The makings of a power crisis

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The makings of a power crisis Complicated factors push the region's problems to the breaking point

Sunday, December 24, 2000

By Gail Kinsey Hill and Michelle Cole of The Oregonian staff

The idea that the lights could go out this winter seems about as real as an old man in a red suit delivering presents for Christmas.

But the threat was real enough for five governors, utility company executives and federal bureaucrats to scurry to Denver on Wednesday to talk about the power crisis facing the West.

"We have a bigger problem than we thought we had," Stephen Wright, acting administrator for the Bonneville Power Administration, said at the summit convened by Energy Secretary Bill Richardson at the request of Gov. John Kitzhaber.

Whether or not homes go dark, everyone agrees that the West has a serious energy problem that can't be ignored any longer. Each state has different needs, and reaching a consensus on how to best deal with the region's electricity problems will be difficult.

A series of circumstances conspired to create the problem. They include:

• Rising consumption: The Northwest's demand for electricity grew at a steady rate in the 1990s. Driven in part by the demands of the high-tech industry, Oregon's consumption of electricity outpaced population growth. At the same time, conservation efforts stalled.

• Inadequate generation: Construction of new generation plants faltered. Nuclear plants went offline. Uncertain regulatory policies and low prices scared away potential builders of new power plants.

• Environmental complications: New environmental laws changed the way states use their rivers and reservoirs. Salmon-saving policies reduced the amount of water available to pour through turbines to create electricity.

• Weather trends: During the past five years, ample rain and snow washed away concerns about shortages. But a hydro system changes with the weather. This winter's dry start reminded power officials that consumption threatens to outpace supply.

• California's mistake: California charged into unfettered territory in 1998 with a bold deregulation plan. The state ran smack into trouble. The state's two largest utilities face financial trouble. Businesses and residents face soaring prices. Two weeks ago, Richardson ordered Northwest utilities to help California.

Officials in Denver last week agreed they must act soon. It will take years to build new plants to produce more electricity, so the first step is to reduce demand.

It won't be easy.

The demand for power Oregon electricity sales, not counting Bonneville Power Administration's direct service customers, grew by an annual estimated average of 2.4 percent in the 1990s, according to the state Office of Energy. That means demand for electricity outpaced the state's 1.7 percent annual population growth.

Nationwide, the Department of Energy reports that demand for electricity increased from 2 percent to 2.5 percent a year in the 1990s.

It's not a new trend, nor one that's likely to end soon.

Electricity consumption has been growing for decades. In the 1950s, '60s and '70s, power consumption grew by as much as 6 percent and 7 percent a year, said Alan Beamon, an economist with the Energy Information Administration, a Department of Energy agency.

Then the nation's appetite for electricity was driven in part by the transformation of the ice box into a side-by-side refrigerator-freezer.

Now personal computers, fax machines, cell phones, cable television boxes and other gadgets help drive the demand for power. The federal government estimates the demand for electricity will grow by 1.8 percent a year through 2020; the Northwest's growth is pegged slightly higher at 2 percent a year.

The expanding world of high-tech and high-tech products cast a degree of uncertainty on those projections. Experts disagree on how much electricity high-tech products use. No one can predict what electricity-eating gizmos may be invented.

Portland General Electric, which serves more Oregon customers than any other company, says demand for electricity in its service area grew 2.8 percent a year between 1995 and 2000. During that period, demand for electricity by PGE's high-tech industrial customers increased by 12 percent a year.

Mark Mills, editor of the monthly newsletter, Digital Power Report, estimates that high-tech manufacturing and the use of high-tech products account for as much as 13 percent of all the electricity consumed. Researchers at Lawrence Berkeley National Laboratory estimate high-tech and its products account for about 3 percent of electricity consumption.

But the laboratory acknowledges that the high-tech demand for electricity intensifies in some areas. For example, the appetite for electricity in California's Silicon Valley grows by 5 percent a year, compared with a statewide 2 percent growth, according to the Electric Power Research Institute in Palo Alto, Calif.

Disincentives to generate The West's growth didn't happen overnight. So why didn't utilities gear up to produce more electricity?

From 1994 to 1999, peak demand for electricity in the West rose by nearly 12,000 megawatts, or 10 percent, while generation capacity grew by 4,600 megawatts.

Traditionally, utilities built power plants. Under regulatory laws, they recovered their investment costs by billing ratepayers. The rules changed significantly in 1992 when Congress passed the Energy Policy Act. The legislation set the stage for deregulation by opening access to transmission networks, previously the domain of utilities and federal power marketers such as the Portland-based Bonneville Power Administration.

"When you follow the trail backwards, the roots for this (situation) were set in the '92 act," said Richard Adams, executive director of the Pacific Northwest Utilities Conference Committee, an organization of the region's public and private utilities and some industries.

Utilities pulled back from investing because they weren't sure whether future deregulation would take them out of the generation game. Developers saw promise in a new world of competitive power marketing, but they weren't willing to spend millions of dollars on new plants until the new rules became clear.

Gradually, states began passing laws to loosen regulation and promote competition. Most states acted cautiously and with little consideration for what their neighbors were doing.

"Everyone was caught in this regulatory muddle," says Judi Johansen, administrator for the Bonneville Power Administration from 1998 until this year, when she left to take a job as an executive vice president with PacifiCorp, a Portland-based utility with 1.5 million customers in six Western states.

What's more, electricity was cheap -- too cheap to make it worthwhile to build expensive plants. Just a year ago, wholesale electric power was selling for $20 to $30 a megawatt hour, not enough to generate much excitement among developers. Now, with prices 10 times higher -- even more when demand peaks and buyers rush to the spot market for extra supplies -- the financial incentives have appeared with a vengeance.

Generation facilities, however, take two to three years to come on line, given permitting requirements and construction schedules.

In the Northwest, about 1,280 megawatts of new generation are under construction and scheduled to come on line in 2001 through 2002. That's enough to light Seattle, but not nearly enough to keep up with the region's growth.

Environmental programs Salmon recovery requirements, issued in 1995, threw another hurdle in front of utilities trying to eke every megawatt out of the Northwest hydro system. The directives changed the way the Northwest operated its vast system of rivers and dams.

Power operators used to draw down reservoirs during the winter when demand rose, pouring more power through turbines and generating as much as 3,000 extra megawatts. In the spring, snowmelt refilled the reservoirs.

Now, reservoirs must be kept at higher levels to make sure enough water is available to release in the spring to help young salmon migrate down river.

"We draft less in the winter, so we produce less power," said Walt Pollock, senior vice president of power supply for PGE.

"There are good public policy reasons" for the changes, Pollock continued. "But the flexibilities we once had are gone."

Until this year, plenty of water and snowpacks buffered potential conflicts between sufficient power supplies and salmon recovery. But since midsummer, abnormally dry weather has pushed water run-off estimates well below targeted averages and highlighted the potential for power shortages.

"All of a sudden, this cushion we had is gone," said Dick Watson, power planning director for the Northwest Power Planning Council, an organization charged with balancing fish and wildlife protections with electricity production in the Northwest.

California deregulation California drove the predicament home.

In 1998, it put into effect a restructuring plan that dramatically changed the way utilities operated. The state opened wholesale markets and encouraged independent power generators to enter the scene. It set up a power exchange to broker power sales and an independent organization to operate the electric grid. It tagged San Diego as the city where residential consumers would be the first to pay market prices for power, rather than regulated rates.

This summer, the plan imploded. A midsummer heat wave, an unexpected drop in generation because of off-line power plants and competitive jockeying pushed wholesale prices through the roof. The situation deteriorated further as winter approached. Since early December, California has faced emergency after emergency.

As the state suffered, so did its neighbors. A vast, interconnected grid of generators and transmission lines connects the West.

In the past, California and the Northwest have benefited from cooperative agreements for exchanging power. California demands more electricity in the summer when air conditioners hum nonstop, and the Northwest uses peak amounts of power in the winter, when temperatures drop.

But this year, the equation went topsy-turvy. Many of California's generating plants, operated full-out in the summer, are down for repairs. Natural gas prices, at unprecedented levels, are heaping massive costs on California utilities that use gas-fired turbines to generate electricity. California's two biggest utilities, recovering just a portion of operating costs through regulated retail rates, are on the brink of bankruptcy.

Last week, Terry Winter, head of the grid-monitoring California Independent System Operator, told the energy officials gathered in Denver that he likely won't have any power to send to the Northwest in January or February.

Northwest operators had expected to import as much as 4,000 megawatts of electricity next month.

"The situation appears to be more serious than we anticipated," said John Savage, director of the Oregon Office of Energy.

Pushing conservation Conservation is one of the few short-term solutions to the region's energy crunch. Northwest residents have shown they can respond in a crisis.

Earlier this month when an approaching arctic front raised the threat of a power shortage, Kitzhaber and Washington Gov. Gary Locke appealed for the public's help. In response, for example, the region recorded energy savings equivalent to 835 megawatts between 5 p.m. and 6 p.m. Dec. 11. That is more than a large power plant could generate during that time.

But an October report by the Northwest Power Planning Council found the region's ongoing commitment to energy conservation has "fallen off considerably in recent years."

The report concludes that creating incentives to conserve should be a "priority" for the region's utilities. Some suggest financial incentives are the best way to guarantee that conservation occurs.

"Altruism only goes so far," said Karl Stahlkopf, a vice president with the Electric Power Research Institute, a nonprofit think tank for the utility industry.

Paying utility customers for what they don't consume is the idea behind a program launched by PGE in July. The company pays large commercial and industrial electricity customers for voluntarily reducing consumption. So far, six businesses have signed on.

Still, consumer advocates and union workers worry that some of these new approaches to conservation will gouge residential ratepayers and cost jobs.

Nine of 10 aluminum smelters in the Northwest have either shut down or partially curtailed operations because of the rising power costs. Kaiser Aluminum was branded a "profiteer" when it announced recently that it could net $52 million by closing its Mead Smelter near Spokane and reselling its unused electricity to the Bonneville Power Administration.

Union leaders called a news conference last week to demand that the money aluminum companies may make from reselling power be spent to compensate their idled workers, expand power generation in the Northwest and to counteract rate hikes paid by all.

"The public ought to have a lot to say about how the proceeds of these sales are used," said David Foster, District 11 director for the United Steelworkers union.

The rumblings of discontent indicate the enormousness of the job ahead as power operators and public officials struggle to pull the West out of it energy quandary.

As the Denver summit closed and snow swirled outside in a Christmas greeting, Energy Secretary Richardson warned governors that hostilities toward California could threaten any energy compact the region tried to craft.

Even so, Kitzhaber and other Western governors seem committed to the task.

"I believe," Kitzhaber said, "Westerners are ready to step up to the plate in times of crisis."

You can reach Gail Kinsey Hill at 503-221-8590 or by e-mail at gailhill@news.oregonian.com.

http://www.oregonlive.com/news/oregonian/index.ssf?/news/oregonian/00/12/fn_12power24.frame

-- Martin Thompson (mthom1927@aol.com), December 24, 2000


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