The California energy crisis has forced drastic business measures by the state's largest investor-owned utilities. On April 6, Pacific Gas & Electric (PG&E) filed a Chapter 11 bankruptcy, and on April 9, Southern California Edison (SCE) announced it will sell its transmission lines to reduce debt. Although the California Independent System Operator (Cal-ISO) has lowered electricity flow levels to a “Stage 2” status, the state is still without the electricity contracts it needs to get through what may otherwise be a long, dark summer.

In mid-January, two days of involuntary rolling blackouts cost some northern California business owners a hefty sum. The memory of that short, but costly period keeps uncertainty and anxiety levels high.

Meanwhile, the various players have tried to alleviate the crisis in numerous ways.

In early February, Gov. Gray Davis signed legislation authorizing California's water resource agency to enter into long-term contracts to buy power on behalf of utility customers. The governor took this course of action because PG&E and SCE exhausted their credit with wholesale electricity suppliers.

The Federal Energy Regulatory Commission, Department of Energy, and Congress have been asked to intervene. At the same time, several alternative energy companies, including and New West Energy, have pulled the plug on retailing in the state.

Supply and Demand Debate

Most reports — even from the utilities themselves — cite deregulation as a root cause. The restructuring of California's utility market created disincentives for utilities to own generating assets.

While utilities retained some power plants, the majority of them were sold to Duke Energy, Mirant, AES Corp., Reliant, and Dynegy — all independent electricity wholesalers.

Currently, a seasonally aggravated supply and demand imbalance exists. No significant power plants have been built in the last 10 years to keep up with demand. Electricity wholesalers have raised spot-market prices in response to this imbalance. These prices were 10 times higher in December 2000 than they were in December 1999.

On the retail side, utilities can't get long-term contracts with better rates, and restraints imposed by the California Public Utilities Commission prevent them from charging consumers for increasing costs. Since May 2000, utilities have accumulated debts estimated in the tens of billions of dollars.

Whether or not the demand for electricity has grown suddenly and beyond predictions is a subject of debate. The California Energy Commission (CEC) released a paper asserting that electricity demand has been accurately forecast as early as 1994.

In 1994 and 1997, for example, the CEC predicted peak electric demand levels for the year 2000 would reach 55,000MW. The actual demand was 53,000MW.

The paper also reported that the calculated growth rate of electricity demand over the last five years was only 2.5%. This means that, to keep up with the current demand of 53,000MW, an additional 1,300MW of new generation capacity would need to be added every year.

Rolling Blackouts: Bad for Business

On Jan. 17 and 18, the Cal-ISO announced a Stage 3 alert, and rolling blackouts ensued. (See Chronology of the Rolling Blackouts, on page 38, and Cal-ISO Alert Levels.)

A recent Wall Street Journal article chronicled some of the ill effects experienced by industrial and commercial customers. Integrated Device Technology, a semiconductor manufacturer, estimated $50,000 in lost production and damaged products on Jan. 18. On the same day, electronics manufacturer Solectron Corp. lost power to six buildings for about 2 hr, idling 2,000 workers.

In a press release following the blackouts, E-Source estimated the cost of a 2-hr outage to all of California's commercial and industrial businesses (on an aggregate basis) between $500 million and $750 million. (Note: This estimate may be high because the January blackouts affected only northern California.)

The Institute of Electrical and Electronics Engineers' (IEEE) Gold Book provides a method for estimating the cost of interruptions to industrial and commercial operations.

The method analyzes a given amount of undelivered energy in kWh using a suggested cost (in year 2000 dollars) of $22 per kWh. Using this method, and assuming the January blackouts affected only industrial and commercial customers, the aggregate cost would be $55 million.

This estimate would be more reliable if the affected customer mix was better known. The Lawrence Berkeley National Laboratory is now completing a report for the Electric Power Research Institute (EPRI) on the economic value of electric reliability. This report will provide a better basis for these estimates in the future.

Interruptible Rates

Some large industrial customers subscribe to interruptible electric rate schedules. Under these programs, customers pay their electric utility at a reduced rate. In exchange, they agree to have their electricity curtailed when needed — with a ½-hr notice, if possible — for a contracted amount of interruption.

Cal-ISO has been in Phase 2 alert for nearly one month. Phase 2 is, in essence, a request for California's utilities to curtail their interruptible load. As of Jan. 22, PG&E had exhausted its interruptible program, having called upon 140 customers for 100 hr each, according to spokesperson Staci Homrig.

When rolling blackouts are ordered, PG&E telephones customers with sensitive loads (e.g., batch processes) or demands in excess of 300kW. According to Homrig, customers have been cooperative and understanding, and PG&E continues to ask its customers for voluntary conservation.

Summer Outlook

California's Department of Water Resources has taken over long-term power purchases for PG&E and SCE. Since February, it has contracted with Mirant Corp. to supply 750MW of electricity. This is only a fraction of the expected peak demands for the utilities' service areas. Overall, California will require at least 2,000 levels of 53,000 MW. The long, dark summer is just around the corner.

For further exploration, check out the following Web sites.

  1. California Energy Commission,

  2. Lawrence Berkeley National Laboratory,

  3. California Independent System Operator,

  4. PG&E, “California Energy Crisis,”

Chronology of the Rolling Blackouts

January 17. Rotating power outages ordered in northern California. Continuing supply limitations necessitate rolling blackouts.

  • In conjunction with a Stage 3 emergency alert, Cal-ISO ordered rotating customer outages and requested that utilities implement their rotating outage programs to curtail a total of 500MW. The outages began at 11:40 a.m. According to Cal-ISO spokesperson Lisa Szot, this involuntary curtailment lasted 3 hr.

  • In response to the Cal-ISO request, PG&E and municipal utilities shed load. PG&E representative Staci Homrig said the utility shed 400MW for about 2.5 hr, affecting approximately 380,000 customers.

January 18. Blackouts ordered in northern California. Electricity supply remains very limited throughout the western region.

  • Cal-ISO again orders rotating customer outages and requests curtailments totaling 1,000MW, with the extent evaluated on an hourly basis. Cal-ISO indicated this curtailment lasted about 1 hr.

  • PG&E shed 800MW for 2.5 hr in response to this request, affecting 670,000 customers.

Cal-ISO Alert Levels

Curtailment and Rolling Blackouts

Stage 1. Emergency reserves fall below 7%. Voluntary appeals for load reduction follow.

Stage 2. Reserves fall below 5%. Service to interruptible customers is curtailed. Interruptible loads typically come from large industrial customers who pay reduced rates in exchange for agreeing to have their electricity curtailed when needed, up to a contracted level.

Stage 3. Firm load curtailment (rotating blackouts). Stage 3 begins when capacity margins have fallen below 1.5%.

The Cal-ISO manages the flow of electricity along California's transmission system. It is a not-for-profit public benefit corporation.