The New Energy Crunch

Sunday, Jan. 21, 2001 By JOHN GREENWALD
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The utilities willingly accepted this limitation, as well as a rate freeze until 2002. "The public utilities thought that it was just a splendid idea to be able to buy wholesale in a free market and turn around and sell at a capped rate to consumers," says Wilson, "because for a long time, at least, they would enjoy the ability to make a profit doing so." But they were gambling that they could wheel and deal their way through the marketplace without exposure to price swings.

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They lost. In fact, the utilities rolled snake eyes time and time again. While the state's appetite for electricity was growing fast, its generating capacity was getting no bigger. Today California imports about 25% of its juice from neighbors in the Southwest and Pacific Northwest--a link that has frayed with the growing demand in those areas. Nor did anyone foresee a spike in rates for natural gas, which fires about half of California's generating plants and can account for more than half of the price of electricity. Then, as the rising demand for power met its restricted supply, the wholesale price of energy jumped from less than 5[cents] per kW-h in January 2000 to nearly 40[cents] per kW-h last December.

The results were catastrophic. Unable to pass along rising costs to homes and businesses, PG&E and SCE piled up losses and owed more than $12 billion to their banks and power providers. The utilities defaulted on some loans last week and refused to pay bills, creating a showdown with their bankers and power suppliers. Either group, in fact, could have forced the utilities into bankruptcy.

With the California utilities so shaky, it was hardly surprising that some generating companies were reluctant to supply them with more power. To keep the juice flowing, outgoing Energy Secretary Bill Richardson last month ordered suppliers to keep selling to California--a demand that rankles. "Suppliers such as ourselves are being forced to assume [the utilities'] credit risk with no promise of payment," says Steve Letbetter, CEO of Reliant Energy in Houston. "This is unreasonable and unfair and cannot be allowed to continue."

Nonetheless, the business has been highly profitable. Just last week Duke Energy reported a hefty $284 million in fourth-quarter earnings--compared with a $189 million loss last year--thanks in no small part to California's soaring wholesale prices.

Those earnings could continue to rise, since the state remains woefully short of generating capacity. California's power demand has grown nearly 25% since 1995, far in excess of the state's relatively small additions to capacity. (By contrast, Texas has built 22 new plants since 1995, with 15 more scheduled to come online within a year.) That forces California's Independent System Operator (ISO), which manages the power grid, to find some 6,000 megawatts a day outside the state.

The poster child for the frustrations that power companies face is the proposed 600-megawatt Coyote Valley generator that Calpine Corp. wants to build in San Jose, in the heart of Silicon Valley. The facility would light 600,000 homes in a region that experienced blackouts last week, but the San Jose City Council vetoed the project in November, even though groups ranging from the Sierra Club to the N.A.A.C.P. supported it. But the plant faced opposition from Cisco Systems, the leading producer of high-speed fiber-optic networks, which happens to be San Jose's largest employer. Cisco argued that the power plant would be an eyesore next to an industrial park that the company plans to build for 20,000 employees.

Such hostility helps explain why blueprints for generators keep gathering dust while California's energy crisis deepens. Proposals for 44 plants representing 22,600 megawatts of generating capacity are currently before California regulatory bodies. But only a handful are likely to come online before 2003. "California has a very cumbersome siting process," says Michael Zenker, a director of Cambridge Energy Research Associates. "It's long and gives opponents a good chance of defeating any plan." To make matters worse, some 40% of the state's capacity comes from facilities built more than 30 years ago, making them prone to equipment problems.

Given the lack of slack in the California power grid, it didn't take much to tip a swath of the state from Bakersfield to the Oregon border into blackouts last week--nor will that be the last such episode. "There's a good possibility that over the next couple of weeks there will be another day or two of blackouts," says Kellan Fluckiger, the chief operations officer of the California ISO. "And unless we have an unbelievably cool summer this year, there will be afternoons when we will have rolling outages again too."

Compounding the problems last week was a shortage of rain and snow in the Pacific Northwest, which depleted hydroelectric plants of the water they need to generate exportable power. Off the California grid went some 3,000 available megawatts. Meanwhile, a combination of routine maintenance and unexpected shutdowns in California took an additional 11,000 megawatts of capacity offline. In Morro Bay, on the state's scenic central coast, Duke Energy had to shut a 163-megawatt unit for two hours last Wednesday after the turbine began to vibrate and emit a loud, piercing sound.