Let there be light
As we grapple with soaring bills and cold homes, experts examine the whys of the power crisis and seek solutions
02/04/2001
Al Gibbs; The News Tribune
The Energy Crisis
It was a design for disaster.
When California's Public Utility Commission announced its plan to restructure and deregulate that state's electric utility industry in 1994 - on Earth Day, no less - it unveiled a plan to let the free market reign for utilities forced to purchase new supplies, but gave consumers a mandatory 10 percent price cut.
It decreed a world in which utilities that always had planned for their electric energy supplies years in advance could now buy power no more than a day ahead.
Although nobody knew it at the time, the utility commission had designed a world that would lead to a buy high-sell low economic disaster that will affect this area's economy for years to come.
The plan would dismantle the stability of a regulated market, destroy a major factor in how monopoly utilities had been doing business for decades and end up largely causing the West Coast's current energy crisis.
It created, according to Ralph Cavanaugh, energy director for the Natural Resources Defense Council, a "roller coaster market that buried everybody."
"I think it could have been foreseen," added Cavanaugh, who is based in San Francisco and is one of the most trenchant observers of the regional energy scene. "I wrote about it (in 1994), but I was feeling pretty lonely."
He's not lonely anymore.
These days, retail utilities struggle to find power - and to figure out ways to pay for it. Some industries have cut back production or shut down entirely. People worry about how they'll be able to stay warm and still pay electric and natural gas bills that are twice as high as a year ago. And the utility industry and many of its customers wonder when their world will return to normal.
Meanwhile, companies like Enron and Dynegy and Duke Power that have electric supplies to sell into the market are posting record profits. B.C. Hydro, the electric utility arm of British Columbia's provincial government, expects to make $1 billion (Canadian) in profits for the budget year ending March 31 - more than double what it made last year - and is expected to give its Canadian customers rebates.
But some observers are concerned that higher energy prices will drag down the Northwest's increasingly fragile economy.
Higher energy prices "will certainly push things a bit in that direction," said Bruce Mann, an economist at the University of Puget Sound.
"This is the next step down the road in our transition from energy-sensitive industries."
Electric utilities have always been conservative organizations. Some would say hidebound.
The best and brightest members of a utility's staff generally gravitated to the power manager's office, a place where jobs revolved around what utilities call portfolio management, a glorified term for making sure the lights stay on.
It was not a place for short-term thinkers.
Hydroelectric and thermal generating plants were expected to churn out electrons for 30, 50, 75 years or more.
A power manager's job was to make certain there was enough energy to meet the electricity demands that followed people's lifestyles: heavy in the morning and evening, lighter at midnight and midday. Supply contracts covering three to five years were considered short term.
In the Northwest, prices ranged from a few dollars for a megawatt-hour - enough power to run 1,000 homes - late at night to maybe $50 during the evening peak. Those prices were the lowest in the nation, one-third to one-half the prices anywhere else, because of the region's abundance of cheap hydroelectric power.
All that changed after Pete Wilson, then California's governor, signed a bill in 1996 that deregulated what had been a monopoly in that state.
The rules of deregulation there allowed supply contracts of no more than a day in advance, the merest blink of an eye in the traditional energy-supply world.
"It is the equivalent of day-trading electricity," said Walt Pollock, a Portland General Electric vice president and former Bonneville Power Administration executive.
"It changed us from a 20-year planning horizon to day-ahead, and that was too big a leap."
Added Cavanaugh: "The PUC said the market would take care of that (portfolio planning). But everybody's figured out that that was moronic.
"'The market will take care of it' is a mantra I heard far too often - and it's wrong."
Resistant to change
Other forces were at work, too.
The entire West Coast was running out of power. Because energy prices had been so low in the regulated market, few utilities were building big new generating plants. Profit margins were so thin they could hardly cover the cost of borrowing money.
And the transmission grid that was designed to enable utilities to trade electricity back and forth - a 7,000-megawatt string of lines that allowed the Northwest and California to avoid building new plants and instead trade power to meet seasonal demand - was becoming increasingly frayed.
Nearly three years ago, in the late summer of 1998, a few people in the energy industry began to sense that something was amiss.
"I started waving flags," said Judi Johansen, an executive vice president for Portland-based PacifiCorp who headed Bonneville, the federal agency that markets power from Columbia and Snake river dams, until last November.
"That was the point where I started getting nervous."
Bonneville's 1998 "White Book," its annual forecast of energy supply and demand, showed a 3,000-megawatt shortage of capacity in the Northwest. In essence, it said blackouts would result if a blast of Arctic air hit the region during a time when a couple of generating plants were off line or a high-voltage transmission line failed.
The booming West Coast economy had erased the power system's ability to meet peak demand.
"I did not anticipate the magnitude of economic growth since 1992," Johansen said. "It was something the industry just missed."
Then, last May, California exploded. Northwest utilities and their industrial customers were caught by surprise.
"I'll be frank," Johansen said. "I didn't pay much attention to California. The California piece of this really crept up on me."
With many plants out of service for their annual maintenance last May, a heat wave sidled into Southern California, probably the most air-conditioned area on the planet.
Huge peaks in demand sent electricity prices soaring on what was a newly deregulated market - and to heights nobody in the industry had ever imagined.
Fifty-dollar power suddenly was selling for as much as $5,000 a megawatt hour.
As they had always done, California energy managers called utilities in the Northwest. Send us all the power you can, they cried.
But there were unplanned plant outages in the Northwest, and an early spring runoff had left hydroelectric reservoirs dangerously low.
There was precious little surplus energy anywhere on the West Coast.
One summer day, as the heat wave deepened and energy supplies were stretched to the breaking point, California's Independent System Operator ordered rolling blackouts.
It was, Cavanaugh said the next day, "eerie" and "weird" to see San Francisco's Market Street thronged with people at mid-afternoon because the power had been shut off.
As electric prices soared, utilities and industries were shocked, then numbed.
Utilities scrambled for power and tried to figure out how to pay for it.
Manufacturing plants like aluminum mills and chemical producers who located in the Northwest precisely because it had had cheap power for decades shut down or dramatically curtailed production.
But that in itself had rippling economic consequences.
Other industries that were used to buying raw materials to keep their production lines running now couldn't get enough because their suppliers weren't producing at full output.
It was, noted Kaiser Aluminum and Chemical Corp. vice president Pete Forsyth, the result of a "half-baked, half-pregnant market."
Kaiser's plants in both Tacoma and Spokane shut down. The company began selling its power into the market, but was required to share its profits with its laid-off workers and Bonneville.
Things just got worse as summer turned to fall and then winter.
For the first time in years, the winter rains didn't come. Reservoirs that should have been filling with water for the next summer's hydroelectric generation were at their lowest level in half a century.
"Until this water shortage, (high market prices) were not negatively impacting us," said Steve Klein, Tacoma Power's superintendent.
"We saw what was going on, but we didn't feel the pain until we were shorted by Mother Nature. If we had normal rainfall, we wouldn't be in this trouble."
California's power shortages also continued, so electricity that normally flowed from California to the Northwest for winter heating wasn't available. Prices stayed high. Tacoma Power has paid as much as $3,000 for a megawatt-hour of juice, a hundred times higher than what had been the normal cost.
Tacoma and other utilities began to impose surcharges on customers to help pay for the dramatically rising price of power.
They also called for energy conservation, but that alone wouldn't solve the problem.
Some industries simply cannot operate without electricity. Nobody's figured out a way to manufacture aluminum or chlorine with natural gas or coal.
And electricity is one of the economy's least elastic commodities.
If the price of pork belly futures skyrockets and bacon costs, say, $50 a pound, well, consumers will eat something else with their breakfast eggs.
No such alternative exists for electricity. Computers, which now consume more than 10 percent of the nation's electricity, won't run on natural gas.
Dim future ahead
At the moment, the region's electric energy future doesn't look very bright.
"There isn't a single silver bullet," said Kaiser's Forsyth.
"You don't see any immediate fixes here," Klein added.
"Now the cry is to build (new plants), especially (by) public power. I think that's irresponsible."
Better to have a balanced response for the long term, he said.
"The other thing that bothers me," Klein said, "is the almost religious call for conservation, but conservation comes at a cost, too."
While conservation can help, it can't in itself solve the problem.
If there is a good side to the West's energy crisis, it is that higher prices have improved the chances that part of the solution for shortages could be the development of what are called renewable resources, wind turbines, solar cells and the like.
Although the price of power from, say, a wind farm would be higher than what regional utilities were used to paying before California's crash, it could now be well below the latest markets.
"Renewables are becoming more economical," said Portland General Electric's Pollock.
In fact, FPL Energy, the generating arm of Florida Power & Light, plans to install 450 wind turbines on Van Sycle Ridge south of Walla Walla this year. The so-called wind farm would generate some 300 megawatts of power. It will be the largest such facility in North America.
And there are natural gas-fired combustion turbines under construction from Washington to the California border.
One thing won't be tried, in all probability: nuclear power.
Although some people outside the power industry have called for resuming construction of a three-quarters-complete nuclear plant near the Tri-Cities, in fact that would take longer and cost more than starting from scratch to build a brand new nuclear plant. And utility executives fear political opposition would kill any effort to build any new nuclear plant.
When will the Northwest return to a time when its supplies of power match the demand, when newly built generating stations and consumer conservation again bring the demand-supply equation into balance?
Nobody really knows for sure, but the best guess of the experts is three to five years.
Maybe, Forsythe said.
"I'm not confident we're stepping up enough to solve the problem," he said. "I'm not confident the measures we're looking at go far enough."
Pollock agreed.
"Nobody's finding the magic bullet," he said. "Not at all."