Demand Had Minor Role in Power Crisis

California has been depicted as a power addict whose growing habit led inexorably to the crisis that has roiled the state since May 2000.

Yet the state’s electricity yen is the wrong target for blame--the least volatile and least decisive piece of a larger puzzle, an analysis of consumption patterns shows.

California consumption has been as regular as a heartbeat in the last decade, sloping upward gently with a blip each summer. In the last year, demand’s predictability made it the lone calm spot within a hailstorm of dizzying price peaks and supply lurches.

Moreover, California’s power consumption increased far less than that of its Western neighbors, on whose excess supply it had come to depend.

“Yes, demand grew in California, but what people who have that discussion ignore is that demand in the rest of the West grew even faster,” said Severin Borenstein, director of the UC Energy Institute in Berkeley. “We’re all part of the same grid.”

Within the complex, sometimes murky power picture, demand was a problem hiding in plain sight.

Starting in 1998, energy agencies began to warn that its slow swell, coupled with stagnant supply, had left California with wafer-thin power reserves. In retrospect, these agencies say, deregulation left them powerless to prevent the impending collision between supply and demand.

When they hit head-on last summer, the amount of power used day to day by Californians often had no relationship to the periods when the state experienced blackouts or the highest wholesale prices, analysts said.

In the last 10 years, California’s power consumption has moved subtly, never advancing more than 3.7% a year and, even at its height, lagging behind such other measures as job growth and economic output.

In the early 1990s, recession savaged heavy-duty power users, ranging from manufacturers to agricultural interests to the aerospace industry. The industrial sector’s usage actually declined from 1990 to 1995.

Overall, consumption inched up so slowly in the decade’s first half--just 1.3%--that demand was of little concern as policymakers assembled the mechanisms of deregulation, current and former industry officials say.

The system’s reserve cushion--the extra supply available at peak times--was estimated in 1993 at a robust 12% to 14.5%, without a single electron imported from beyond California’s borders. With pressure off, utilities shifted resources out of programs promoting conservation and redistributing peak-hour consumption. Instead, they focused on new technologies that had little immediate payoff.

“There was less emphasis on demand management,” said Barbara Barkovitch, an Oakland-based consultant who served on the California Independent System Operator’s board from its formation in 1998 until last June. “There was nothing nefarious about it, but people always assume the future will be like the present.”

As the economy rebounded, consumption growth averaged about 3% a year. That slight escalation--which fell within the expectations of forecasters at the California Energy Commission--took on out-sized significance because it occurred as supply stagnated.

“The problem was not one of demand in isolation, but that our demand kept growing steadily, supply did not grow much at all, and the gap just shrank progressively,” said Ahmad Faruqui, the Palo Alto-based Electric Power Research Institute’s area manager for retail and power markets.

Regionally, the expansion was uneven, weighted toward the fast-developing San Diego area and Northern California’s tech corridor. Consumption in San Diego Gas & Electric’s service area rose more than 17% from 1995 to 2000 and, for the decade, increased almost twice as much as in the state overall.

The commercial sector’s usage grew twice as fast in the decade’s last five years as it had in its first half as the economic mix shifted toward services and offices loaded up on energy-eating technology.

The heady affluence of the late ‘90s also inflated residential consumption.

Consumers splurged on bigger houses, pools and spas, more appliances and up-to-the-minute gadgetry, said Sean Randolph, president of the Bay Area Economic Forum. Fixed retail prices meant consumers had little incentive to rein themselves in, analysts said.

“We decided we were not going to have a process for adjustment on the demand side,” Borenstein said. “We relied entirely on the supply side and that turned out to be a huge mistake.”

Still, even as consumption grew, businesses became more efficient. Measured per capita, California’s consumption remained modest compared to that of less efficient, more weather-intensive states.

But gradually and quietly, the system’s reserve margin shrank to 4% by 1998, a third or less than they had been at their fattest. Even that depended heavily on seasonal help from the other states that share California’s grid, help they were increasingly less able to give.

Electricity consumption in Arizona, Colorado and Utah grew at about twice California’s rate from 1988 to 1998. It expanded three times as fast in Nevada. In these states, too, supply did not keep up.

The collapse that started in May 2000 could have begun a year earlier if not for cool weather and plentiful rain, yielding cascades of Pacific Northwest hydroelectric power.

At least six state, regional and federal energy agencies issued reports from late 1998 to early 2000 warning that California’s reserve margin had shriveled, that help from other Western states might decrease, and that the state was one hot summer away from disaster.

“The Arizona-New Mexico-Southern Nevada and the California-Mexico areas of [the Western transmission grid] may not have adequate resources to accommodate a widespread severe heat wave or a higher-than-normal forced outage rate for generation,” wrote the North American Electric Reliability Council in its June 1999 summer assessment. “Those areas are experiencing a continuing trend of peak demand growth exceeding the addition of new generation facilities.”

But in the deregulated system, regulators no longer had a decisive hand in balancing supply and demand. Officials at the California Energy Commission say even analyzing the situation became harder as utilities became less methodical in submitting their consumption data.

“Things got sloppier,” said Michael Jaske, the commission’s chief forecaster since 1980. “The utilities started letting that stuff slide, poorer data was coming in to us, and our management wasn’t going after them the same way.”

Marketplace incentives were supposed to replace government control, but new supply did not materialize even though rising demand had created a clear-cut opportunity.

Private generators say the system’s uncertainties, plus California’s environmental fervor and slow regulatory process, prevented the market from working. Borenstein’s assessment is blunt: “The reason that no one built power plants was that no one thought you could make money at it.”

Ultimately, the flurry of studies predicting an oncoming crisis circulated among regulators and power industry insiders, but prompted little urgency when it came to curtailing demand. The Davis administration focused on supply instead, taking steps to expedite the approval process for power plants, Davis spokesman Steve Maviglio said.

“Hindsight is always 20-20,” he said. “We weren’t having blackouts in ‘99, so it didn’t pop up on anyone’s radar.”

Summer 2000 took care of that, hitting like a sonic boom.

Hot weather caused consumption to jump almost 4% year-over-year, double the decade-long average. Peak demand from May through August was consistently about 10% higher than in summer 1999, averaging an extra 3,200 megawatts per day--enough to power more than 3 million homes.

On Aug. 16, the day with the year’s highest peak, Cal-ISO’s so-called spinning reserve--the amount of capacity that can be brought on line within 10 minutes--was 1.2%.

The causal link between heightened usage and other pressure signals, from higher spot-market prices to staged emergencies, seemed clear.

Or was it? Peak demand still fluctuated within a narrow range only marginally above long-standing forecasts. The so-called superpeak--the moment of highest usage on summer’s most brutal day--was lower than in uneventful 1999.

Moreover, after summer’s heat ebbed, California’s consumption tapered. Still, the power crisis’ other symptoms raged on.

In November and December, wholesale power prices soared, California paid far more for natural gas than the rest of the nation, and the first rolling blackouts hit. Yet peak demand traced an almost identical line as it had the year before, averaging a few megawatts less.

Peak demand was down again from January to April when rolling blackouts returned, averaging about 1,600 megawatts less than in the same stretch of 2000, which passed without a single emergency.

State officials were quick to blame suppliers, but many industry analysts point to the region-wide supply-demand equation.

These forces may continue to dominate, they acknowledge, even though Californians have cut back on consumption faster and more this year than state officials had dared to hope.

In May, peak demand dropped 10.4% below its 2000 level and consumption fell 11%, marking the fifth straight month of reductions.

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Electricity Demand

Electricity use in California has shown no dramatic shifts over the last several years, increasing at an average of about 2% a year. In the last year, its predictability has stood in stark contrast to the gyrations of supply and wholesale prices. Total consumption of electricity in the state, in thousands of gigawatt-hours:

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Source: California Energy Commission