Informational Hearing
California's Demand For Energy:
The California Energy Commission's Forecast Through 2012
State Capitol, Room 112
February 20, 2002
1:30 p.m.
I. Opening Comments
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Senator Debra Bowen, Chairwoman
Senate Energy, Utilities & Communications Committee
II. The California Energy Commission's Forecast Through 2012
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Steve Larson, Executive Director
California Energy Commission
III. Meeting California's Demand For Energy
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S. David Freeman, Chairman
California Power Authority
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Bill Julian, Director Office of Governmental Affairs
California Public Utilities Commission
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Joe Ronan, Vice President of Governmental & Regulatory Affairs
Calpine
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James Avery, Senior Vice President
San Diego Gas and Electric Company
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Gary Schoonyan, Director-San Francisco Office
Southern California Edison
California's Demand For Energy:
The California Energy Commission's Forecast Through 2012
Background
The current relative tranquility of California’s electric market stands in sharp contrast to the circumstances of last year. While a review of 2001 may be painful, it may also serve as a useful reminder of how disruptive and costly last year was and how California found itself in the position it’s in today.
Electricity supplies had been relatively tight as early as the summer of 2000, but shortages didn’t become evident to most users until December 2000 when the California Independent System Operator (ISO) declared its first ever Stage 3 alert, this at a time when electric demand is typically at its low for the year. (A Stage 3 alert is triggered when power reserves drop below 1.5% and rolling blackouts are possible.)
Starting that month, the ISO was in a near continuous state of emergency as it searched throughout western North America for power supplies to keep the lights on in California. A Stage 1 alert (where electricity reserve margins drop below 7% and public calls for conservation are issued) was in effect virtually 24 hours a day, 7 days a week from mid-December 2000 through February 2001. Stage 2 alerts (where electricity reserve margins drop below 5% and large customers with interruptible loads are interrupted) were in effect for almost the same period of time. Stage 3 alerts were in effect continuously from 1:45 a.m. on January 11, 2001 through 11:59 p.m. on February 16, 2001. Long-threatened rolling blackouts occurred on January 17 and 18, and again on May 7 and 8.
Electricity prices started moving higher in the early summer of 2000 and by early 2001, they were 10 to 20 times higher than the historical normal cost of around $0.025 per kilowatt hour (kwh), peaking at $1.90 per kwh. On January 18, 2001 the Legislature passed SB 7x (Burton), Chapter 3, Statutes of the First Extraordinary Session, with only two dissenting votes to provide $400 million for electricity purchases necessary to keep the lights on. That money was spent in ten days.
Since that time, wholesale power prices have returned to something closer to historic averages. The average cost per kwh of the purchases made by the Department of Water Resources (DWR) has dropped about 70%, from $0.33 per kwh to $0.09 per kwh, and electricity supplies appear to be sufficient in the short term. Having said that, questions remain about the future of California’s electric market structure and how the growing demand for power will be met through a combination of demand side management practices and new power plant construction.
Lower wholesale electricity prices, the circumstances surrounding the Enron Corporation, and the collateral concerns about other electric generators have caused a number of these companies to reconsider their plans for building new powerplants. The boom in new powerplant applications at the California Energy Commission (CEC), which coincided with the very high wholesale electric prices through mid-2001 and forecasts of ongoing supply shortages, is starting to turn into a bust as wholesale prices return to near historic levels and electricity demand growth slows.
While it is a normal market reaction, it is somewhat ironic that the tremendous effort by Californians to conserve electricity in 2001, which helped drive down the price of power in the state, has caused generators to rethink their construction plans because their profit margins may not be as healthy as they had previously forecasted. As a result, the outlook for electric supply over the medium- and long-term is cloudy, as the CEC has noted in its recently published report entitled 2002-2012 Electricity Outlook Report.
While energy conservation will continue to play a critical role in meeting California’s future demand for electricity, the reality is as the state continues to grow, so too will the need for new power plants. Five months ago, in September 2001, California’s demand for electricity was going to be met by ongoing and improved energy conservation efforts, investor-owned utility retained generation supplies, power acquired by DWR under long-term contracts, and private merchant generators – all of which could be supplemented by the activities of the California Power Authority (CPA).
Five months later, with the hour-to-hour, day-to-day electricity crisis having subsided, it may be appropriate to articulate a more refined vision of the course of California’s electricity future. Viewed in starkest terms, two opposing choices present themselves:
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Allow The Market To Run Itself. Continue down the path of deregulation and rely on the invisible hand of the market to react to the ebb and flow of supply and demand by satisfying that demand at market prices.
- Reinvigorate Historic Market Structures. Rely more heavily on the investor-owned utilities (Southern California Edison, San Diego Gas & Electric, and Pacific Gas & Electric) and re-emphasize their historic role of electricity procurement, either through outright ownership or contracting with third parties, to create additional supply.
Overlaying both of these options is the CPA, which has a statutory mandate to supplement private investment in power supplies to ensure a sufficient and reliable supply of electricity for California’s consumers at reasonable rates.
On February 13, 2002, the CPA adopted an investment plan calling for improved energy conservation and demand management, along with targeted investments in power plants (particularly renewable power supplies) where local supplies are inadequate. For the CPA to truly prove to be beneficial to ratepayers, it must be fully integrated into California’s overall energy acquisition effort.
