernatorial race -- state Treasurer Phil Angelides -- has issued a warning.

"My fear is that the governor's proposal is just the first step back down the road to deregulation," Angelides said. "We have been there before and we should never go there again."

While policymakers wrestle with the future of energy in California, there remains legal fallout from the last power crisis. It includes dozens of energy-related lawsuits and a handful of criminal proceedings, with more potentially on the way.

At stake are billions of dollars California says consumers and other power purchasers are owed, as well as the integrity and power of the oversight system.

Another possible gubernatorial candidate, Lockyer is cautioning that without big changes to federal and state law, a deregulated California energy market would put the state's consumers, businesses and taxpayers at risk of repeating the energy crisis, with all of its legal fallout and little hope of relief or remedy.

"Laws, rules and regulators are supposed to protect consumers and deter misconduct," Lockyer said. "But in the case of the California energy crisis, the system has sheltered wrongdoers and left rate payers out in the cold. The enforcement defects continue to provide sellers incentives to game and gouge."

Throughout the wide-ranging, broad discussions of the energy crisis and the direction to take in the future, there's much discord. But virtually all participants agree on three things:

They don't want to get it wrong a second time.

The best decisions are made before the panic of another crisis.

Time is running out.
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Wire services contributed to this report.
Contact Sacramento Bureau Chief Steve Geissinger at sgeissinger@angnewspapers.com




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