State’s Utilities Suffer a Costly Power Surplus; Customers Pay

Several years ago, California put together an emergency plan for the next energy crisis. Los Angeles residents would be ordered to slash their consumption of electricity or face the punitive shut-off of power for two days and a fine amounting to half their monthly bill.

Last week, leaders in the state’s energy community convened in Los Angeles and San Francisco to figure out what to do about all the extra electricity they have--a power surplus of about 10% above what will be needed to run California in 1990.

It is another of the countless examples of society’s inability to predict the energy future--one which should be good news for customers because a surplus is supposed to mean lower prices. Unfortunately, this surplus is defying the law of supply and demand by driving electric rates up instead of down.

It is an ironic turn of events that reflects not only the volatility of world energy supplies but the creation of an alternative-energy industry in California that, swollen by contracts with high prices locked in, is producing more power than anyone expected.

The result, according to the California Energy Commission, is a statewide surplus of electric generating capacity that will prevail until the mid-1990s. The commission calls it unneeded, high-cost capacity that will cost ratepayers several billion dollars to maintain.

Inflates Business Costs

At joint hearings held last week by the Energy Commission and the state Public Utilities Commission, Southern California Edison said its customers will “overpay” by $130 million this year and more than $300 million in 1990 because the utility was required by law to buy power from hundreds of independent power plants whether it needed the electricity or not.

This year’s $130-million overpayment amounts to 2 1/2% of Edison’s cost of doing business this year, the utility says, and adds about $1 a month to the average residential customer’s $41 bill.

Many of those contracts--Edison has agreed to buy power from 409 independent providers of electricity, ranging from small start-up solar projects to offshoots of major industrial plants--are based on fixed rates that were set when everyone expected oil prices to keep rising to $75 a barrel or more.

Today, those rates are well above the free-market level, especially compared to cheap, newly available hydroelectric power. Charles Imbrecht, chairman of the Energy Commission, says: “There is a 5,000-megawatt surplus of hydro in the Pacific Northwest. There is no way you can build any new generation and compete with that resource. You’re trading 1 cent per kilowatt hour for 7 or 8 cents per kilowatt hour.” (One megawatt is estimated to meet the peak demand of about 720 homes at any given time.)

These higher costs continue despite the fact that by 1990, according to the Energy Commission, there will be more than 55,000 megawatts of generating capacity to supply just 50,000 megawatts of demand at California’s major utilities. Demand is expected to rise by only about 2% annually over the next decade.

“Edison, as well as other utilities, is experiencing overpayments to these independent producers by having to pay for capacity in advance of need and for energy in excess of its value,” Edison Executive Vice President Michael Peevey testified.

Policy-makers are now trying to cut back on the number of independent power plants scheduled to come on stream over the next several years. The remedies could range from postponing the start-up dates for certain plants to pulling the plug on others, a step that could mean costly buyouts of contracts that would ultimately be paid by electric customers.

Already, the utilities are canceling contracts at the slightest provocation. Edison says it has killed projects totaling about 1,000 megawatts since 1985 by rigidly interpreting the terms of its contracts with independent producers. Even so, Edison expects 23% of its total energy requirement to be provided by independent producers by 1991.

But there is disagreement over the extent of the surplus, and independent power producers claim the state’s estimates are exaggerated. There are also those who argue that today’s energy projections could prove just as unreliable as those of the past, and that any dismantling of today’s independent power projects could prove shortsighted.

“The last time these two committees met jointly, in 1981, it was to discuss the undersupply of electricity,” said Jack Mayson, an executive of a co-generation project owned by a unit of Atlantic Richfield that sells excess steam from an oil refinery. “The moral of this story is that we cannot forecast. Let’s be cautious about doing something that’s irrevocable.”

Besides, some argue, a surplus isn’t necessarily bad.

“There’s more at stake here than who’s gouging whom in the epic struggle between the utilities and the independent producers,” said Ralph C. Cavanagh, an attorney for the Natural Resources Defense Council. “Electricity surpluses can be good if they reflect decreasing dependence on oil and gas.”

‘Gold Rush’ of 1985

Though conservation measures and moderating demand have played a role, today’s embarrassment of electric riches in California has its roots partly in the Public Utility Regulatory Policies Act enacted by Congress in 1978.

In effect, the legislation created a new power industry by requiring public utilities to buy electric power from independent producers. In California, the state Public Utilities Commission set guidelines for contracts between the utilities and the hundreds of new power producers that began springing up in response to the law. The contracts’ terms themselves became a controversy, leading to what is now called the “gold rush” of 1985.

The utilities, alarmed at long-term, fixed-cost contracts, persuaded the PUC to abolish one particularly onerous type of contract. But as word of the pending suspension leaked out, dozens of power plant proposals representing about 1,700 megawatts came in “over the transom,” in Peevey’s words, in the beginning of April, 1985, just ahead of the rescinding of the advantageous contracts.

The utilities had to sign the contracts, Imbrecht says, and just a month later the Energy Commission issued its first warning that the state was heading for power surpluses at artificially high costs.

Today, California’s independent power producers--using such forms of power as co-generation, solar, wind, biomass (such as burning of wastes), geothermal and small hydro projects--are producing about 4,000 megawatts of electricity and selling it to the major utilities in the state. That would double by 1997 under projects already approved but which now might be reassessed.

The independent producers dismiss the utilities’ complaints of surpluses and high-cost contracts as a “smoke screen” to divert attention from nuclear plant cost overruns and other causes of higher electric rates. They also portray it as a campaign by the utilities against new competition that has jeopardized their long monopoly on power production.

“The reason we’re here,” Janice Hamrin, director of the independent producers’ lobbying arm, said at last week’s hearing in Los Angeles, “is we have some major changes taking place in the electric utility industry. They’ve got other players in the game.”

As for the contracts themselves, Arco’s Mayson says, “You made a deal. Let’s stick to the deal.”

Despite the finger-pointing, Imbrecht says the two sides have toned down the rhetoric and shown signs of cooperation that could lead to renegotiation of terms of some contracts. Before, “the mere suggestion that the contracts are uneconomic” was shouted down, he said.

“There is at least an acceptance of that reality, which I found lacking a few months back,” Imbrecht said.

CALIFORNIA’S ELECTRICITY PICTURE IN 1990

(in Megawatts) Northern Calif. Southern Calif.* Expected Capacity 23,558 31,821 Expected Need 21,819 28,356 Projected Surplus Capacity 1,739 3,465

*Combined figures of Southern California Edison, Los Angeles Department of Water & Power and San Diego Gas & Electric. Source: California Energy Commission