The California Energy Crisis — A Silver Lining? (Part 2 of 2)
By Steve Hoffman, Hoffman Marketing Communications, Inc.
In part 1 of this two-part article on the chaos in the California energy markets, I discussed how a range of beneficial outcomes of this disorder are possible. In addition to stimulated development of renewable energy and heightened interest in conservation and energy efficiency improvements, the crisis encourages "out-of-the-box" thinking about possible alternatives. In this second part, I focus on more silver lining: rising awareness of needed transmission system expansion in North America, and the variety of innovative energy service programs offered by opportunistic energy service providers.
Awareness of Transmission System Needs
Most casual followers blame the shortage of power plants in California as the cause of the current electricity crisis there. While a power system "adequacy" problem (as power system planners call it) does exist in California, an equally important shortage involves the power transmission system. The problems in California are bringing this latter shortage to the fore, enabling industry experts who have been warning of the potential repercussions of this shortage for years to take the podium.
One such expert is EPRI vice president Karl Stahlkopf, who explains that the need for transmission system expansion is a nationwide issue. Quoted recently in a San Jose Mercury News article by Steve Johnson, Stahlkopf points out that while demand for electricity has increased about 30 percent over the last ten years, transmission line capacity has increased by only 15 percent during the same period. This discrepancy has severely reduced the level of reserve transmission capacity nationwide.
According to Stahlkopf, this difference between new demand and new capacity is expected to rise even more. In the next decade, he expects demand to increase five times faster than capacity additions or revamps. The main reason for this disparity is cost—new lines can cost as much as $2 million per mile.
And the problem is particularly acute in California, according to the Western Systems Coordinating Council (WSCC), part of the North American Electric Reliability Council (NERC) that monitors power flow through most of the United States. The WSCC estimates that only about 200 of the almost 2300 miles of high-voltage transmission lines planned for the western U.S. will be in California—a disproportionate share given the state's enormous population.
Why doesn't California—which arguably needs the lines the most—build more lines? Answers include the "not in my backyard" (NIMBY) phenomenon, combined with stringent opposition from environmentalists. Sums up senior WSCC official Bill Comish, "California is probably worse in allowing new lines to be built. It tends to get my hackles up." (Mercury News, 12/20/2000)
PG&E's infamous "path 15" set of three 500-kV transmission lines illustrates the problem the state faces. Calling path 15 the worst electrical choke-point in the state, Armando Perez, director of grid planning for the California ISO, explained recently to the Mercury News that these lines are a key path for transferring power within the state from the south to the north. (Southern California sometimes is able to generate more power via local generation than it needs.) The problem is that the three lines neck down to only two lines over much of path 15, limiting its ability to route power throughout the state as needed during peak usage periods. But adding the third line would cost about $300 million, estimates Perez, and take years to buy land, obtain permits, and complete construction.
For a long time, PG&E has been aware of the limitations that path 15 poses; the energy company has relied on power purchases from the Pacific Northwest to supply Northern California with a portion of needed power. But this winter, the low rainfall there has exacerbated an already difficult situation.
Jeff Butler, PG&E's vice president of operations, maintenance, and construction recently stated that he was unsure if a third line would be added to path 15. (Mercury News, 12/20/00) Today, little financial incentive exists for PG&E to build such a line. One year ago, the Federal Energy Regulatory Commission (FERC) issued its final order (number 2000), which specified required functions of what it termed regional transmission operators (RTOs). One of the stated functions is "planning and expansion" of transmission lines, a responsibility that would fall on California's RTO, the California ISO.
The publicity and scrutiny that arises from the crisis in California is likely to increase awareness of the need for transmission expansion in California and throughout the country—a very positive side to the problems with which Californians are grappling. Even though the California ISO and other forming RTOs across the U.S. are responsible for planning this expansion, who will finance and build the lines? What mechanism for encouraging such construction can be implemented? What regulatory impediments can be streamlined to facilitate this process? These questions are being asked now, and their answers will likely determine whether sufficient transmission capacity is installed to maintain power reliability at levels that are the envy of the world.
Opportunity for Innovative Marketing Programs
An article I received today by email presents another beneficial aspect of the California quagmire. In his IssueAlert entitled "New West Energy Exits California—Others to Follow?" Bob Bellemare, vice president of utility services at Signtech (www.consultrci.com), points out that "With high market prices and volatility, I see a great opportunity for new marketing programs in the state of California." Bellemare asserts that a main benefit of competition in energy markets is "the innovation and investment in new products and services that leads to a revolutionary change in the way that the industry operates…" While some energy marketers will exit the market, as he illustrates with New West Energy's announced suspension of commodity sales in California, Bellemare predicts that "others will persevere and ultimately the MCI of the electricity business will emerge."
To support his thesis, Bellemare offers some examples of innovative services now being offered in California. For example, he relates that Green Mountain Energy now offers SDG&E customers its "Breathe Easy Payment Plan," which guarantees enrollees a rate of 8.5 cents per kWh until the end of 2001. Similarly, he reports that Strategic Energy Limited (SEL) offers SDG&E customers a ceiling price. So far, the Food and Beverage Association of San Diego County has endorsed one of SEL's programs, and Marriott announced that SEL will provide and manage electricity supply to its San Diego Area Lodging Facilities. Further, Bellemare points out that other new marketers are appearing in California, including the New Power Company, AOL Utility Corp., 3 Phase Electrical Consulting, and Power for Less.
I concur with Bellemare, believing that open markets--and only open markets--spark the flurry of service offerings needed to make deregulation a self-sustaining approach. It is no coincidence that much of the activity Bellemare cites is in San Diego—the only part of California that currently has gone beyond its artificial rate freeze period.
Lessons Learned
Beyond these benefits of the confusion in California, observers across the U.S. and in other countries can gain an advantage. For California can act as a model, in some respects, of what not to do when deregulating an electric power industry. Many states in the U.S. have not yet deregulated, and others are in the midst of the process. A colleague told me that at a recent deregulation workshop he organized in Germany, participants wanted to know all about what was going on in California—what worked and what didn't work. The California experience provides valuable lessons in this complex area.
What's your take on the California calamity? Do you see other potential benefits that will emerge? Please email me with your ideas, steve@hoffmanpubs.com.
Steve Hoffman is president of Hoffman Publications, Inc. (www.hoffmanpubs.com), a California-based firm that specializes in writing for the energy industry. Steve authors a monthly ElectricNet column entitled "Plugged In with Steve Hoffman." (Back to top)