PERFECT STORM CLOUDS FORMING FOR ANOTHER CALIFORNIA ENERGY CRISIS?

by Wayne Lusvardi 

For anyone who is a political cloud watcher, the same sort of metaphorical storm clouds which resulted in the California Energy Crisis of 2001 again seem to be forming.  

Half humorously and half seriously, maybe California should just start naming its energy and water crises like the U.S. Weather Service does hurricanes.  The last energy crisis should have been called "Energy Storm Gray" after former California Governor Gray Davis, who was recalled over his mismanagement of the crisis. Although it is premature and speculative, should another energy crisis occur it certainly would be called "Energy Storm Arnold," an ironic term for the man who replaced Gray Davis. Whoever the next Governor of California is should pay attention to the ominous political storm clouds forming over energy, no matter how unlikely a repeat of the Energy Crisis of 2001 is.      

California's Energy Crisis of 2001 was called a "perfect storm," a term which was taken from the 1997 book and movie "The Perfect Storm," referring to the simultaneous occurrence of a combination of natural and man-made events which aggravate a situation catastrophically. The same sort of conditions which resulted in rolling blackouts, skyrocketing electricity bills, and political instability are once again forming like storm clouds over California for anyone with a trained eye and a memory of what really happened in 2001.  Let's take a quick look at the elements which formed the energy storm in 2001 and compare them with what is happening today.  

1. In 1996, the Federal Environmental Protection Agency threatened to cut off Federal funds to California by 2001 if smog conditions in big coastal cities were not improved.  The quickest way to significantly improve air quality was to shut down or modernize old polluting power plants, mainly along California's coastline.  In 2001, California was running out of sky, not energy per se.

2. The California legislature's response to the EPA mandate was incorrectly called "electricity deregulation." Deregulation was meant to break up the monopoly of the state's publicly-owned  electrical utility companies and replace old fossil-fuel power plants with newer less polluting natural gas-fired power plants as well as "green power." California electricity deregulation created the Independent System Operator (ISO) which required that power users order electricity a day ahead of time instead of on the "spot market."

3. The real crisis was as much financial as it was a shortage of electrons. The old mothballed power plants had mega billions of dollars of unpaid mortgages (i.e., bonds) on them which needed to be paid off. These were called "stranded assets." 

4. California added a "Competitive Transition Charge" onto the price of electricity to pay off the mortgages on the old power plants and enforced a blockade on the purchase of any cheap electricity outside the boundaries of California. This created an energy pricing fever so that the bonds could be paid off quickly with premiums on electricity purchases.  

5. To improve salmon runs in the Sierra Nevada mountain chain, permits for many hydropower plants and turbines were not renewed and the plants were decommissioned.

6. A 100-year cold snap hit in the winter of 2001 resulted in an unanticipated heavy demand on natural gas for heating just as old power plants were being mothballed.  

7. A drought in the Pacific Northwest curtailed the availability of cheap backup hydropower from the Columbia River in the event of a crisis in California.

8. Cal-Trans coincidentally ordered a shut down of a critical interstate natural gas line adjacent to a freeway to perform road repairs just as the energy crisis hit even though only the California Public Utilities Commission (CPUC) technically had jurisdiction over interstate gas lines.   

9. After "deregulation" purportedly failed, the California legislature imposed price controls on retail electricity, resulting in a pricing fever of wholesale electricity.   

10. New power plant construction permits around 2001 did not keep up with the demand for electricity due to California's population increase and its switch to high tech devices (large screen TV's).

Much of the above is not the conventional media explanation of what caused the California Energy Crisis of 2001. Most of the media believed it was caused by private energy traders, such as Enron, gaming the so-called deregulated energy system.

But Enron was only in the California energy market for a short period and its share of the market was too small to manipulate the entire market. Enron's powering down of a power plant in Nevada at the peak of the crisis was to alleviate grid congestion, but the media believed it was to game the system for higher prices.

Nonetheless, the majority of the media and public continue to believe the crisis was caused by Enron, even though municipal utilities such as LADWP and the Pasadena PWP made out like bandits with windfall profits from arbitraging energy sales at the peak of the crisis. Years later, even the U.S. Supreme Court stated in the case of Shohomish County vs. Enron that Enron did not cause the California Energy Crisis of 2001.

Now let's take a look at the current situation beginning to form in California.

1. Oddly, the State Water Quality Resources Board is proposing to order the phase out of the use of ocean water to cool California's coastal power plants. This would boost fish populations but also raise electric rates. What jurisdiction the State Water Quality Resources Board has over ocean water and superordinate powers over the CPUC is uncertain.

2. The curtailment of use of ocean water for power plant cooling would result in $2 billion in stranded assets (unpaid mortgages) on coastal power plants.  Although a relatively manageable sum, added to the state budget deficit this may be a tipping point.  

3. The provisions of Assembly Bill 32, the California Global Warming Solutions Act, which mandates a shift from conventional energy to green power, are pending implementation. The California energy market is about to be "deregulated" by allowing expensive "green power" to replace about 30% of the state's energy needs while erecting trade barriers against the purchase of cheap out-of-state "dirty" coal power.  By keeping outside competition for energy out of California and raising the price of power, it is hoped the structural state budget deficit can be plugged.

4. Weather forecasters are noting the formation of what is called an "El Nino" condition in the ocean off California, which possibly may lead to a wet and cold winter in 2009-2010.

5.  What has paradoxically been called "California's Wettest Drought" has resulted in the curtailment of water shipments to Southern California through the Sacramento Delta in order to protect a tiny fish.  This curtailment of water shipments will result in drastically less hydropower being available from the State Water Project.

6.  For the second year in a row, the Pacific Coast has been closed to salmon fishing, both commercial and recreational, because Sacramento River salmon runs have been shutdown due to the court-ordered curtailment of water shipments to Southern California through the Delta.  Paradoxically, water shipments have been curtailed by court order to protect the smelt and salmon.

7. According to the U.S. Drought Monitor, conditions in the Columbia and Snake Rivers in the State of Washington indicate below normal rainfall runoff. In any event, California AB 32 would likely forbid purchases of cheap hydropower from out-of-state suppliers. Hydropower is not defined as "Green Power" under AB 32.

8. In 2009 the California Independent System Operator re-started a day-ahead market for electricity purchases, as it was previously suspended after the 2001 energy crisis. 

 

9. Once again the permitting of conventional energy plants is being curtailed in California while the permitting for "green power" (wind, solar and geothermal) is being fast tracked.  The Wall Street Journal recently ran an article concerned about the unreliability of "green power" in California.

There is no predicting the future. California energy regulators and operating agencies are NOT predicting any blackouts or a repeat energy crisis for 2009-2010.  The one big factor running against another electricity crisis is that California is using less energy due to the economic recession.  

But the recent mostly unforeseen meltdown of our entire national finance and banking system makes us realize that no one really knows what is going on.  Our financial system melted down partly because of an infusion of too much foreign capital into real estate. What the precariousness of California's budget deficit may have on energy is uncertain.

The recent book, The Black Swan, The Impact of the Highly Improbable reminds us that not all swans are white. Every once in a while a rare black swan is born. And strange things usually happen around elections.

 

According to those "in the know," most likely we will not have another California Energy Crisis any time soon. But political cloud watchers might just keep an eye on the storm clouds forming around California energy to see if a storm blows our way.   

Comments

[Liz]

Apparently the motto of California's government and politicians is "nothing succeeds like failure."