Electric storm: Mild summer and US slowdown stave off Californian crisis

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The Independent Online

Nothing about California's electricity crisis is turning out as expected.

This was supposed to be the summer of sky-high wholesale prices and non-stop rolling blackouts, but they haven't happened. In fact, if you were to take a tour of the Golden State now you would be hard pressed to notice there was a crisis at all: The lights are on, and everyone is still here.

That's mostly because of a fluke of nature: The weather has been uncannily mild and so demand for air-conditioning and refrigeration systems, in particular, has been significantly reduced.

It also helps, in a perverse sort of way, that the economy has been slowing down, particularly the energy-guzzling hi-tech sector. Consumption fell by 11 per cent in June, even before a round of retail price increases kicked in on 1 July, and by 5 per cent in July.

Contrary to dire predictions, wholesale prices have in fact been falling,

That's not all that has gone against expectations. We heard California's governor, Gray Davis, and his supporters, accuse private energy generating suppliers of "gouging" prices; the worst of them, they said, were based in the president's home state of Texas.

However, power-buying statistics published last month showed that Texas companies like Enron and Dynergy had, in fact, sold California only 10 per cent of its electricity since the beginning of the year – much less than the Canadians, say – and that the highest spot-rate prices of all had in fact been charged by California-based concerns.

We were also told to expect a showdown between California and the federal government. Californians, went the common wisdom, were hapless victims of a failed deregulation that had left them at the mercy of ruthless generating companies; moreover, their appeals for help from the Federal Energy Regulatory Commission (FERC) were falling on deaf ears because the president and his advisors were all in the pocket of those self-same companies.

This picture, too, has been complicated by recent events. Under heavy pressure, FERC has reluctantly agreed to impose reasonably effective price caps, not only on California but on all the western states. At the same time, California's public officials themselves have been shown to be in the pocket of energy companies.

Two veterans of the Gore presidential campaign brought in by Governor Davis recently resigned because it turned out they were simultaneously working for Southern California Edison, one of the state's two giant power utilities. Five other advisors were dismissed because of their personal holdings in energy stocks, while a sixth quit of his own accord. A further eight are under investigation.

The conflict of interest has reached Governor Davis' press spokesman, Steve Maviglio, who agreed last week to sell his $12,000 (£8,450) stake in a California energy company, Calpine, that had been noticeably absent from his public criticisms of the "price-gougers". It has also reached the chairman of the California Energy Commission, Bill Keese, who has just agreed to sell more than $500,000 in energy holdings, some of them in companies that have come before him on regulatory matters.

Given the confusion into which the politics of the crisis has descended, it is tempting to look at the lights burning, both on Hollywood Boulevard and the San Francisco hilltops, and conclude that there is nothing out of the ordinary.

But the crisis is far from over. "It's not over because none of the underlying causes have been addressed," says Mark Bernstein, an energy specialist with the Rand Corporation.

As things stand, California's largest utility, Pacific Gas & Electric (PG&E), is in bank-ruptcy court, and the second-largest, Southern California Edison, is still scrambling around for ways to avoid the same fate. The state government has become the sole official buyer of energy, creating severe imbalances in the budget and effectively putting all non-essential public programmes on hold. (Total energy expenditure in California is expected to reach $70bn this year, compared with $7bn last year, with the state picking up much of the slack.) There are hopes the state could eventually withdraw from the wholesale market, but nobody yet knows how.

There is a complicated court battle going on to secure rebates from the generating companies for over-charging. The rebates could go as high as $9bn, although it is not clear whether the recipients would be the utilities or the state. The rebates will almost certainly get sucked into PG&E's bankruptcy settlement, further complicating the issue.

Meanwhile, the root causes of the crisis have hardly changed: an improperly deregulated market with too few power sources, too little transmission infrastructure, and a dearth of active players in a position to create a truly free market. If nothing changes, Dr Bernstein says, the shortages, uncontrolled price rises and rolling blackouts will simply be postponed until next summer -- or whenever the next demand crunch hits.

Much of the political debate has focussed on generating plants – whether local authorities have been too slow to build them, or too reluctant on environmental grounds. But the state of the transmission grid is arguably a bigger problem, not only in California where there is a north-south bottleneck in the San Joaquin Valley, but across the country. Last month, Las Vegas suffered a blackout because there was no way to funnel emergency power supplies there quickly enough. Since there is no direct north-south transmission line through Nevada, the power has to travel either through California (a no-go in the current situation) or through Utah, which was experiencing similarly high demand at the time.

One can anticipate similar problems in New York state and New England, where the dense population makes it hard to build new transmission lines, or in Florida, which has just two electric line connections to the wider United States, both of which were operating at capacity during last winter's peak season. Given the state's continuing population growth, it wouldn't take more than a bit of freak weather or a power plant going down unexpectedly for the great electricity crisis to hit there as well.

"You can build as many power plants as you like, but if you don't have the grid to transmit the electricity they won't do you any good," Dr Bernstein remarked. The White House energy plan recently unveiled focuses almost entirely on energy production; not on distribution or conservation. If implemented in its current form by Congress, it is unlikely – energy specialists say – to do much to alleviate the core US problem.

California's respite this Summer could well be the calm before a much wider storm.