While the Bay Area was hit with rolling electricity blackouts during last week's record heat wave, the Los Angeles Department of Water & Power is flush with a power surplus. And that will enable the DWP to sell the precious commodity on the open market, generating up to $100 million this year alone.
The lion's share of the windfall will be used to pay down the DWP's nearly $2 billion debt, a crucial tactic if it is to successfully compete in the coming deregulated electric power market. A small portion, about $5 million, will be passed through to the city's general fund, making it available to help pay for the mushrooming liability from the Rampart police scandal.
"Instead of selling off power plants like the other utilities have, we have focused instead on reliability, on making sure there is enough power available to keep the lights on," said DWP General Manager S. David Freeman. "As a result, today, we're able to market surplus power, which has kept us ahead of schedule to pay down our debt."
In a twist of irony, this bonanza for the DWP and the city is a direct result of decisions made 20 years ago that left the agency saddled with more than $4 billion in debt. That's when the DWP invested in power plants in Utah, Colorado and other Western states in an attempt to ensure enough electricity for a growing metropolis.
Today, those plants are contributing to the agency's surplus of electricity, which is being sold on the open market. Last month alone, as the state weathered its first major heat wave of the year, the DWP netted $17 million in spot market sales of surplus electricity, Freeman said. (Under the state's 2-year-old deregulation law, the DWP is barred from selling electricity directly to outside customers; rather, it sells electricity on the California Power Exchange, which facilitates transactions with other buyers.)
But while the DWP and its customers are now enjoying their good fortune, customers of the state's three investor-owned utilities, especially Southern California Edison of Rosemead, are facing some painful choices in the tightest electricity market on record.
A growing population and a booming economy that has factories running at full throttle has translated into record levels of demand for power. Since 1995, power consumption has risen 3 to 5 percent a year, according to state regulators.
Meanwhile, uncertainty over market prospects in the age of deregulation has meant that virtually no new power plants have been built in the state in more than five years, even though experts believe two new plants would be needed each year just to keep up with the rising demand. New power plants are in various planning stages, but none will come on line before fall 2001, meaning the state still has two more summers to get through before supplies can be boosted.
Also, Edison and the other two California investor-owned utilities - Pacific Gas & Electric and Sempra Energy have sold off most or all of their power plants to reduce debt, as they prepare for full deregulation, which begins in 2002. This has forced them to rely on other electricity providers to secure their supplies.
"We're moving into uncharted waters for power demand," said Patrick Dorinson, spokesman for the California Independent System Operator, which was set up two years ago to ensure power supplies in a deregulated marketplace. "If we have a repeat of 1998, which was the hottest summer in California in decades, then we expect to have very difficult days."
That year, the state came close to running out of electricity; power suppliers avoided disaster by importing power from the Pacific Northwest. Such imports can be used again this year to offset in-state shortages; however, demand for that same Pacific Northwest power is also rising in other Western states like Nevada and Arizona.
Last week brought a strong reminder of such problems, when tens of thousands of consumers and businesses in the Bay Area endured rolling electricity blackouts because the area's electricity grid was unable to handle soaring demand brought about by record 100-plus weather.
High temperatures sent electricity use spiking across California, leading state power officials to declare a Stage 1 power emergency, which means that power reserves fell below 7 percent. In a Stage 1 emergency, consumers are asked to voluntarily reduce electricity consumption as much as possible.
Warning major customers
Potential electricity shortfalls might be made slightly more manageable if a recent order from the California Public Utilities Commission, which regulates electric power companies, gets implemented.
Currently, the three investor-owned utilities Edison, PG & E; and Sempra must buy all their power from the California Power Exchange. The order would allow these utilities, which supply power to three-fourths of all Californians, to buy their power from other exchanges that provide real-time pricing information. With such instantaneous pricing, which is not available on the California Power Exchange, electricity providers could make more-informed decisions on how much power they could afford to bring on line.
But as of late last week, the order still faced a challenge from state legislators who say it violates the intent of the deregulation law they passed four years ago. And it does nothing to bring more electricity onto the state's power grid.
To further prepare for a hot summer, Edison officials last week sent word to more than 1,500 major power customers that they should be prepared to institute power-saving measures, according to Lynda Ziegler, director of business and regulatory planning.
Those customers are all enrolled in a special power-conservation program set up across the state 20 years ago, following the last national energy crisis. Edison has the largest number of enrolled companies.
Companies that sign up must commit to reduce their power during periods of unusually high demand, such as heat waves. In exchange, the companies receive reduced power rates for some or all of the remainder of the year.
In addition, Edison has started a new program this year in which it pays manufacturers and other major customers - at market rates - not to use power, which is reminiscent of the federal government's program to pay farmers not to plant certain types of crops. For example, if a factory that normally uses $100,000 of power per month were to cut its usage in half, Edison would pay that customer $50,000 a month. So far, 20 companies have signed up for this program, Ziegler said.
These conservation programs are voluntary; companies have the option of signing up and making themselves eligible for the discounts or rebates.
But Edison and California Independent System Operator officials say that if the summer proves exceptionally hot - or if there are an unusual number of power plant shutdowns mandatory cutbacks could be instituted.
"Under extreme conditions, we could see involuntary cutbacks," said Ron Nunnally, director of federal regulation and contracts for Edison. "That's when we move into the realm of rolling brownouts and other such measures."
Even the DWP would not be entirely immune to such a scenario.
"Look, if we have a heat wave that drags on for a week or more, we may not have any surplus power to sell," DWP general manager Freeman said. "We would be searching for more power to bring in like everyone else."
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