New Rules, Demands
Put Dangerous Strain
On Electricity Supply
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Partial Deregulation Breeds
Confusion in Industry;
Summer Shortage Feared
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Oracle Builds Its Own Bunker
running short of electricity.
shortages are likely to strike as the days lengthen and the temperatures rise. The East Coast got a taste
of what's coming when a surprise heat wave hit this week just as many power plants were shut down
for spring maintenance. Utilities and grid operators temporarily cut voltages, called on big industry to
conserve and asked homeowners not to open their refrigerators too often.
"America is a superpower, but it's got the grid of a Third World nation."
guzzling appliances, boosting demand for electricity faster than capacity is being added. The other big
reason is deregulation. Loosening the rules that governed how power is generated, supplied and sold
was supposed to spur competition and efficiency. But the four-year-old deregulation process has
spawned more confusion than improvement so far.
electricity on a summer's day. But it will take a minimum of 700,000 megawatts to power the nation
this summer, according to estimates by the Department of Energy. That leaves little surplus, and in
any event, the power can't always get where it's needed most. The buffer of surplus electricity has
been whittled by 60% over the past decade.
protect consumers from gouging, rates were regulated. The result was tremendous reliability but also
inefficiency and waste.
affiliated with utilities, some not -- to build power plants and sell electricity . Prices are set by
competitive markets; risks are borne by investors, not ratepayers. At the same time, utilities are
surrendering control of long-haul transmission lines to new nonprofit operators whose job it is to
ensure fair access to the grid -- the multistate system of high-voltage lines.
breakdowns and human error as newly established regional grid operators assume responsibility for
much larger areas than those formerly overseen by individual local utilities. For big energy users,
who expected deregulation to bring lower prices, not lower reliability, it has been a worrisome
experience.
big software company has spent more than $6 million to build its own electrical bunker, complete
with a substation and generators capable of supplying thousands of servers with electricity at its
headquarters in Redwood Shores, Calif. While giant manufacturers have done this for decades, other
commercial users are starting to follow suit.
dollars per hour. It's so important, you almost can't calculate the value, to us and to our customers."
deregulation has produced planning paralysis that could have longterm consequences. Old-line utilities
shied away from adding capacity, worried they wouldn't be able to recoup their investments in a truly
competitive energy market. Independent generators, who were supposed to fill the need, mainly held
back until they could figure out which markets would be the most lucrative. Regulators, who were
often confused as to whether they should be enforcing the old rules or helping tear them down, let
things slide.
162,000 megawatts of new generation has been announced -- including a doubling of New England's
power-plant capacity -- but much of it will never get built, and it will be years before enough is added
to have a substantial impact.
into service. The joke used to be that the utility industry was the only one where you could boost
profits by buying new furniture for your office.
receive subsidies for remaining on standby even when their power isn't needed. But these kinds of
deals are considered temporary and companies that want to build new plants can't be sure that they
will benefit from similar arrangements.
necessarily where needs are the greatest, since an elaborate system of price caps sometimes
suppresses the rising prices that signal scarcity.
city, home to cell-phone supplier Qualcomm Inc. and a slew of other high-tech firms, doesn't have
enough local generating plants to meet its growing needs. It also is poorly connected to plants
elsewhere in the region. The transmission lines simply aren't numerous enough to allow San Diego
Gas & Electric Co., a unit of Sempra Energy Inc., to import enough juice, according to California
Independent System Operator, a nonprofit corporation that manages the state's electric grid.
Corp., that recently bought the plants from San Diego Gas & Electric. More plants are needed, but
many generators want a special price zone set up before they will build within San Diego, because its
transmission problems limit their ability to sell power outside the area. Economists believe, however,
that such a small market wouldn't have enough bidders to produce competitive prices, says Severin
Borenstein, director of the University of California Energy Institute at Berkeley.
raise prices by almost 30-fold whenever demand peaks, while still staying within a statewide price
cap. That's because the generators would know that little electricity could flow in from the outside and
drive down prices, Mr. Borenstein says.
environmental rules, every molecule of nitrous oxide emitted by a new industrial source must be
offset by nitrous-oxide reductions from an existing source. PG&E Corp., the only company that is
trying to build a new plant in San Diego, has rummaged around for such offsets for the past two
years.
industry, PG&E is negotiating with private transport companies and the city government to convert
dozens of garbage trucks and harbor boats from diesel to cleaner-burning liquid natural gas. That
should produce enough offsets for it to build a 500-megawatt plant a few miles from the Mexican
border.
National Energy Group. "I have no idea what the next guy is going to do when he wants to build a
plant. There's nothing in the air-quality rules that sees any special value to a power plant. It's treated
like any other factory."
provided a good buffer against occasional mistakes. But now, what would have been a minor setback
in the past can be devastating.
belatedly jettisoned a software program based on 30-year averaging that understated the effects of
global warming. Expecting cooler weather than what it experienced last year, Entergy was caught flat-
footed when nine of its generation plants wilted in the heat. The company wasn't able to buy enough
electricity from the spot market to make up the deficit.
snapshot, revealing a trend toward hotter summers, spurring the company to secure better sources of
emergency power.
climaxes in the summer and at ever-higher levels. That wasn't always the case. Up until a few years
ago, demand was heaviest in winter because of heating. Experts say the shift to summer peaking
stems from a population shift to warmer climates, insistence on air-conditioned comfort -- especially
for finicky computer equipment -- and the fact that it simply takes more energy to cool a room than to
heat it.
relaxed times in the power patch. The grid operator there, PJM Interconnection LLC, misjudged the
potential output of electricity plants in five states and the District of Columbia. That's because it relied
on the "nameplate rating" of the plants, the amount of electricity the manufacturer says the plant can
produce. PJM found that 54 generators were cranking out only 70% of what was expected -- a
shortfall equivalent to the output of 18 big power plants. The grid operators' demand projections
weren't much better. A 10% underestimation of need by PJM resulted in voltage disruptions that
produced brownouts.
your spare tire -- reserves -- pretty quick," says Paul Elbert, executive vice president of
Commonwealth Edison in Chicago.
fix. One is the design of the country's transmission system. The U.S. is generally well-wired, but
some of the fastest-growing parts of the country, such as San Diego, are virtual islands in the vast
electricity grid. San Francisco, Long Island and Florida all have inadequate links to larger regional
electric networks. Mr. Richardson, the energy secretary, says he doesn't even like identifying the
regions at greatest risk because, as he puts it, he's afraid of "causing public panic." Fixing
transmission's weak links won't be easy. San Diego Gas, for example, wants to hook up a second
transmission line to Southern California Edison's system. But the 25-mile line has been talked about
for a decade, and San Diego Gas still hasn't filed a formal proposal with regulators. That frustrates
even some of deregulation's staunchest backers. "New power lines in Southern California? Good
luck. Forget it," says Jessie Knight, the executive director at the San Diego Chamber of Commerce
and a former member of California's Public Utilities Commission. "Nimbyism is too strong here."
of old-line utilities hasn't been touched by deregulation. That leaves local utilities with monopoly
powers despite looming shortages and the country's highest wholesale power prices for the coming
summer season.
municipal utility. But the three biggest utilities in the state have gone to court to stop the project. In
April, the Florida State Supreme Court sided with them, ruling that Florida law prohibits construction
of merchant plants -- which sell electricity on the wholesale marketby outside generators.
for intraregional conflict. The nation's two most populous states, California and New York, have
become net importers of power, at peak times. If the summer is exceptionally hot, California could be
short 4,000 megawatts beyond what it is able to beg or buy from other providers.
want to cut off consumers involuntarily. So the operator has put in place a plan to pay big users up to
$1,000 for every megawatt hour of electricity they forgo during peak hours this summer. One of them
-- the city of San Francisco -- figured it might as well get paid if it was probably going to have to shut
down some nonessential services anyway. But even with the financial incentives, admits Mr. Winter,
the firm is still short of the commitments necessary to get California smoothly through a really hot
summer.
engineering problems, is resulting in some serious soul-searching. Mr. Richardson, who has been
barnstorming the country warning of the shortages, is now pushing the idea of deregulation
legislation at the federal level and the creation of a kind of uber-regulator to oversee a cohesive
national energy policy. In the interest of harmony, Mr. Richardson is proposing that the Federal
Energy Regulatory Commission take the lead, stripping away some powers from state legislators.
uninterrupted supplies of the highest-quality electricity ," he says. "Something has got to be done."
