State Grid May Lose Oil's Excess Energy

Greg Lucas, Sacramento Bureau Chief

Saturday, March 10, 2001, ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/10/MN193468.DTL

Sacramento -- Oil companies, whose operations produce enough excess electricity to power 1.5 million California homes, may stop supplying power because they aren't getting paid and the Davis administration isn't helping lower their production costs.

At the same time, Gov. Gray Davis has asked the operators of the state's largest refineries to try to put more power on line this summer to avert rolling blackouts.

"If the governor is serious about having more generating capacity on line this summer, the last thing he would want to do is force a shutdown of power that's already out there," said Jack Coffey, manager of California state relations for Chevron, which sells some of the excess electricity created by its co-generation plants.

Some oil officials say privately that unless costs are brought down, they will stop selling excess power to California because it would be cheaper to not produce the megawatts in the first place.

What oil companies want is more freedom to become energy self-sufficient, a better price for the spare energy they produce and an end to a state fee they claim unfairly dings companies creating their own electricity.

The oil industry plays a key role in energy production in California. The industry is one of the biggest creators of co-generation power, which along with wind and solar power makes up about a third of the state's energy supply.

Oil companies produce more than 2,100 megawatts of power, of which they sell 1,500 megawatts to the state's power grid.

Co-generators are basically big airplane turbines, powered by natural gas. The turbine creates electricity, and the hot gases that come out of the other end of the turbine are heated and steam is produced.

Because steam is used both in refining oil and prying it from the ground, co-generation is used widely by refineries and oil drilling operations all over California.

In fact, California's largest co-generation plant is operated by British Petroleum at its Torrance refinery. The plant not only powers the refinery's operations but sells an additional 360 megawatts to Southern California Edison, its partner in the venture.

The main issue for the oil companies is the same as other electricity providers -- getting paid.

The shaky financial state of the utilities has meant that any company selling them electricity -- whether it's a big oil refinery or a little biomass plant -- has been paid little to nothing since December.

So far there has been no assurance from the state or the utilities that the more than $500 million owed oil industry generators will be paid or even that future power will be paid for. That, oil companies say, is a strong disincentive to supplying more power.

The cost of creating co-generation power has also skyrocketed.

With the price of natural gas at record levels, some oil companies say that without some help from the state it costs more to run their turbines than they will get paid for the energy created.

Different oil companies want different things from the governor and the Legislature.

There are two types of oil company co-generators: Those that have contracts to sell their energy, like British Petroleum and Shell, and those like Chevron and Tosco, which make their excess power available when they have some to spare.

The as-available companies say that a legislative deal to bring down the cost of all electricity created by alternative producers makes it unprofitable for them to sell their extra power.

Legislators want to pay alternative energy producers less by changing the price formula. Now the price is calculated on the average monthly purchase price of natural gas. Lawmakers want to use a five-year average of the price of natural gas, a much lower figure.

But the as-available producers, like Chevron, buy their gas monthly. Switching to a five-year average means they would be paid less than the cost of producing the power. "The economic signal being sent is 'No, don't sell surplus electricity. Don't install new generation,' " said Carol Guthrie, manager of electricity supply for Chevron.

At the Volero refinery in Benicia, the company is considering installing a $50 million co-generation plant to supply the refinery with the 50 megawatts a day currently bought from Pacific Gas & Electric Co.

But energy legislation at the Capitol is making them nervous."Although our refinery has the capability of putting power on the grid, some of this legislation is creating an environment where it's very difficult to do any economic projections to allow you to comfortably go forward with massive electrical projects," said Scott Folwarkow, manager of environmental and regulatory affairs for Volero.

One bill that oil companies and other big energy customers worry about would return their right to negotiate directly with power generators, a right eliminated when Davis signed legislation in January putting the state into the power-buying business.

But the bill, by Sen. Debra Bowen, D-Marina del Rey, also would impose an exit fee on anyone who no longer buys their power from someone other than the state or the utilities -- whether through deals with generators or by becoming self-sufficient.

Oil companies also oppose an effort by the Independent System Operator, the buyer of last resort for California electricity, to charge companies that have their own co-generation plants a fee for not just power they buy from the grid but the power they produce themselves.

For example, under the ISO plan, a co-generation plant that creates 50 megawatts of the 60 megawatts needed each day to run a refinery would pay a fee based on all 60 megawatts, not just the 10 megawatts bought from the grid.

So far the Davis administration has done little to aid the big co- generators other than back a $50 million commercial loan guarantee program to expand renewable and other alternative energy sources.

On their own and through a trade group called the Western States Petroleum Association, oil companies are powerful advocates in the Capitol, and they are trying to make their case with lawmakers.

Their focus is on Bowen's bill and another measure by Sen. Jim Battin, R-La Quinta, that changes the way alternative energy producers are paid. Battin said he is changing his bill so the as-available co-generators will be paid using the higher formula.

The petroleum association also opposes a third bill, by Sen. Jackie Speier, D-Hillsborough, as "overboard." The bill would give control of the maintenance and operation of any electric generator to the Public Utilities Commission.

The oil companies favor a bill that would give them electricity priority during blackouts. The bill would rank them second behind fire stations, police stations and hospitals.

E-mail Greg Lucas at glucas@sfchronicle.com.

©2001 San Francisco Chronicle Page A - 3

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