Report 2000-134.2 Summary - May 2001

Energy Deregulation:

The State's Energy Balance Remains Uncertain but Could Improve With Changes to Its Energy Programs and Generation and Transmission Siting

HIGHLIGHTS

Despite programs to add supply and reduce demand, the State's energy balance remains uncertain:

  • Even with projections to the contrary, there is little assurance that the State will meet energy supply needs this summer.

  • The State Energy Resources Conservation and Development Commission's (energy commission) AB 970 demand reduction programs are estimated to save 281 megawatts at June 1, however, over one-half of this savings is expected to come from programs that are voluntary in nature.

  • The California Public Utilities Commission's (CPUC) interruptible program-the State's buffer for avoiding rolling blackouts-includes many customers who were not prepared to reduce their demand for electricity. The CPUC recently changed the program, but its viability will not be known for some time.

  • Changes the energy commission made to building and appliance standards will not result in energy savings this summer but will benefit the State in 2002and beyond.

  • Since 1996 the energy commission has approved 12 power plants, but only 4 of those within 12 months, its statutory goal.

  • Despite adding three new processes to hasten power plant siting, only one will add a significant amount of energy to the State's supply in time for summer 2001.

  • The CPUC does not have an expedited transmission siting process for urgent projects.

  • Although the CPUC relies on them for approving transmission projects, the investor-owned utilities' projections of transmission demand growth may not be reliable.
Finally, because of the State's role in purchasing electricity for the investor-owned utilities, it remains unclear whether retail competition is consistent with the State's goal of returning the utilities to a credit worthy status.

RESULTS IN BRIEF

In 1996 the California Legislature passed Assembly Bill (AB) 1890, deregulating the State's electricity industry to allow energy customers to switch from one of the three investor-owned utilities to another provider. The California Public Utilities Commission (CPUC), along with the Legislature, believed deregulation would bring about free market competition and lower electricity costs for the State's residents and businesses. The failure of true competition to develop, a growing demand for electricity, and a lack of new power plant construction proposals have all contributed to California's current energy crisis. As of March 2001, the State Energy Resources Conservation and Development Commission (energy commission) projects that newly legislated programs will bridge the gap between energy supply and demand, safely carrying California through a perilous summer. However, we are concerned that demand will outstrip supply and that California will have to cope with some level of electricity shortage.

In September 2000, after a summer when the fragility of the energy supply became painfully evident as rolling blackouts hit the San Francisco Bay Area, the Legislature responded by enacting AB 970. This legislation primarily aims to bring new supplies of electricity on-line quickly and to reduce energy demand through incentives to customers who cut back their energy use, especially during peak summer hours. As summer 2001 approaches, California's citizens are concerned that the blackouts occurring on four separate days of this past January and March are only a prelude to what may happen in July and August, when demand for air-conditioning will peak. Although the energy commission estimates that California will have enough new supply and reduced demand to avoid rolling blackouts this summer, uncertainties in its projections regarding these programs leave little assurance that the State will escape further power outages. To comply with AB 970's mandates, the energy commission and the CPUC have been creating new programs and revising existing ones. Among other features, these programs aim to cut energy use in commercial and state buildings, install energy-efficient traffic lights, and install heat-reflective roof surfaces. The energy commission estimates that its new Peak Load Reduction Program can save 281 megawatts (MW) of power by June 1, 2001, but more than half of this savings depends on building owners and operators complying with repeated requests to reduce air-conditioning and other power use during the hot summer months. Moreover, the CPUC's costly new efficiency programs, aimed at residential and small business consumers, have many unresolved problems, including a similar consumer compliance issue. Finally, the CPUC in reviewing its interruptible program (program), which for some years has had a mechanism to free up electricity during peak demand hours, has found that program participants are unprepared for frequent requests to curtail energy use. The megawatts these programs are estimated to supply or save are summarized in the Appendix.

Although the energy commission's updating of the building and appliance efficiency standards mandated by AB 970 will not lower this summer's energy demand, this effort will produce future electricity savings. The Renewable Energy Program, part of the 1996 legislation that deregulated electricity in California, is also currently helping the State through this precarious time by ensuring that renewable power plants-plants fueled by renewable sources such as the wind-stay in production and continue to provide enough electricity to power about 4.4 million homes.

In addition to mandating new efficiency programs, AB 970 requires the energy commission and the CPUC to speed up power plant permitting and to address the limitations of the electrical transmission grid. Although legally required to reject or approve power plant siting applications within 12 months of the completion of an application, the energy commission generally does not meet that time goal. By pushing back the dates that plants come on-line, these siting delays have kept badly needed megawatts from being available to relieve energy shortages. Since 1996 the energy commission has approved 12 plants for construction using its standard siting process. If the siting for these plants had taken the 12 months specified by law and assuming no changes in their construction schedules, one plant would be operating now and a second would be coming on-line this June, by which time the 2 plants would be contributing 1,059 MW of power to the State's transmission grid. Both these power plants are now estimated to be operational in July 2001.

The time it takes the energy commission to site power plants has lengthened since the early 1980s, as more private power companies that are less familiar with the application process have planned larger plants that take more time to evaluate than the previous smaller ones. The energy commission also reports that public opposition to power plants, application project changes, and delays of other involved agencies have caused recent siting delays. Although it has made changes to speed up its siting process, the energy commission is not evaluating the results of these changes, and so it cannot be sure that the power plant siting process will be improved. Recently, the energy commission began using three new expedited siting processes of varying lengths, but it estimates only one process will add a significant amount of energy (several hundred megawatts) to the State's electricity supply in time for this summer's peak demand.

Unlike the energy commission's effort to expedite power plant siting, the CPUC has not responded to the current energy crisis with a faster process to issue transmission line permits for its more urgent projects. Not only does a congested transmission grid risk power outages under adverse conditions, but congested lines increase costs for buyers of wholesale electricity because such congestion triggers price surcharges. Although the lack of transmission lines to transfer power from the southern to the northern parts of the State caused rolling blackouts in Northern California on January 17 of this year, the CPUC has not acted to expedite transmission siting. In almost half of the transmission permits the CPUC granted after 1990, its environmental review process has taken considerably longer than prescribed timelines set up by the California Environmental Quality Act. Major causes of the CPUC's delays are the need to coordinate with the federal government on some projects, a slow process for contracting with consultants, and other involved agencies' late permitting requirements. Although one of these causes is out of its control, and even though it has tried to minimize the contracting delays, the CPUC has not addressed the delayed involvement by other agencies.

Further complicating the transmission picture, applications for transmission projects come from the State's three investor-owned utilities, which are primarily responsible for transmission planning. However, the utilities' transmission plans use varying assumptions about demand growth in their respective service areas. Not only do these three individual plans hinder comprehensive statewide planning, but the utilities may often have little economic incentive to expand transmission lines in their respective areas because the increased transmission capacity would simply allow competition by other power generators. Thus, the investor-owned utilities' projections of transmission demand growth may not be reliable.

When deregulation was implemented in March 1998, the Legislature and the CPUC had great expectations that consumer choice would create retail competition and drive down the costs of electricity. Unfortunately, the details of deregulation provided little incentive for customers of investor-owned utilities to switch providers. As a result, true competition never emerged, and Californians never received the supposed benefits of "direct access" to energy providers. The independent energy service providers (ESPs) had little chance to compete in price with the investor-owned utilities because of their small customer base and inability to negotiate low enough wholesale purchase prices. Also, the ESPs found that electricity is not a product they could endow with brand recognition. Now, with the State being the main buyer of wholesale electricity and negotiating long-term contracts with energy generators, consumer choice may not have a future-because expanding competition now could result in the State paying for unneeded power.

Even if retail competition had taken hold in California, an ideal model of free market forces may not exactly fit the electricity industry. In theory, a lack of supply drives up prices and creates an economic incentive for energy producers to build more power plants. But because the process of bringing a power plant on-line takes several years from the initial planning to the delivery of power, energy producers may not be able to respond quickly enough to market signals, resulting in boom-bust cycles as they adjust to shortages and excesses of electricity. To spare residents and businesses in California the effects of disruptive swings in the energy supply, the State may need to continue to play a part in energy planning. As the State's primary energy policy agency, the energy commission (in the former regulated energy market) used to ensure that the investor-owned utilities did not build too many power plants. Now the energy commission may need to take on an expanded role of planning for electricity supply, ensuring that neither too many nor too few power generation plants are built.

RECOMMENDATIONS

To provide the Legislature with information it could use to measure whether and to what extent legislative action is needed to help California meet its energy supply and demand needs in the future, the energy commission should do the following:

  • Consult with the California Independent System Operator and develop an annual projection of summer supply compared to peak demand that acknowledges the full range of constraints within the State's electricity system, including transmission constraints.

  • As part of its projection, provide the Legislature with a range of possible supply and demand outcomes that reflect the likelihood that the underlying assumptions will prove true.
To ensure that it achieves its goal of reducing peak demand on an ongoing basis, the energy commission should consider modifying its Peak Load Reduction Program as follows:
  • As a condition of program participation, require participants in its commercial building program to meet specified compliance levels for reducing lighting and the energy used to power air-conditioning levels for a certain period of time, such as 24 months. If the compliance levels are not met, the participants should be penalized. After 24 months, the participants' compliance could become voluntary.

  • Develop a plan to actively evaluate itself and program participants in all components of the program against set milestones, such as:
    • Securing a certain number of participants by milestone dates.

    • Verifying that equipment is ordered and delivered by scheduled due dates.

    • Ensuring that projects are installed, tested, and operational according to scheduled dates.
    In an effort to maximize energy conservation over the next several years, while at the same time making the best use of funds collected from the utilities' ratepayers, the CPUC should expand conservation measures to include those types of customers that will produce the most energy savings. This may not necessarily prompt the CPUC to abandon more costly residential and small commercial programs in favor of larger commercial, industrial, or governmental projects, but it will permit the CPUC to take advantage of potentially greater energy savings at a lower cost to ratepayers.

    To help the State avoid large swings in the supply of electricity relative to demand, the Legislature and the energy commission should consider augmenting the energy commission's role in electricity planning. For example, the energy commission's existing planning role could be expanded to include integrating supply and demand projections and using them as a basis for making decisions regarding whether to site new power plants.

    In assessing the future role of retail competition, the CPUC should consider the effects of competition at the retail level to evaluate whether retail competition is viable in the current market environment, in which the State is the primary purchaser of electricity for the investor-owned utilities.

    AGENCY COMMENTS

    The CPUC stated that it is working on a number of efforts to improve reliability, including energy efficiency programs, transmission planning and siting, and programs that interrupt the energy used by large customers and stated that the efforts are often consistent with our recommendations. The CPUC did express concerns that emphasizing only those energy efficiency programs with the largest savings presents equity issues in allocating funds for those programs. Moreover, the CPUC offered several aspects that it believes new legislation for expedited transmission siting should include. Finally, the CPUC agreed that the actual success or failure of changes it made to its interruptible program will not be immediately known, but noted that these changes were developed by consensus reflecting many parties' input.

    The energy commission noted that the State is facing significant challenges and one of the primary contributors to the crisis is electrical generators' withholding of needed power supplies. The energy commission also stated that its siting process is complex and it works to balance many issues within its timelines but acknowledged that its average permitting time has run beyond its statutory timeline. With regard to its Peak Load Reduction Program, the energy commission stressed that its demand reduction estimates were conservative and understated the energy savings that will be achieved. The energy commission disagreed with our analysis of the commercial buildings demand response program, stating that there are certain penalties in place which will substantially reduce the level of potential noncompliance. However, the energy commission did agree with our analysis of its water systems replacement program, stating that its tracking could be more systematic.


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