Blackouts loom while politicians dither

Blackouts loom while politicians dither
September 1, 2000

Power blackouts plagued homeowners from Detroit to the Silicon Valley to the Pacific Northwest in mid-June, pre-saging what many experts believe could be the worst interruptions to electric service in years.

While environmentalists have long predicted energy shortages, this imminent crisis is not due to depleted natural resources. Known reserves of oil, for example, are at their highest levels in recorded history. Rather it is the result of government incompetence and . . . well, dithering.

When the lights go out

Wholesale prices of electricity soared from $300 to $900 per megawatt hour in the Pacific Northwest the week of June 25. Georgia Pacific West shut down its paper mill in western Washington and laid off more than 600 workers rather than pay the high prices. Earlier that month, a Vancouver-based aluminum plant, Vanalco Inc., had also shut down, laying off 450 workers.

Nearly 100,000 residents of the Silicon Valley experienced rolling blackouts on June 14, and several high-tech manufacturing plants were closed temporarily. Much of the Pacific coastal region, and Arizona as well, experienced the high heat and humidity, making it difficult to import sufficient power from outside the region.

Halfway across the country, Detroit also experienced a mid-June blackout. Officials there warned that hot weather, tight reserves of power, and high demand made it possible other blackouts would occur through the summer.

Late June temperatures in the 80s in Portland and Seattle caused a Stage Two alert, which asked the utilities to cut power to major industries to keep state power reserves above 5 percent. A Stage Three alert would have meant rolling brownouts in order to prevent a major power outage.

“We have some real fears that part of the country could experience blackouts this summer,” said Energy Secretary Bill Richardson in one of his many speeches around the country this summer. He warned that certain areas of the country—the Midwest, Northeast, and Southwest—would be especially vulnerable to brownouts.

Supply-demand mismatch

None of this should surprise electricity consumers after the brownouts and power failures of 1999.

The Department of Energy reported that electricity demand through May 2000 was running 4 percent higher than over the same period last year. Peak demand, however, is projected to be just 1.7 percent higher than last summer’s peak, according to the North American Electric Reliability Council (NERC), a not-for-profit organization formed to promote the reliability of the bulk electric systems that serve North America.

The four-state Northwest Power Planning Council warned earlier this year of potential power outages in the region if a hot, dry spell occurred. Nationwide, utilities hold a 10 percent power reserve for peak-demand days; in Michigan, according to Governor John Engler, there is only a 5 percent reserve.

Among the causes mentioned for the low reserves and compromised reliability of the nation’s electricity system is higher-than-normal temperatures this spring. But virtually all other causes mentioned by experts have to do with government policies:

  • high demand for air conditioning made less efficient by the ban on freon and other chlorofluorocarbons and high home computer use;
  • too few new power plants being built due to onerous environmental regulations and tighter environmental regulations on both new and modified plants;
  • a distribution system ill-suited to the demands placed on it by deregulation, and often stymied by political and NIMBY ("not in my backyard") resistance to new construction and upgrades; and
  • new risks and disincentives facing investors following the deregulation of the utility industry.

Roger Gale, vice president of PHB Hagler Bailly, a consulting firm, testified before the House Commerce Committee in June that “America’s electric distribution system . . . will require a massive rebuild in the next twenty years. Few utilities are able to make these investments because rates of return are not high enough and because in many states there are rate freezes in place as part of the settlements that are opening markets to customer choice.”

Secretary of Energy Bill Richardson had come to the same conclusion two months earlier. Testifying before the Senate Energy and Natural Resources Committee in April, he noted, “There is growing evidence that our interstate electricity markets are in need of repair. Essential investments are not being made because of the uncertainty that exists due to delays in enacting legislation. The construction of new major transmission facilities is almost non-existent and existing transmission capacity is tightly constrained in certain regions. At the same time, the demand for electricity continues to increase.”

Clinton-Gore to blame?

Senator James Inhofe (R-Oklahoma) and others have criticized the Clinton-Gore administration for what they say is a lack of a national energy policy. They claim Richardson could do more to ensure the reliability of the current system.

Senator Frank Murkowski (R-Alaska), chairman of the Senate Energy and Natural Resources Committee, sent a letter to Richardson on July 10, calling on him “to take real action to protect the nation’s electric power system.” In the letter, obtained by Environment & Climate News, Murkowski says the administration has given us “seven years of neglect and adverse action.”

Murkowski identified several actions he contends have hurt the country’s electric power supply:

  • “President Clinton vetoed a nuclear waste bill which is essential for a viable nuclear power industry.”
  • EPA has sued seven electric utility companies, “alleging that the routine maintenance necessary to keep their plants operating is not allowed under the Clean Air Act without triggering expensive retrofits of these utilities.”
  • While the Bonneville Power Administration in the Pacific Northwest needs more generating capacity in the next several years, the administration is “considering removing four Lower Snake River dams” and “the National Marine Fisheries Service has imposed a water flow regime on the Snake and Columbia Rivers which is costing hundreds of megawatts of electric generation.”

Murkowski also pointed out to Richardson that nothing in legislation proposed by the administration “would encourage the construction of significant new transmission lines or significant new electric power plants which are key to assuring consumers reliable and reasonably priced electricity over the long term.”

A matter of interstate commerce

Twenty-five states have enacted utility restructuring legislation that allows for competition at the retail level. But several of the state-level plans have been controversial, especially with respect to requirements that owners of existing transmission lines provide access to their competitors (a disincentive to investment in new lines), price controls or price roll-backs, forced vertical divestiture by utilities, and provisions that suspend or violate long-time regulatory contracts.

The NERC reported it is seeing “a marked increase in the number and seriousness of violations of the voluntary reliability rules.” According to NERC Vice President David Nevius, “The longer it takes to establish this new system, the greater becomes the risk and magnitude of grid failures.”

Power failures are costly

A June 22 Reuters article warned high-tech companies could expect “a hit from $75 million to $100 million a day in Silicon Valley if there isn’t enough electricity to keep industry on line.” Justin Bradley, director of environmental programs at Silicon Valley Manufacturing Group, testified before the House Commerce Committee on June 28 that “one high-tech company reported losses exceeding $3 million in three hours when their manufacturing facility was blacked out.”

Nor will the end of summer necessarily bring an end to power supply problems. John Cook, director of the Petroleum Division of the Energy Information Administration (EIA), testified on June 29 before the Senate Committee on Governmental Affairs that EIA “is concerned about winter distillate and natural gas supplies as well. Even with a normal inventory build during the summer and early fall, we will enter the winter with lower-than-normal stocks.”

Cook added, “Natural gas is showing signs of not building adequate inventories this summer for consumption next winter, and prices have been high.” If natural gas prices remain high through the summer, warned EIA, more distillate will be used during the summer to meet peak cooling needs. Higher fuel prices and higher home heating costs this winter could result.

Policy ramifications

The threat of blackouts and brownouts across the country has generated calls for several policy changes. Alaska’s Senator Murkowski has called for opening more domestic natural gas production fields in offshore wells and reserves, including the Arctic National Wildlife Refuge (ANWR). He introduced a bill to open a small portion of the coastal area of ANWR to drilling, a move he said would reduce the country’s dependence on foreign oil to just 50 percent by 2010. The U.S. currently imports about 57 percent of the petroleum it uses. (See “Senate to consider Arctic oil drilling,” Environment & Climate News, August 2000.)

Discussing the need for new investment in transmission capacity, consultant Gale observed, “Congressional leadership is critical to creating the national incentive to get this job done. This job is as big and as important as was the construction of the interstate highway system.”

Some industry experts say federal legislation is needed because electricity is an interstate commerce issue. Before its Fourth of July recess, the Senate passed the Electric Reliability 2000 Act (S. 2071), authorizing creation of an industry self-regulatory organization with the authority to promulgate and enforce mandatory reliability standards. The current system relies on voluntary compliance by companies.

Other experts believe greater use of financial markets and instruments can protect consumers from price instability. Jim Johnston, a retired Amoco economist and policy advisor to The Heartland Institute, says medium to large energy users can purchase futures and/or call options for natural gas or heating oil to lock in prices for the upcoming winter. For the following summer, electricity futures and/or natural gas futures and options are the prescription. Johnston also says firms might choose to invest in micro turbines powered by natural gas and then cover their fuel price risk with natural gas futures and call options.

In the longer run, Johnston agrees new investment must be attracted to the electricity grid. “To handle long-distance interstate transmission of power, the capacity of the grid must be expanded substantially,” he noted.

“One way of doing that is for incumbent utilities to offer generators and consumers equity interest in the grid. This is the model for interstate oil pipelines and intrastate natural gas pipelines in Texas. Over time, the equity interests will parallel the power throughput, and in the process the new owners will arrange for the necessary investment in the grid.”