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July 1, 2000, 1:09AM

Distribution troubles spawn blackout fears By MICHAEL DAVIS Copyright 2000 Houston Chronicle

CINCINNATI -- As the mercury rises this summer, big power users in the Upper Midwest are bracing for the worst.

One is AK Steel, among Ohio's largest power users. It made it through the last two summers "with much pain" because of power shortages, said Alan McCoy, a vice president of the Middletown-based company. More of the same is expected this year.

"There is really not that much we can do to prepare for this," McCoy said. AK Steel's contract with Cinergy allows the utility to reduce the power it sends to the company when supplies get tight.

When temperatures rose last summer and the steel maker's power was curtailed, it was forced to buy power on the spot market at more than 30 times the normal price to keep its plants running, McCoy said.

Record heat, rising demand and an overburdened transmission system are expected to combine this summer to cause power shortages and outages across the nation. The most vulnerable areas are expected to be the Upper Midwest, New England, California and the Southwest.

There have been some lessons learned in the past two years. And there have been improvements, mainly on the supply side.

In Texas, more than 5,000 megawatts of new generating capacity will be available this summer. In Illinois, eastern Wisconsin and eastern Missouri, all the nuclear generating units are expected to be running. And in the Southeast more than 10,000 megawatts of new power will be available.

But there will still be bottlenecks.

"As we look at the supply and demand in the Midwest, it is clear it will be as tight as it was last year," said Larry Makovich, a senior director of Cambridge Energy Research Associates who tracks North American power markets. "A lot of the interruptions last year were not supply and demand as much as distribution. The transmission system is in a state of gridlock."

Some of the nation's biggest independent power companies are in Houston, which along with the rest of Texas should not have problems, officials say. Texas will be in good shape because of the isolated nature of its markets and the heavy load its utilities are accustomed to carrying in summer. AK Steel blames electricity deregulation for its headaches. New power marketers are clogging a distribution system that was built to handle a few monopoly utilities, it says.

The marketers are basically middlemen who buy wholesale power and resell it, a practice allowed under deregulated markets,

AK Steel has become a vocal critic of deregulation in Ohio, where a settlement was reached among utilities and state regulators in May to open the state's markets to customer choice and supplier competition.

"We've been told this has happened in the past because critical generating plants were down for maintenance, or there are not enough new plants being built or because of deregulation -- none of which is a satisfactory answer to us," McCoy said. "This is bad news for us and bad news for consumers."

A power fulcrum For the past two years, when temperatures have hit triple digits, the Upper Midwest has been ground zero for power shortages that have dominoed across the country.

The region is like the main intersection for numerous interstate highways carrying traffic in all directions. Shortages and transmission problems here can affect Canada, the Eastern Seaboard, Illinois, Kentucky and parts of the South.

"We cannot operate our system without taking into account what is happening on other people's systems," said John Procario, vice president of electric operations at Cinergy Corp., the utility serving southern Ohio and parts of Indiana.

Because of the state-by-state way in which U.S. power markets have been deregulated, the nation has been left with an interconnected power grid that is populated by competing utilities and power marketers operating under different rules.

This has led to utilities, which long operated on the assumption that they'd generate all the power used in their market, blocking power transactions over their main transmission lines for competitive reasons.

The most vulnerable section on the grid this summer will be the East, according to the 2000 Summer Assessment compiled by the North American Electric Reliability Council.

The New Jersey-based council oversees the safety and reliability of the national grid. Members of the not-for-profit group include investor-owned utilities, electric cooperatives, state and municipal utilities, independent power producers and power marketers.

The group has found areas where conditions have improved. In the mid-Atlantic region, a comprehensive analysis of the grid was conducted and remedial actions are being taken.

"Generation and transmission resources are expected to be adequate to meet projected customer electricity demand in most areas in North America this summer," said Michehl Gent, president of the Reliability Council.

State laws do not -- and for that matter, cannot -- address transmission grid problems that are national in scope. Meanwhile, federal lawmakers appear dumbfounded by the issue.

The Senate passed a bill on Friday to improve the reliability of the power grid, but only after members failed to gain consensus for a broader bill to restructure the $300 billion electricity industry.

The measure would grant the Federal Energy Regulatory Commission jurisdiction over organizations that are supposed to ensure the reliability and maintenance of the nationwide power grid. The commission, better known as FERC, has begun the slow process of doing just that.

"The problem is more pronounced in competitive markets because in those markets supply disruptions can bankrupt marketers," said Gerald Alderson, president of Wattage Monitor, a publication that tracks deregulated power markets. "When that begins to happen, it will not be just a shakeout, but a serious market disturbance."

Deregulation backfiring Electricity deregulation was supposed to create an open marketplace where competing independent power companies would provide low-cost power and utilities would move the power as it was needed.

The reality is that power plant builders run into obstacles getting their power to users and some local systems in major cities are prone to breakdowns.

"All of the signs are saying that, with the demand increase and the finite supply that has been added, we really think things are going to be interesting this year," said Steve Bergstrom, president of Houston-based Dynegy, which has power plants in some of the nation's hot spots for shortages, such as California and the Chicago area.

In California, the first state to open its electricity markets to competition, power shortages are costing the high-tech industry an estimated $75 million a day in lost production as utilities are forced to conduct rolling blackouts in the San Francisco Bay and Silicon Valley areas.

Some California companies, such as Oracle Corp., are building backup power plants because they do not trust the system.

U.S. Energy Secretary Bill Richardson has been traveling the country the past three months warning that such problems will continue each summer until Congress enacts legislation requiring standards that ensure the reliability of the nation's power markets.

An Energy Department report issued in March concluded that the transition to electricity competition has caused some utilities to focus on competing for customers instead of assuring that adequate power is kept flowing.

An effort is under way to develop national standards to ensure equal access and fair prices to move power over the national grid, but the standards will not be in place this summer. Many in the industry say the power shortages of 1998 and 1999 should have been wakeup calls.

Thousands of commercial and residential customers lost power in Chicago last summer, some for as long as three days. Commonwealth Edison, the utility serving Chicago, has made progress, but resolving all of the problems that were identified last summer will take two years, said Jonathan Goldman, director of policy and governmental affairs at the Citizens Utility Board, a Chicago-based utility watchdog group.

"They blamed it on the extreme heat, but the real problem was their distribution system," Goldman said.

Numerous investigations by the City of Chicago and state regulators indicated that ComEd was not prepared for anything above the average summer high of 93 degrees, Goldman said.

Unicom Corp., the parent of ComEd, is spending about $900 million this year to fix its transmission system.

Cinergy and other utilities in the most populated areas of the Midwest say they have the power supplies on their systems to meet the growing demand. Whether their transmission systems will be able to handle the peak loads this summer remains to be seen, Goldman said.

ComEd started locking up power under contract as early as last December in preparation for this summer.

The company's goal is to acquire enough power from plants in and around its service area to handle its normal customer demand, said Paul Elbert, president of Unicom Enterprises, a division of Unicom. "Our demand load is growing at about 3 percent a year, and that's pretty hefty for a utility," he said.

ComEd started a program on June 1 under which it will pay residential customers $60 for every outage of more than eight hours. The company estimates that it would have paid out $10 million if the program had been in effect last year.

Cinergy conducted an almost "militaristic" efficiency update of its power plants in preparation for this summer, spending about $15 million, said Michael Cyrus, president of energy commodities at the company.

Cinergy also is investing about $24 million in its electric transmission and distribution system in preparation for high demand this summer.

In addition, the company has established a program designed to reduce demand this summer. Named PowerShare, it offers financial incentives to large commercial and industrial customers if they cut their usage during times of high demand. About 350 large customers have signed up, said Jim Willis, Cinergy's vice president of field customer services.

Wholesale snags The growth in wholesale electricity trading by power marketers is putting an increasing burden on the national transmission system.

In early 1995, 11 power marketers were engaged in wholesale trading. By early 1999, that number had jumped to 124, according to the Edison Electric Institute, a Washington D.C.-based trade group that represents investor-owned utilities.

During the same four years, the amount of wholesale electricity that power marketers sold in the United States jumped from 2.7 million megawatt hours to 487 million megawatt hours.

These companies are pushing for a completely open grid that would let all power providers use the wires like public highways. They say competing utilities are intentionally blocking the flow of power over their limited transmission systems.

"We can deal with the inter-regional supply issue -- the problem has been getting power to where it is needed," said Steve Kean, senior vice president at Enron Corp.

Although the Federal Energy Regulatory Commission is addressing the problem, no solution is expected this year. In December, the agency issued its Order 2000 guidelines for creating regional transmission organizations, which would manage public utility transmission facilities.

The thinking behind the formation of such organizations is that since they would own no power plants, they could ensure that the system would be operated in a fair way.

An example of how this would work has already been proposed in the Northwest. Six utilities have agreed to consider combining their transmission systems into a separate company that would own, lease or maintain high-voltage lines stretching from Washington to Nevada and Montana.

The companies are Sierra Pacific Resources' two Nevada utilities, Enron Corp.'s Portland General Electric Co., Montana Power Co., Avista Corp. and Puget Sound Energy.

One of the most pressing tasks facing the restructured industry will be expanding the capacity of its main lines. People do not want to live near them, and picking routes that match future power plant development also is daunting.

"Some have said it is more difficult to build transmission lines than it is to build a nuclear plant," said Elbert of Unicom.

The main obstacle to getting more power lines built is the question of how utilities will recover their investment, said John Colson, chief executive of Houston-based Quanta Services, whose services include building and maintaining electric transmission systems.

"The only places where they are adding new lines is where they absolutely have to, where there were outages that infuriated the public and politicians," Colson said.

His company has been kept busy working on existing systems as more utilities have cut their full-time maintenance crews and turned over the work to firms like Quanta.

Even when utilities go foward with power lines, it doesn't solve the problem overnight.

"It's going to take an extraordinary amount of time because of the process of permitting and gaining right of ways," he said.

There are plans on the books to build about 7,000 miles of high-voltage lines. The North American Electric Reliability Council said the system will be expanded to 208,221 miles of line by the end of 2008, up from 201,243 miles in early 1999.

In a move to add power this summer, the Federal Energy Regulatory Commission is taking steps to allow non-utility companies that have their own generation facilities to sell excess power during peak periods.

Makovich said there are plans to build plants that can generate 240,000 megawatts of power in the United States over the next four years -- more than half of all new power plants in the world. The first wave of that new power will be coming onto the market this summer, he said.

Texas has more plants under construction than any other state -- about 12,000 megawatts worth. To get an idea of how much power that represents, consider the fact that Reliant Energy HL&P, the state's second-largest electric utility, has about 13,000 megawatts of total generating capacity.

Electricity use in the United States was up 4 percent this year through May, according to the Energy Information Administration, the research arm of the U.S. Department of Energy.

In the short-term energy outlook that it issued in June, the agency said "major concerns for utilities are the possibility of severely spiking power prices and transmission equipment failure during hot spells."

http://www.chron.com/content/story.html/business/593106

-- Martin Thompson (mthom1927@aol.com), July 02, 2000

Answers

I guess people (and businesses) might find a use for those Y2K generators and other preparations.

-- K. (infosurf@yahoo.com), July 02, 2000.