Agency Reports Cost of Deregulation High

As a stubborn heat wave strained the state’s electricity system again Wednesday, the Public Utilities Commission reported that the deregulation of the state’s electricity industry will cost Californians billions of dollars in higher rates this year. And Atty. Gen. Bill Lockyer agreed to expand an investigation into possible market manipulation.

Meanwhile, Gov. Gray Davis issued an executive order that directed the California Energy Commission and other state agencies to speed the approval of much-needed new power plants.

And Davis said the state will conserve energy during power emergencies by setting the air-conditioning in state buildings no lower than 78 degrees and hot water temperatures no higher than 105 degrees. Overhead lighting will be dimmed, and computers and photocopiers will be shut down after the workday whenever the state’s electrical grid operators declare a Stage 2 emergency, called when electricity reserves fall below 5%.

California narrowly missed threatened rolling blackouts Wednesday. A fifth straight day of sizzling temperatures sent electricity demand soaring to 42,879 megawatts, short of record territory but high enough for state power officials to declare a Stage 2.

In these situations, Southern California Edison and the state’s other big investor-owned utilities are ordered to cut power to certain customers who have agreed to that possibility in exchange for lower rates. A total of 1,800 megawatts was conserved through that statewide program Wednesday, said Patrick Dorinson, spokesman for the California Independent System Operator, which operates the power grid for most of the state.

“For an unprecedented third day in a row, we were asked to call on all of our interruptible customers, all 127,000,” Edison spokesman Gil Alexander said. “The state barely missed Stage 3 . . . and a lot of the credit goes to these customers.”

If reserves were to fall below 1.5%, the California Independent System Operator would declare a Stage 3 emergency and rotating power outages would become likely across the state. (Customers of the Los Angeles Department of Water and Power, which is not part of the Cal-ISO system and has plenty of power to meet its demand, would not be affected.)

In response to a request Wednesday by Davis, Lockyer said he would broaden a weeks-old investigation into the state’s wholesale electricity market to look for price-fixing, criminal collusion and other behavior that would violate antitrust or unfair business practices laws.

“It gets to be very subjective,” Lockyer said. “I don’t know if it’s a short-term transition problem or a more intractable market condition that is not easy to fix.”

In a report to the governor delivered Wednesday, the Public Utilities Commission concluded that Californians have paid $1 billion more for electricity in the last two months than they did in June and July 1999--and more is on the way.

The report makes several suggestions, including the revamping of how electricity is auctioned in California and the fast-tracking of power plant construction. But the report acknowledges that the state gave up much of its authority to control prices and supplies when the Legislature passed a law deregulating the electrical industry in 1996.

Now the governor and energy officials find themselves pleading for help from the Federal Energy Regulatory Commission.

“Much depends upon the willingness of federal regulators to cooperate,” the report states. “California may not be able to develop a workable electric market and to fulfill the promises made to California consumers and businesses throughout the 1990s. But this administration should do its best to make good on others’ promises before concluding that electricity markets cannot become competitive.”

The governor asked for the report after Bay Area residents and businesses suffered rolling blackouts June 14.

“Your concerns have proved well-founded in light of recent retail price escalations in San Diego and the statewide wholesale price upsurges,” wrote Electricity Oversight Board Chairman Michael Kahn and PUC President Loretta Lynch in a letter presented in the report to the governor. “The Bay Area outages and the San Diego price increases are only the first manifestations of problems in our electricity system.”

The PUC report notes that Californians probably will pay billions of dollars more for electricity this year. That money will profit the corporations--most of them based out of state--that bought power plants from the big utilities that were forced to sell off assets under the 1996 deregulation law. But that money will not necessarily pay for more power production or better electricity transmission, the report states.

The report’s authors said they could not get the data they needed from the California Power Exchange and the Independent System Operator, the two nonprofit agencies that oversee the purchase and transmission of most of the state’s electricity, to determine if power producers and marketers colluded or otherwise manipulated the market.

The Federal Energy Regulatory Commission is conducting an inquiry into electricity prices nationwide.

The PUC report also suggests that the state consider extending beyond March 2002 the rate freeze that now protects customers of Pacific Gas & Electric Co. and Southern California Edison. The report suggests that imposition of a new freeze should be studied for San Diego Gas and Electric; the utility’s residential customers have seen electricity bills double, to an average of $105.10, in the last few months.

Customers in San Diego and south Orange County are the first in the state to bear the wild swings of the deregulated electricity market because SDG&E; was the first of the state’s big utilities to pay off its uncompetitive investments, such as in the San Onofre nuclear power plant, and thus free itself from a Legislature-imposed rate freeze.

Davis ordered the responsible state agencies to streamline the process of getting permits to build power plants without compromising public safety and environmental protections.

As it is, there is no time limit on how long the state can take to review applications to build power plants. The process of reviewing proposed plants in terms of earthquake safety, air pollution, water quality and a host of other concerns now takes at least a year.

In the last decade, while a booming, computer-dependent economy has created a surge in demand for electricity, the state has built no major new power plants. Experts say California’s existing power plants can generate enough electricity to meet only about 75% of peak demand. The rest must be imported from other states, and when heat waves grip the West, such supplies are scarce and expensive.

The state Energy Commission has approved five new plants since March 1998, and 11 other projects are under consideration. But obtaining permits and building a plant can take an operator three to five years.

The governor also created a California Energy Reliability Task Force, modeled after the federal National Security Council, to coordinate the state’s approach to its energy problems.

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The West’s Power Grid

Formed in 1967 to ensure reliable electrical service, the Western Systems Coordinating Council serves 59 million people through an 113,000-mile-long system ofpower lines. During a heat wave, regions low on power borrow electricity from their neighbors.

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HOW WE GET ELECTRICITY

Before reaching a home or business, electricity travels from generating plants through a series of substations that “knock down” the power to a manageable voltage. The flow of power:

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* A substation cluster includes at least one group of 220-, 66- and 12-volt substations.

Graphics reporting by BRADY MacDONALD / Los Angeles Times

Source: Edison International, Independent System Operator

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RUSH HOUR OUTAGE

A dip in electrical power knocked out 160 traffic lights at rush hour in the San Fernando Valley. B5