Electric Utility Deregulation

[Kidicious]

Originally posted by MichaeltheGreat


Cheaper has to be in relation to actual cost of service. Since residential systems are low voltage, they have additional levels of transformation (transformer costs and losses), expensive distribution in relation to the amount of power carried, and lots of billing and customer service related costs.

If I sell you something for nine dollars that costs ten to provide, and sell someone else the same thing for six dollars that only costs five to provide, the other guy is getting his something cheaper, but still subsidizing your costs.

The worst hit rate classes in California are large commercial customers, then agriculture/large pumping, then industrials, then residential. How much each non-residential class pays depends on load profile (since they're time and seasonal rates), but if you had a similar load profile for all customer classes (just scale it down for residential, but keep the same percentages each day, hour and month), then large industrial and residential customers would pay about the same in absolute terms, with pumping/ag and large commercial paying 5-15% more.

In terms of actual cost in relation to cost of service, then residentials are paying about half of what the other customer classes are paying. Cost of electricity and cost of water are two large factors (in addition to People's Republic taxes) which discourage a lot of businesses from locating in California, and encourage a lot of them to leave.

Ok this is interesting and I agree. And I think this was in regard to whether I like to be subsidized. So you have changed my mind on that. I'm having trouble putting in together in the big picture though.

[Kidicious]

Originally posted by MichaeltheGreat
The combination of an eight-year growth boom, hottest summer on record, and three-four years of drought in three-four key regional hydropower basins was unprecedented, and would have had to be predicted a decade in advance at least.

The object is not to predict the demand, its to prepare for the maximum demand possible under reasonable circumstance. Electricity is a basic necessity, and the price of it is only of secondary concern to the supply or it. What occurred was market failure, because of the shortages. I don't believe that the failure occurred because of incompetence or unforeseen factors. So it must have occurred because of corruption in the system. I think a lot of people saw before hand at least the possibility of shortages and were more concerned with deregulation than the primary objective of the industry, which is to avoid shortages at all costs.

I hope that the system will work better in the future. And in order for that to happen the corruption needs to be eliminated. That has to be the major concern.

Originally posted by MichaeltheGreat
I'm not denying that substantial gaming of the system occured, to the tune of billions, but to say that is the only cause of the power crisis, or even the leading cause, is totally incorrect. That type of gaming could not have occurred in a normal balance of supply and demand. One of the failures of "deregulation" (restructuring) in California was that there was no mechanism to compensate plants adequately for sitting idle as spinning or ready reserve assets, and no mechanism for adequately compensating "surplus" plants for just being there if needed. The way you prevent disasters like Cali 2000 is by having substantial overcapacity in the system, but ratepayers in regulated schemes, and generation owners in deregulated schemes, don't like to suck up the cost of that necessary overcapacity.

Had the old system remained in place, we would have still had the rolling outages problems, and the cost problems would have been nearly as bad, just with the cost spread out more.

I agree with most of this, but I think the deregulation has to be looked at as part of the problem. You haven't convinced me to let it off the hook yet. I follow the money and I see Enron amoung the others who got away with the money.

Having said that, I will say that you know a hell of a lot about this, and its a pleasure to discuss it with you.

[Ned]

I personally believe that the people who build that "last mile," be different from anyone who is selling power. The people who have the last mile monopoly should be regulated to the extent the rates they charge power distributors have to be fair and non discriminatory.

The problem of conflict of interest between those who own the wires and those who provide "content" over the wires is best illustrated by early radio broadcasting in the US. AT&T had a big chunk of RCA which owned NBC, the first radio broadcaster. When CBS wanted to get off the ground and in competiton, they asked to lease the necessary dedicated telephone wires from New York to various cities across the nation. Unfortunately for CBS, AT&T never was able to complete CBS's order - that is, until AT&T sold its stake in RCA. Immediately thereafter, AT&T found the necessary wires for CBS, and the rest is history.

[MichaeltheGreat]

Originally posted by Kidicious

The object is not to predict the demand, its to prepare for the maximum demand possible under reasonable circumstance. Electricity is a basic necessity, and the price of it is only of secondary concern to the supply or it.

Careful... "Supply at any cost" can be a big minefield - by that definition, the only problem in 2000 was the rolling outages.

Realistically, though, economics is always a factor. Powerplants aren't charitable operations. Pre-dereg, there were two ways to get new capacity - investor utility owned, or non-utility (QF, IPP, muni). In the non-utility segment of the mid-90's, you simply couldn't get financing. Utilities could get financing, but to cover the costs of those plants and to get approval to build them, you'd have to convince the regulators that there was a need for new capacity. You couldn't do that in front of the CPUC, and most of the "consumer" organizations such as TURN and UCAN that have *****ed the loudest about dereg also *****ed the loudest in opposition to ratebasing new capacity additions in the decade before dereg. And God couldn't even help you if you proposed new in-state transmission projects to ease congestion around the occasional but persistent chokepoints in the state transmissions system, such as South Pass-North Pass, Devers sub, or the Tesla-Midway link.

People can't have it both ways.

What occurred was market failure, because of the shortages. I don't believe that the failure occurred because of incompetence or unforeseen factors.

The biggest culprit was timing - the combination of factors leading into 2000, on top of a decade long softening of wholesale praces, that discouraged both wholesale (IPP merchant plants) and retail (cogen and demand-side management) alternatives to utility supply. Then you get restructuring of the market at the exact wrong time - new people in new jobs (the CPX and Cal-ISO) right when the **** hit the fan.

Another thing about markets and market power that people like to ignore is that you have to average out pricing. The two biggest gougers of the marketplace, at least in terms of price levels, were not investor owned utilities or other private-sector market participants. They were California public agencies, which by law can't run a profit - the California Department of Water Resources and Los Angeles Department of Water and Power.

Most of the time, these agencies are scrambling for money, and they're not big players in the wholesale export market (even though they have surplus capacity) for a number of reasons, mostly bureacratic non-responsiveness to the marketplace. (In other words, they're real ****** and nobody wants to deal with them.)

To give you a common example of what happened in the non-abusive market power side of things, Utah Power & Light, one of many subsidiaries of Pacificorp (who are generally SOB's, but at least SOB's you can deal with), has a majority of it's base load power in coal. Coal-fired generators are notoriously "sticky" in the sense that they're slow to bring on line, slow to go off line, and the technological requirements of the combustors and steam turbines are such that you can't vary the amount of fuel going in to any great degree.

The upside is that you get a very reliable, low capital and operating cost, efficient source of power when you have base-load needs on a 7-24 basis. The downside is that you can't respond to excess load conditions economically, that is, if the demand drops to 80% of the unit's output, you still run 100% load worth of fuel through it, because you screw up the machinery otherwise. So you sell the excess power for whatever you can get, or you just vent the steam and suck up the loss. At night, when you get into off-peak demands, UP&L had a lot of exportable power, that generally went for about 0.7 cents per kwh, delivered to either SCE or PG&E's transmission systems. Sometimes, the power would be 0.1 or 0.05 cents per kwh, and at least once in 1995, the price dropped to zero. (there's a slight maintenance benefit in running the steam side at full output, rather than condensing excess steam. So even giving it away, you lose a little less than throttling back the steam turbine.) Even at a delivered cost of zero, there was no demand, because once the power got into California, it wouldn't gain you anything by the time you routed it and displaced some of your 1.5 cent generation and incurred costs for that.

So when the summer of 2000 hit, and Cali came begging, yeah, UP&L, APS (Arizona Public Service), Nevada Power, and anyone else who had a kilowatt-hour of power to sell, took advantage of the market price. Who wouldn't? It's not screwing the consumer, unless the consumer was screwing the supplier in all those hours of low wholesale prices. Again, this is something you can't have both ways. Power out of the Palo Verde nuke in Arizona is another example - those turds will never break even, so anytime there's a chance to momentarily make some money off of them, of course APS will take that chance - they're obligated to their shareholders and ratepayers to make off-system profits (which lower their effective costs to ratepayers) when they can do so without compromising their supply to their in-system customer base.

Even though there's some gouging because Cali got caught with it's collective pants down, that's just the way markets work. The average trend will be to lower prices to less than what fully regulated captive markets will provide.

So it must have occurred because of corruption in the system. I think a lot of people saw before hand at least the possibility of shortages and were more concerned with deregulation than the primary objective of the industry, which is to avoid shortages at all costs.

Actually, there's multiple sets of participants in the system, each with their own agendas. A majority of the planning and decision-making personnel in the existing regulated utilities were not big fans of deregulation. Dereg in a hurry was a state level political mandate, because the legislature coudn't figure out there might be valid structural reasons that power cost more in Cali than in the adjacent states. The general form of dereg enthusiasm with the existing utility types was "we're going to get this stuck up our asses anyway, so let's try to get what we can out of it."

The Dukes, Dynegy's, Southerns, etc. were essentially opportunists who wanted to cherry pick existing utility assets in the forced divestiture. Then there were the clueless - the mass of retail resellers who all croaked in a heap before the race began. Then your usual slop of politicians, regulators, lawyers and lobbyists, some of whom were smart people, and some of whom were clueless.

The problems going in were far less corruption than they were self-delusion. The biggest failure in planning for dereg was the lack of attention to market incentives for building reserve capacity.

The biggest failure in disaster management lies right with the governor's office, who in the finest political "we've got to do something" manner, started trying to tweak a dysfunctional market and sent out all sorts of inconsistent and contradictory signals. The state sets wholesale price caps, so Oregon utilities refuse to sell to California for $150.00 per megawatt-hour when the local market is $250.00. Instant rolling outage. The state decrees it will buy power and resell it, then takes a bath by buying long-term contracts at the market peak, then tries to renogiate those contracts by claiming market-gaming when it had no evidence. The state creates the California Power Authority to handle power transactions, but the only agency empowered to transact power statewide is the California Department of Water Resources, which is notorious in both the utility and financial communities, etc.

Then Davis has the balls to say he fixed the problem, when the real cures were recession and soft weather. The underlying structural defects are still there, but it looks like we'll have a few years respite with the partial restoration of the western hydropower basins, plus however long it takes the economy to start another boom cycle.

I hope that the system will work better in the future. And in order for that to happen the corruption needs to be eliminated. That has to be the major concern.

The main concern is still structural - there's overcapacity back in the market only to the extent that demand slackened - supply shortfalls were only partly cured, and there is still inadequate incentive to build and maintain dedicated reserve capacity.

I agree with most of this, but I think the deregulation has to be looked at as part of the problem. You haven't convinced me to let it off the hook yet.

The details as to form and timing were more to blame than the general concept of deregulation. The same crisis would have happened in the traditional regulated market, with only a somewhat lower percentage of price gouge, but the major rate and reliability pain would have happened regardless.

I follow the money and I see Enron amoung the others who got away with the money.

Ultimately, most participants (good, bad or otherwise) got skinned. As one example of a little known market gambit, there was a midwest gas pipeline system who had virtually cornered the market on GE's LM-6000 PC SPRINT gas turbines, which are the most efficient peak generation turbines in the world. They had 60 turbine-generator packages spoken for out of 85 that would be produced in the year. These were intended to go into ten regional powerplants in the midwest, then they ran into money problems and became a hostile takeover target. Eventually, Enron ended up with rights to those turbines, for power projects they had in their little minds (these were pre-debacle projects intend for development outside of Cali). When things hit the fan, everyone wanted LM-6000 PC SPRINT turbines, and there was a big market to buy your way forward in the production queue to get online quicker. People with existing 15.2 million dollar turbine packages were trying to sell them for in excess of 20 million, but the market settled between 16.5 and 17.5 million during the crisis. Now, you can still find some of those, for about 13.6 million.

Enron sold some of those off, but they were trying to ration their entry into the marketplace, to keep the price up, but then the market softened, and they still ended up sitting on 35-40 of them, paying big cancellation fees and/or selling finished turbine packages off at a loss.

Dynegy and Southern did better in the short run, but they still overpaid for underperforming assets, so they'll get their share of pain in the marketplace, independent of what pain they'll rightly get for their abuse of market power, to the extent it happened.

Having said that, I will say that you know a hell of a lot about this, and its a pleasure to discuss it with you.

I was very busy from 1998 to 2001.

[Kidicious]

MtG,

What was\is your job?

[MichaeltheGreat]

Two things - one is consulting work for independent generation developers and some types of muni utilities. I deal with market forecasts, operations planning, logistics and resource planning, and in the past I've done analysis for various wholesale power contracts for buyers and sellers.

The other one is writing specialty software tools for that type of analytical work.

I've never worked directly for investor-owned utilities, although I did some second and third-tier consulting for Sempra for off-system IPP offerings and a potential hostile acquisition.

During the Cali disaster, I was involved mostly in the analytical and regulatory work for various sizes of peaking plants. Two of the nine projects I was involved in actually got built, since they were on the front end of the state's sweetheart emergency peaking power deals. One more of those got dropped, and six northern California projects I was involved in died off - three because the prospective owner decided they didn't want to be in the flaky Cali market, one I dropped when the land developer who was my client decided not to pay his bills, and two more died because the market was turning faster than the client was moving, so I recommended that the client shelve those projects.

Currently I'm working with a Cali Indian reservation that wants to eventually become a tribal utility authority (I've done out of state tribal utility work in the past, including one that got cutoff by WAPA and was being shafted by the local regulated utility). I'm also working on a few small QF projects for industrial clients, and writing and marketing a custom software package for remote operations and commercial issues management (billing, inventory pooling, on-call personnel dispatch and embedded e-documents for status reporting) for portfolios of independently owned retail generators.

For fun, I'm working on flight dynamics and flight control software for a privately funded UAV design.

[Kidicious]

Very Cool

[TCO]

Originally posted by MichaeltheGreat


Finally, I get time for the initial post.

Technically, the Congress wouldn't be involved in electric utility restructuring, which is what it's really called. Deregulation is just a buzz-word used to market it to the public. The legislation referred to was the Energy Policy Act of 1992, which mandated that the FERC (Federal Energy Regulatory Commission) oversee restructuring of monopoly electric utility markets within a reasonable period of time. FERC in turn mandated to the states that they come up with their own restructuring policies, or else FERC would do it for them.

The manner in which California approached restructuring was atrocious (the main bill was authored by a former Southern California Edison Co. lobbyist, who left a consultancy as a registered lobby to go to work as the chief of staff for the Assemblyman whose name appeared as the bill author. ), but that in itself was survivable. It's now been a matter of ideological fashion to blame the "California disaster" on whoever you never liked in the first place. Some people blame government regulators, some greedy utilities, some blame "those California environmental loonies," some blame greedy corporations trying to con their way into the utility market.

Reality is that a little of all those things contributed to those problems, and a few more factors nobody likes to be bothered with, because they're not ideologically useful.

Here's a quick rundown:

1. - Blame the fruity environmentalists. This is a cute charge, and the general idea is to blame the lack of generating capacity on treehuggers. Actually, a lot of the "treehuggers" are card-carrying Republican conservatives who didn't want power plants in their backyards either. Putting plants in the boonies doesn't work real well, and triggers real environmental delays, because you have to address much longer transmission paths for electricity and often for fuel.

A big cause of the transmission shortfall that people ignored was market factors. During the decade before restructuring and the disaster, there were virtually no additions of new generating capacity, but it just wasn't feasible to build new capacity - the economy was booming, so industrially zoned sites that had good gas and electric transmission access were few and far between, and usually every developer who owned such a site was thinking high-tech industrial park, so a big ugly power plant wasn't what he'd consider an attractive anchor tenant. Couple that with very low short-run wholesale costs, and you couldn't build new capacity and recover your investment - the cost of producing the power was over the market.

By the time restructuring hit, you had a seven to eight year boom in California, combined with drought conditions for three to four years in the southern Rocky Mountain, California, Southwest and Columbia River basins. Oooops, so much for the cheap hydro power the west counted on. You also had massive growth in neighboring states that traditionally had surplus power to sell to Cali, so the market changed far more quickly than anyone could respond to it.

2. - Greedy utilities. To some extent, this is true, what with starting in a 100% market share position, then whining about recovering 38 billion in so-called stranded investment, when in fact much of that was 10-30 year old investment largely or completely recovered in the rate base. In a healthy market, we could have paid them off and let them go away. Instead, in the market that developed, they got skinned too.

3. - Inept regulators and system operators. This is another one that's fashionable in the utility and lobbyist crowd ("WE won't be as stupid as those California people."), but doesn't really work either. The changes in market condition in 2000-2001 were totally unprecedented and extreme (three major areas in sustained drought conditions, a long term boom in growth in and out of state, followed by an extremely hot summer). To avoid something like the California disaster, you have to plan ahead in a 10-15 year timeframe for generation reserve, and 15-20 years for electrical transmission. All indications going into the disaster were that there would be adequate reserves and transmission access for any reasonably foreseeable market conditions, but that there would be a period of time where generation supply was tight, until the market price came up enough to support new capacity (or until the regulated market built new capacity and rate-based it)

Electricity is unique in that it's the only manufactured commodity where supply and demand have to essentially be matched continuously in real time - there's no commercially practical storage, and won't be for decades, at least. That's not good when you also have a long lead time to build new generating or transmission assets.

4. - Greedy corporations entering the market and rigging the system. Some of this happened, but it accounted for less than 20 percent (by the most optimistic interpretation), or maybe even less than ten percent (by more conservative interpretation) of the price movements. The basic claim was that generators were deliberately kept out of the market to drive prices. That can only work when you have very fragile supply-demand balancing, AND when you have a lot of assets in the market, so that you can withdraw some and make enough extra money to cover loss of that asset. As it turns out, much of the maintenance was necessary, or at least prudent, since much of the portfolio bought by Duke, Dynegy, etc. were existing utility plants that had been undermaintained from the late 80's.

I was one of the few and unwelcome who predicted repeatedly (and got blown off repeatedly) that Cali deregulation would raise prices substantially for the first several years, and that it would be about five years for the market to adjust. That last number got whacked because people are back to ignorant bliss. The "problem" got cured because of a series of changes in the initial factors that caused it in the first place: A recession, undoing much of the growth in the original boom, and a couple of mild summers, with a normal winter followed by a sustained, wet winter that is close to restoring normal hydro flows.

California can still end up in a bit of a mess, but a certain amount of peaking capacity did get shoved in during the panic, and both the necessary and unnecessary maintenance of a lot of generating assets has been performed, and won't be an issue for several years at least.

The real lesson is that restructuring can't just be dictated ideologically. Both the form and the timing have to consider objective market conditions and geographic considerations.

1. Isn't there some truth to blaming the environmentalists? Cali had very low capacity and it was hard to build plants.

2. What about the failure to pass on prices to the consumer?

3. What about the long-term power contracts bought by Davis in a reflexive manner at the top of the crisis? He wanted to hold the power companies to those if prices had stayed high. Now he wants out? Great way to play the market if you can.

[TCO]

I have a friend who is looking at an energy consulting oppty in CA. I think he will turn it down, though. I sent him to talk to my friend at SDREO, since Dave is not an energy "guy".

[MichaeltheGreat]

Originally posted by GP

1. Isn't there some truth to blaming the environmentalists? Cali had very low capacity and it was hard to build plants.

Environmentalists are just one of the groups though. A lot of times, you'd have minority groups, labor unions, environmentalists, land developers, etc., all in a weird sort of unholy alliance of the moment, yanking your chain on siting issues. NIMBYs and BANANAs transcend ideology, and commercial landrapers are often the biggest (and best connected) NIMBYs of all.

Industrial and commercial/office park developers are a great example. They used to go out of their way to keep you from being a neighbor, give you **** on transmission lines, etc., until the shortages and pricing drove companies away. Then they loved you. Now the marriage is over again.

Racial issues even get into it. Sunlaw (IIRC) had an aborted proposal to repower an old site in the Compton area, which they pursued after losing some siting issues in more affluent, whiter areas further west. So when they came to Compton, they did the same white people in suits canned spiel, and came unglued when the city folks and locals told them, in essence "you're just coming here to pollute our neighborhood because the people in the white neighborhoods where you tried to build don't want your noise or your pollution." What was really needed was some good ol' wheeling and dealing, but they screwed things from the beginning with their patronizing dog and pony show.

2. What about the failure to pass on prices to the consumer?

That's a tougher call. Theory says you should always pass on the prices, but the situation was close to either a mass ratepayer rebellion, or an economic collapse as businesses shut down. Essentially, the consumer is sucking up the prices over a longer term, by paying surcharges (some now expiring or scheduled to expire) for the state's bailout of the IOUs and for the DWR contracts. Immediate pass-through and transparency was probably not a pragmatically good idea at the time. If/when there's a Cali FUBAR II, then it could be considered, because at least there's some lead-in time, and before that happens, people should see rates going down for some time. The extreme volatility in pricing that a lot of consumers saw was up to the limits of what some could bear as it was. In theory, the market benefits from pricing transparency, IF consumer response falls within economic norms (i.e. use less and suck up the costs, with some default level). If consumers flip out, or a lot of industry folds up and moves elsewhere, it's a different story though, with potential cascading effects. Although having five or ten million people leave Cali and move back where they came from might not be too bad in the long run.

3. What about the long-term power contracts bought by Davis in a reflexive manner at the top of the crisis? He wanted to hold the power companies to those if prices had stayed high. Now he wants out? Great way to play the market if you can.

In the short run, yeah, he can get away with it. Nobody really wants to litigate the issue in front of a Cali jury, so he can "renegotiate" with the weight of a threatened AG lawsuit and a lynch mob atmosphere behind him. Longer term, though, the people he's ****ing now will remember long after Davis sinks (not soon enough) into political oblivion.

[MichaeltheGreat]

Originally posted by GP
I have a friend who is looking at an energy consulting oppty in CA. I think he will turn it down, though. I sent him to talk to my friend at SDREO, since Dave is not an energy "guy".

If I wasn't already here, and already doing it, I wouldn't take it either. I'm looking to move out of the field altogether in the next two-three years, unless there happens to be another gold rush.

[TCO]

Originally posted by MichaeltheGreat


Environmentalists are just one of the groups though. A lot of times, you'd have minority groups, labor unions, environmentalists, land developers, etc., all in a weird sort of unholy alliance of the moment, yanking your chain on siting issues. NIMBYs and BANANAs transcend ideology, and commercial landrapers are often the biggest (and best connected) NIMBYs of all.

Industrial and commercial/office park developers are a great example. They used to go out of their way to keep you from being a neighbor, give you **** on transmission lines, etc., until the shortages and pricing drove companies away. Then they loved you. Now the marriage is over again.

Racial issues even get into it. Sunlaw (IIRC) had an aborted proposal to repower an old site in the Compton area, which they pursued after losing some siting issues in more affluent, whiter areas further west. So when they came to Compton, they did the same white people in suits canned spiel, and came unglued when the city folks and locals told them, in essence "you're just coming here to pollute our neighborhood because the people in the white neighborhoods where you tried to build don't want your noise or your pollution." What was really needed was some good ol' wheeling and dealing, but they screwed things from the beginning with their patronizing dog and pony show.

I guess my point was more that the immediate pointing out of other limiters seems like it doesn't admit what environmental problems there were or estimate their scope. And of course some of this stuff is a grey area, no? (Where does a NIMBY change into an eco-freak?) But bottomline, they restricted expansion of capacity with a godawful regulatory process.

And the rhetoric of conservation made some wierd things happen too. I remember getting paid by SDGE to do an efficiency study for a customer who DIDN'T even want the study. Said there was zero chance that they would consider getting rid of their 20 ugly process chillers. But SDGE got the money from some ratepayer pot of money and they made money by commisioning me to do the study and tacking a markup on it. (I didn't mind...it was a kinda fun break to do that instead of more plumbing design. Even if it only took me two days to churn out a $4000 report. Had a nice comb binder...)

That's a tougher call. Theory says you should always pass on the prices, but the situation was close to either a mass ratepayer rebellion, or an economic collapse as businesses shut down. Essentially, the consumer is sucking up the prices over a longer term, by paying surcharges (some now expiring or scheduled to expire) for the state's bailout of the IOUs and for the DWR contracts. Immediate pass-through and transparency was probably not a pragmatically good idea at the time. If/when there's a Cali FUBAR II, then it could be considered, because at least there's some lead-in time, and before that happens, people should see rates going down for some time. The extreme volatility in pricing that a lot of consumers saw was up to the limits of what some could bear as it was. In theory, the market benefits from pricing transparency, IF consumer response falls within economic norms (i.e. use less and suck up the costs, with some default level). If consumers flip out, or a lot of industry folds up and moves elsewhere, it's a different story though, with potential cascading effects. Although having five or ten million people leave Cali and move back where they came from might not be too bad in the long run.

They are paying for it one way or another. But in this case they are paying for more, since they used more. They would have paid less if prices had risen since they would have used less.

Having some businesses that use a lot of energy close, would have been tough, but I guess good, given that it was in short supply. I mean there was a real shortage for all the reasons listed (lack of capacity, hot summer, transmission problems, etc.), Why not let people know that?

Didn't the prices get passed on in SD? Just not in SCE or PGE areas?

In the short run, yeah, he can get away with it. Nobody really wants to litigate the issue in front of a Cali jury, so he can "renegotiate" with the weight of a threatened AG lawsuit and a lynch mob atmosphere behind him. Longer term, though, the people he's ****ing now will remember long after Davis sinks (not soon enough) into political oblivion.

Agreed. And people wonder why power providers want a premium for dealing with that banana republic...

[TCO]

Originally posted by MichaeltheGreat


If I wasn't already here, and already doing it, I wouldn't take it either. I'm looking to move out of the field altogether in the next two-three years, unless there happens to be another gold rush.

It's more that the other opportunity is a lot firmer and closer to his area of expertise. (VP of marketing for a service company.) I think the energy thing kinda intrigues him, but is a less developed thing...

[Adam Smith]

MtG:

I have a pdf version of the Borenstein, Bushnel & Wolak article (about half a mb) which I can e-mail to your Poly address or any other e-mail address you might wish to PM me.

I skimmed through the article again last night. It appears that increased profits from transmission difficulties falls under the category of "rents", ie, above normal returns to a resource that is temporarily in short supply. Also, the authors count scheduled outages as part of market power, since a generating company can strategically choose when to have a scheduled maintenance outage. Since some maintenance outages are necessary, this clearly overstates the amount of market power.

Frank Wolak presented some further work on this topic at the American Economic Association meetings in January, but all I have are some handwritten notes from that presentation.

Three further questions:
1. Where is North Pass? I can't find it on the transmission map I have.
2. Which parts of the state were hit hardest by power outages and price hikes, on a percentage basis?
3. Why does LA have so many small power plants? Are they inefficiently small plants left over from years of NIMBY? Or are they newer, more efficient combined cycle plants? My guess is the former.

[TCO]

Originally posted by Adam Smith
MtG:

I have a pdf version of the Borenstein, Bushnel & Wolak article (about half a mb) which I can e-mail to your Poly address or any other e-mail address you might wish to PM me.

I skimmed through the article again last night. It appears that increased profits from transmission difficulties falls under the category of "rents", ie, above normal returns to a resource that is temporarily in short supply. Also, the authors count scheduled outages as part of market power, since a generating company can strategically choose when to have a scheduled maintenance outage. Since some maintenance outages are necessary, this clearly overstates the amount of market power.

Frank Wolak presented some further work on this topic at the American Economic Association meetings in January, but all I have are some handwritten notes from that presentation.

Three further questions:
1. Where is North Pass? I can't find it on the transmission map I have.
2. Which parts of the state were hit hardest by power outages and price hikes, on a percentage basis?
3. Why does LA have so many small power plants? Are they inefficiently small plants left over from years of NIMBY? Or are they newer, more efficient combined cycle plants? My guess is the former.

I'd like a copy too. The analysis that I've seen was more in line with what MTG said.

[TCO]

Originally posted by MichaeltheGreat


If I wasn't already here, and already doing it, I wouldn't take it either. I'm looking to move out of the field altogether in the next two-three years, unless there happens to be another gold rush.

Can I have him give you a call--he is in San Diego? (If this job oppty is still in play for him.) I don't think that the type of work he is looking at is competetive. It's more on the energy buy side. Not generation permitting.

Might be real useful for him to talk to someone with industry experience. His partner would have that, but he does not.

[chequita guevara]

Originally posted by MichaeltheGreat
And of course, they also caused the hot weather, the drought, lots of people to move to Cali and not give a **** about conservation, and transmission lines to go overcapacity.

So how come many of the days when they had electrical shortages were days when demand wasn't anywhere close to peak?

[MichaeltheGreat]

Originally posted by Adam Smith
MtG:

I have a pdf version of the Borenstein, Bushnel & Wolak article (about half a mb) which I can e-mail to your Poly address or any other e-mail address you might wish to PM me.

Cool, the Poly one should be fine. I'll PM you my work one anyway.

I skimmed through the article again last night. It appears that increased profits from transmission difficulties falls under the category of "rents", ie, above normal returns to a resource that is temporarily in short supply.

That sort of expense/profit falls into two different areas: One is having to go to less optimal wheeling routes or displacement deals, with more fees to more parties and/or larger transmission and substation losses.

The other is where an absolute constraint effectively partitions the grid, and only in-block generators are available. As one example, I worked on three 50 MW peakers in Solano County (that's the client who decided they didn't want to play in Cali, so they paid us up and quit), and another 150-350 MW proposed base+peaker in Contra Costa County. Physically, the two sets of sites were 15 miles apart as the crow flies, an hour apart to drive (the Sacramento River Delta was in the way), and a practical world apart from a transmission perspective during high load periods. The Solano County plants, despite their geographic proximity, would have been unable to reach the SF-Oakland load center during the very high peak periods, but they would have handled the Sacramento area load center.

Also, the authors count scheduled outages as part of market power, since a generating company can strategically choose when to have a scheduled maintenance outage. Since some maintenance outages are necessary, this clearly overstates the amount of market power.

They're partly correct here and partly not. This was the one area where most gaming took place wrt in-state generators. The flip side is that some "maintenance outages" were really planned long-term shutdowns for repowering (i.e. tearing out the guts and putting in new turbines, etc., to uprate, downrate, change fuel source or increase generating efficiency.) Once shut down for repowering, a lot of regulatory things happened - and the plant was "new development" for air quality and land use permitting. Several SCE peakers that were sold off fit that mold. Sometimes, the new owners were in a position to restart the existing hardware, sometime it was already partly removed.

Three further questions:
1. Where is North Pass? I can't find it on the transmission map I have.

North Pass is a colloquialism for the northern transmission route out of South Pass. It's a sort of short for "North of South Pass." In addition to the overall transmission line constraint, there are constraints at the breakers, transformer banks, etc. in each section of a primary transmission substation, so you can have capacity on a line in or out, but not through a particular transformer bank taking a line out to a specific destination.

2. Which parts of the state were hit hardest by power outages and price hikes, on a percentage basis?

I don't have hard numbers, although I can dig around. SDG&E territory was the least hit, despite being the most import dependent, due to low industrial load and the major population concentrations being coastal. SDG&E also has a different transmission situation, since they have less outside system connections, but those are typically less constrained.

The SF Bay Area was probably the worst hit, followed by the LA basin. Other parts of PG&E territory and SCE territory were less badly hit. Some munis, like SMUD, (Sacramento) were virtually immune to outages, but not cost hits.

3. Why does LA have so many small power plants? Are they inefficiently small plants left over from years of NIMBY? Or are they newer, more efficient combined cycle plants? My guess is the former.

Well, it's definitely not the latter. LA and SCE territory in the LA Basin is just a transmission nightmare. There are a ton of munis - LA itself (LADWP), Anaheim, Riverside, Burbank, Glendale, Azusa, and Colton are all munis, with LADWP generating pretty heavily. Some of the others have the odd peaker plant, but most of those don't really run, they were installed in the wholesale contract gaming days between SCE and the munis. LADWP's transmission system is labrynthine, since there are franchise cutoffs that nearly isolate large industrial areas, so LADWP has a lot of end-of-line situations. Many of their peakers are more for stability purposes in end-of-line than they are for pure peaking.

SCE had a bunch of peakers connected closely to major distribution substations, and some of those are now in prime real estate. Torrance has some, Redondo or Manhattan Beach (not like there's a real difference ) had some. They kind of got lumped in ad hoc as different areas industrialized and built out over the years, so now, there's not a lot of coherence to the overall transmission and peaking / system stability scheme.

[MichaeltheGreat]

Originally posted by GP


Can I have him give you a call--he is in San Diego? (If this job oppty is still in play for him.) I don't think that the type of work he is looking at is competetive. It's more on the energy buy side. Not generation permitting.

Might be real useful for him to talk to someone with industry experience. His partner would have that, but he does not.

Sure, I'll PM you my cel phone #. Weekday afternoons are the best, now that I'm over by the beach in Playas, it's hard to get out the door too early. Plus things are at a fairly "casual" pace right now, until a couple of contracts close.

[MichaeltheGreat]

Originally posted by chegitz guevara


So how come many of the days when they had electrical shortages were days when demand wasn't anywhere close to peak?

Several reasons. The biggest factor is that outages are a separate issue from pricing. Outages are mandated by the WSCC (Western Systems Coordinating Counsel) protocols for the safe management and operation of the transmission grid in the 11 western continental states.

WSCC is a non-profit technoweenie organization, that doesn't care at all about markets. Their whole mission in life is to assure overall reliability of the overall system. Every utility that dispatches generation is a member, so that includes private utilities, the feds (WAPA and BPA), some large munis who generate (Sacramento Municipal Utility District), and state agencies like the Cali Department of Water Resources. If you dispatch into the grid, membership is mandatory, and you pay to support the organization and have a rep there. Members are obligated to other members to comply strictly with WSCC protocols, so that's why you can have a major transmission line loss that affects isolated pockets in all 11 states - each member has to take action to restore stability in event of a major generation or transmission loss.

The way the outages worked was that each dispatching utility monitored it's different required reserve levels, so when a particular reserve level got too low, the utility was mandated under the WSCC protocols to reduce load until the reserve level was back to the acceptable minimum.

The first people to go were those who were voluntarily on interruptible rate tariffs. Under these, you got a break in your power rate, in return for the utility having the right to cut you off (they use wireless radios, so it's under their control) under certain load conditions. The interruptible service contracts specify that you can only be interrupted for a certain total number of hours, a maximum number of different days, and a maximum of X hours in a day. That means if the problem hasn't gone away, eventually you have to let the interruptible guy back on the system, and drop your load some other way. (i.e. rolling outages)

Peaking plant operations are another problem - as load goes up, you bring a peaker to idle, no load condition, and it's then part of your hot ready reserve (aka "spinning" reserve). However, if you actually start generating, it's no longer reserve, so you have to replace your reserve level or drop load off your system. A lot of the peaking plants in the system hadn't had major maintenance since the 80's (this is by design, to make them more economical you try to stagger how much you run them, so that your entire fleet averages out longer intervals before major maintenance). A lot of them were overdue, and running them excessively, say at 110% load, or for too many more hours than planned, increased the risk of breaking something, and taking the plant all the way down for the season. So you run a risk analysis - how much benefit from X extra running hours, vs. what risk of total loss for the season, and how would that total loss affect system integrity?

There's an environmental issue, in that a lot of peakers are oil or diesel fired, and on limited duration air quality permits that allow them to run X hours per year. On a hundred degree day with a Stage II smog alert and a nice inversion layer, the last thing you want to do is run 20 inefficient oil burners. The dirty plants are all liquid fueled, so they have to have onsite fuel storage, and normally, that isn't sized to run 300 hours in a month. The plants were never designed for that, so they instead have fuel for maybe 30 hours running time before needing to be refueled. And when everyone wants fuel for their baseload (semi-clean) and peaking (dirty) plants, getting refueled in time to keep running is a nasty logistics issue. So again, you do risk-benefit analyses on the fly, to look at preserving the greatest availability of your peaking assets.

The late year problem in 2002 came about mostly as a result of exhaustion of the peaking assets. Too many of them had maintenance issues, they'd outrun their permits or been overloaded past 100% for too long, turbines had cracked compressor blades or combustion liners, etc. So a lot of what would have served as reserve capacity in October to December of 2000 was just one step away from being a bucket of bolts. BTW, most of those were still owned by the regulated utilities that got skinned by the market prices, so they weren't really the gougers - they were much more the gougees.

[MichaeltheGreat]

Originally posted by GP
I guess my point was more that the immediate pointing out of other limiters seems like it doesn't admit what environmental problems there were or estimate their scope. And of course some of this stuff is a grey area, no? (Where does a NIMBY change into an eco-freak?) But bottomline, they restricted expansion of capacity with a godawful regulatory process.

The process was/is a mess, but interestingly enough, I've never had the problems with the eco-weenies I've had with landowners, landrapers and lawyers. Eco-weenies can be bought off fairly easily if you work with them a little and give them some of what they want. The NIMBYs and BANANAs are just impossible, though.

And the rhetoric of conservation made some wierd things happen too. I remember getting paid by SDGE to do an efficiency study for a customer who DIDN'T even want the study. Said there was zero chance that they would consider getting rid of their 20 ugly process chillers. But SDGE got the money from some ratepayer pot of money and they made money by commisioning me to do the study and tacking a markup on it. (I didn't mind...it was a kinda fun break to do that instead of more plumbing design. Even if it only took me two days to churn out a $4000 report. Had a nice comb binder...)

Yeah. The legacy of moonbeam Jerry. At the time, nobody was going to do that crap, but the funny thing was that if they had, it would have really paid for itself in 2000, and then some.

They are paying for it one way or another. But in this case they are paying for more, since they used more. They would have paid less if prices had risen since they would have used less.

Spread over time it's a lot less painful. It was bad enough as it was, if there hadn't been a market limiter somewhere, it could have gotten beyond any ability to control. The utils couldn't really cope (and the legal system would have been overwhelmed) with 5 or 10 million bill rebels. So it would have gotten political at some point anyway, but with a lot more bad blood that would make creating a real market more difficult.

Having some businesses that use a lot of energy close, would have been tough, but I guess good, given that it was in short supply. I mean there was a real shortage for all the reasons listed (lack of capacity, hot summer, transmission problems, etc.), Why not let people know that?

Didn't the prices get passed on in SD? Just not in SCE or PGE areas?

They got passed on to an extent everywhere. Just that the market prices in SCE and PG&E went higher, due to worse constraints and load conditions. Up to the same point, everyone got stuck, but the SDG&E costs never rose high enough that the cap became an issue.

Agreed. And people wonder why power providers want a premium for dealing with that banana republic...

Yeah, the financial market people flat out told DWR/CPA that they didn't believe the state would fulfill the commitments it was promising. A lot of the prospective DWR/CPA stuff died because it was unfinanceable due to political risk. Then the economy tanked and the weather turned, so people don't have a clue how lucky they were, and the pols all have an incentive to lie about it and look the other way. 'Til next time.

[TCO]

Thanks Mike. Did I mention the nice comb binder?

[MichaeltheGreat]

Yeah, I sent out some of those reports the same way. Even got them nice card stock covers and clear plastic sheets to protect the pretty color letters on the covers. It was the least I could do.

Ahhh, those were the days... When Cali FUBAR II happens, I think being able to triple my billing rate will probably get me to yank myself out of semi-retirement from the field.