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California’s Blackouts Were the "Wake Up Call"

The California energy crisis should have been a warning to the White House. Opening up the electricity sector to competition may eventually provide consumers with cheaper power but it won’t ensure a reliable flow of electricity unless the high-voltage transmission lines used by energy companies to send power to customers are upgraded.

But spending tens of billions of dollars to improve the country’s electricity grid doesn’t give publicly traded utilities that own the lines a return on the investment and will likely result in a lower rating from Wall Street analysts and even a lower valued stock. At least that’s the story that’s been told by energy company executives for nearly a decade.

To top it off, the Bush administration said California’s energy crisis was an isolated incident, the result of a poorly designed market that left to many regulatory restrictions in place. Although that is partially true, California’s crisis was also due to an outdated infrastructure, which also plagues other states that deregulated their power markets. The old system puts reliability at risk and could result in widespread blackouts, which is what happened to much of the eastern seaboard last week.

Demand for juice, coupled with a long out of date energy infrastructure has led to extreme bottlenecks in the nation’s transmission system, including grid constraints that contributed to major price spikes and power outages across the country. Currently, government codes require transmission lines to maintain a safe clearance from the ground and other structures, but heat caused by the current flowing through the electrical resistance in the lines causes the lines to expand and sag causing the power lines to trip.

Last week’s historic blackout that left an estimated 50 million people in the dark shouldn’t come as a surprise. Former Energy Secretary Bill Richardson sounded an early warning in May 2000 that the United States has the grid of a “Third World nation” and would only be a matter of time before the nation plunged into darkness.

“America is a superpower, but it’s got the grid of a Third World nation,” Richardson said in an interview with the Wall Street Journal on May 11, 2000, in which Richardson had predicted that electricity shortages and blackouts would plague the west coast that summer. A copy of which can be found at http://www.solarattic.com/wsj.html.

“In the old days, utilities generated electricity and delivered it to customers in exclusive territories. To protect consumers from gouging, rates were regulated. The result was tremendous reliability but also inefficiency and waste,” the Journal reported. “Deregulation … upsets that structure and allows new players – some affiliated with utilities, some not — to build power plants and sell electricity. Competitive markets set prices; 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. The result: a national electricity system that is vulnerable to disruptions caused by equipment 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.”

A month after Richardson warned of rolling blackouts and electricity shortages in May 2000, San Francisco suffered through a blackout that energy experts said was the result of a faulty transmission line known as Path 15, a major bottleneck connecting Northern California to Southern California. Path 15 is made up of three 500-kV lines between Northern and Southern California, except for the segment between the Los Banos and Gates substations, where only two 500-kV lines were built.

Path 15’s low capacity has caused at least one blackout in Northern California and played a part in at least two others, say officials of the California Independent System Operator, the agency that oversees California’s electricity grid. The low capacity also has been blamed for Northern California’s higher electricity prices.

Path 15 “is known nationwide as the poster child for capacity restraint in transmission lines,” says Robert Mitchell, executive vice president for Trans-Elect Inc. a private non-utility company that is financing an $87 million upgrade of Path 15.

The project will add a third line and modify the substations at both ends of this segment to accommodate the new line. It will add 1,500 megawatts of transmission capacity between Northern and Southern California. Work on the transmission line will be completed by Sept. 20, 2004. The Western Area Power Administration, the federal agency that is overseeing the construction contract, will own the transmission line.

The California Independent System Operator determined that the added capacity would significantly reduce electricity costs in California. As reported in June 2002, when the ISO Board of Directors voted in favor of a Path 15 upgrade, the ISO estimated Californians would save $100 million during a normal year and more than $300 million during a dry year when the project is complete. The ISO also noted that improving Path 15’s transfer capacity could help mitigate the drought-caused lack of hydro resources in Northern California.

But it took a crippling blackout, an energy crisis in California and tens of billions of dollars in higher electricity costs to get the federal government to realize that deregulation won’t work unless the power market’s infrastructure is improved. Even then, there is no guarantee that the free market will do anything but increase the profits of energy corporations at the expense of the average consumer.

Congressman Sam Farr, D-California, introduced a bill to provide $350 million in loans to modernize transmission grids across the nation. But House Majority Whip Tom Delay, R-Texas, called Farr’s proposal “demagoguery” and demanded that his fellow Republicans vote it down, which they did.

Because of last week’s blackout, DeLay is now coming under fire by Democrats in the House. A preliminary investigation into the events leading up to the blackout has found that the failure of four key transmission lines in Ohio, referred to in the industry as the Lake Erie Loop, triggered the massive outages. It appears that part of the reason the transmission lines tripped is that FirstEnergy, the Ohio company that owns the power lines, was busy cooking its books and tending to its bottom line rather than maintaining reliability of its power lines, which was in dire need of improvements. But the company’s shareholders balked at investing hundreds of millions of dollars into the power lines because there would be no return on the investment.

“They’re not going to spend the money unless they can get a return on their investment,” said Cody Graves, a former utility regulator who now leads a company that helps customers save money in deregulated energy markets, in an interview with The Street.com Monday. “No company is just going to say, ‘I’ll spend the money and make it up in current [utility] rates. … And no state regulator wants to increase the rates.”

But that line of reasoning may soon change. As more energy experts blame FirstEnergy for last week’s blackout, Wall Street analysts have warned that the company may be forced to spend money to improve its power lines, straining the company’s finances. The prediction led Wall Street banks, like Merrill Lynch, and ratings agencies like Standard & Poor’s to downgrade the company’s stock and bond performance.

However, that’s the least of FirstEnergy’s problems. A day before the blackout, lawsuits seeking class-action status was filed against FirstEnergy alleging that, among other things, the company inflated its earnings and stock price. On August 5, the company reported that it would have to restate its financial results for 2002 and the first quarter of 2003 due to its improper accounting for expenses and for above-market leases. News of the malfeasance sent FirstEnergy’s stock plummeting 8.5 percent to close at $31.33 per share on extremely heaving trading on the New York Stock Exchange.

Still, despite its other troubles, FirstEnergy is sure it’s power lines were not the cause of Thursday’s widespread blackouts.

“Contrary to misinterpretations that identified FirstEnergy as the cause of the widespread outage, it is clear that extensive data needs to be gathered and analyzed in order to determine with any degree of certainty the circumstances that led to the outage,” the company said Monday in a prepared statement. “What happened on Thursday afternoon is a very complex situation, far broader than the power-line outages we experienced on our system.”

JASON LEOPOLD spent two years covering California’s energy crisis as bureau chief of Dow Jones Newswires. He is currently writing a book on the crisis. He can be reached at: jasonleopold@hotmail.com

 

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JASON LEOPOLD is the former Los Angeles bureau chief of Dow Jones Newswires where he spent two years covering the energy crisis and the Enron bankruptcy. He just finished writing a book about the crisis, due out in December through Rowman & Littlefield. He can be reached at: jasonleopold@hotmail.com

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