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California: The power shortage that wasn't The myths and facts behind the "energy crisis" that has driven electricity costs through Californian roofs Since the advent of California's "energy crisis," the energy industry has made many claims about its causes. It's blamed insufficient power generation developed over the last 10 years, natural gas price shifts, below-average runoff on the Columbia River, and load increases from increased demand. None of these explanations, however, reflect California's true problems. As an analysis published in the Jan. 1, 2001, issue of Public Utilities Fortnightly shows, any energy production shortages in California most likley were created by the energy industry itself. "The California market was characterized (last summer) by large, enduring deviations from traditional utility practice," analyst Robert McCullough says. "Generators did not generate. Peakers did not peak. All of the evidence is consistent with a major, sustained exercise of market power." McCullough is managing partner of McCullough Research, which specializes in bulk power and restructuring policy issues in the United States and Canada. He's also an adjunct professor of economics at Portland State University. McCullough's statistical analysis, titled "Price Spike Tsunami: How Market Power Soaked California," refuted energy industry assertions about California's energy shortage. Below are some of the more significant findings: l Myth: Columbia River runoff was below average and curtailed power generation at hydroelectric plants. Fact: All summer hydroelectric generation was slightly above the average for the past 14 years. River inflows ran at 98 percent of the historical average over the last 20 years. l Myth: The high-tech economy drove energy demand through the roof. Fact: Although load rose somewhat over the last three years, peak demand in the summer of 2000 was below peak demand in 1998 and 1999. l Myth: Air emission control standards inhibited power plant operation. Fact: The California Public Utilities Commission "did not find any significant environmental constraints for plants outside of the LA basin." Los Angeles is governed by a municipal utility, whose ratepayers have experienced rate reductions and no outages over the summer and fall. l Myth: Not enough additional generation capacity was built over the last decade. Fact: "The Summer Adequacy Report" indicated that there were sufficient resources, both within California and on the regional level. Western Systems Coordinating Council estimates for California and the California Independent System Operator implied a satisfactory margin of loads over resources for this summer -- a margin above 15 percent. The analysis says: "The ISO's frequent emergencies (38) did not reflect the experience of the summer at any other utility in the region. The ISO declared each emergency when the offers of capacity were insufficient to meet its reliability criteria. It is, of course, significant that, without exception, next day real-time sellers were available to avert the ISO's emergency, but at murderous market-clearing prices." Even with power plant outages at 8 percent, as reported by the Federal Energy Regulatory Commission, McCullough's analysis found that there was a "10% reserve margin across all hours during which the ISO declared emergencies." In fact, "on average, before forced outages, the actual ISO reserve margin averaged over 20 percent during the periods last summer in which it declared emergencies." The analysis further showed "a broad pattern of undergeneration at California thermal units." The Public Utilities Fortnightly analysis points out that the Western States Power Pool was created in 1987 but actually started in 1980. Prices remained steady from January 1980 to 1998, "through earthquakes, droughts and wide variations in the balance between resource and load." But, "20 years of stability ends in May 2000." In fact, the price for power began to increase in April 1998, the time deregulation began to take hold in California. Finally, the analysis points to a significant flaw in the California ISO operating procedures. "The methodology of collusion is uncomplicated. . . . The ISO collected and distributed data for its suppliers. It violated its own restrictive policies on dissemination of market information. Suppliers in the ISO service territory knew exactly the production levels of their competitors at any time." McCullough's analysis clearly shows that the so-called power shortage in California not a cautionary tale about the need to build additional generating capacity. It's a classic case of the fox guarding the henhouse. Analyst Paul Fenn put it this way in an article titled, "Our Fake Energy Crisis: What Really Happened in California": "It's not about supply; there's plenty of capacity around. It's a problem of who controls the supply, and the money that pays for it." For more information
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