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State Likely to be Paying for California's Power Mistakes by Chris Mulick, Herald staff writer Tri-City Herald, December 31, 2000

Benton City's Earl Penor says he saw this one coming.

When construction stopped on four much-maligned Washington Public Power Supply System nuclear plants in the early 1980s, Penor scoffed at those who said the power wasn't needed.

Since then, energy surpluses have decayed so far as to leave supply and demand nearly identical in the West, with little left to spare.

"I knew this would happen," Penor said this month after reading reports power managers are worrying about blackouts. "It was just a matter of time."

But a simple supply shortage only partly explains the power pains straining the entire West Coast. The 1998 deregulation of California's retail electricity industry is widely considered a massive failure that has raised rates and closed businesses from Bellingham to San Diego.

And Washington, which is boasting its decision to keep its industry regulated, is taking note. "We're being very cautious," said Dave Danner, who advises Gov. Gary Locke on energy issues.

California deregulation plan 'catastrophic'

Most consumers haven't yet felt the brunt of the electric storm brewing. All except customers of San Diego Gas and Electric Co. are served by private utilities with regulated rates or by public utilities that buy inexpensive hydroelectric energy from the Bonneville Power Administration.

But forecasters say rate increases are on the way. Private utilities already are asking for significant rate hikes, and even customers of public utilities may see double-digit increases within a year.

That's because it's become astonishingly expensive for utilities to keep the lights on. Two of California's three largest utilities are near bankruptcy, with combined debts of more than $9 billion just to buy power off the market to meet energy demands this summer and fall.

For comparison's sake, the combined debt of those two utilities alone is twice the value of the infamous Supply System bond default when adjusted for inflation.

Worse yet, the WPPSS default was several years in the making. The California debt was amassed over a matter of months and still is building.

As embarrassments go, the California fiasco is putting WPPSS to shame, according to industry analysts.

"I'd say it's 10 times as big," Gary Saleba, a Bellevue-based power consultant, said of California's faulty deregulation plan. "This is a serious policy faux pas."

The state agency California established to run its market and another that operates its transmission grid are being widely criticized.

The California Power Exchange serves as the state's computerized trading floor, where most transactions are made. Sellers tell the agency how much power they'd like to sell the next day and at what price. The sellers offering the lowest prices are accepted first until there is enough supply to meet demand.

The highest price accepted then becomes the market price for the day, which is paid on all accepted offers.

But Mike Warwick, who advises governments on energy issues for the Battelle Memorial Institute, said power marketers realized they could jack up prices if they withheld some of their available power.

When there wasn't enough energy bid in to meet demand, the marketing arm, known as Cal PX, would alert the California Independent System Operator, the agency that runs the transmission system.

Without enough electricity, the Cal ISO would declare an emergency and effectively abolish price caps so more power would be bid just to keep the system from collapsing.

Emergencies were called in one of every three weekdays during June, July and August and were often upgraded to more serious alerts during many of those days.

"That's a lot of emergencies," said Robert McCullough, a Portland-based energy consultant.

Officially, many of the alerts were called because of unscheduled power plant outages. But many analysts suspect the outages had less to do with mechanical failures than market gaming.

"Plants were broken down all the time in California to a point never before seen," McCullough said. "There was no emergency. There was a public policy failure."

Though their practices of withholding generation was not illegal, it certainly was unethical, Warwick said.

As a result, some power marketers in and out of California made a killing. The Vancouver-based B.C. Hydro, for example, reported average prices for power sales tripled for the six-month period ending Sept. 30 compared to the same period last year.

Even Bonneville got in on the action, selling spare megawatts to California in the name of helping the state out of a tight spot while being handsomely compensated.

Utilities, such as Pacific Gas & Electric and Southern California Edison in the south and Avista Utilities in the north, were hammered by the skyrocketing prices.

Without seeing sufficient bidding data, Dick Watson won't go so far as to fully subscribe to McCullough's analysis.

Even so, the power planning director for the Northwest Power Planning Council says there is "clear evidence the incentives that operate the market worsen the volatility."

While others remain confident market forces will ultimately stabilize prices, some California lawmakers are calling for re-regulation, hoping to put an end to the fiasco.

The effects of the catastrophe don't stop at the state line. Washington already is paying for California's mistake.

And though there is talk of re-regulation in California, it's not guaranteed and won't necessarily come without drawbacks. A return to regulated prices could leave utilities there stranded with massive debts with little means to pay them off.

And with an integrated market up and down the coastline, trouble in the south means trouble in the north.