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Know the West

Power on the loose

Deregulation sparks an energy revolution


Years from now, historians may look back on this winter as a turning point in American energy policy. The most obvious bookmark will be the California electricity crisis.

California is learning the hard way that the electric deregulation law it passed in 1996, requiring its utilities to sell off power plants to independent companies and then to buy power on the open wholesale market, has nasty flaws. For a variety of reasons, California-style deregulation has had a chilling effect on the building of new power plants and on the coordination of power delivery. Thus, the almost daily dance with potential blackouts.

California's deregulation law has also put the state's two largest utilities, Pacific Gas & Electric and Southern California Edison, in a financial bind because the law forbids their passing on their cost increases to customers. While residents are insulated for the moment from rising power costs, the utilities - which hatched the deregulation scheme now eating them alive - hover on the brink of bankruptcy.

More is at stake than the survival of California's two utility giants. Economists worry that the sixth-largest economy in the world will falter if its power system isn't fixed. And a faltering California would probably mean another large out-migration to seemingly greener fields in Oregon, Washington, Nevada and other Western states.

So California's crisis is, to some degree, a Western crisis. The region is tied together by a common power grid. As wholesale power prices go up in California, they drive prices higher throughout the region, says John Nielson, an economist and energy specialist with the Denver-based Land and Water Fund.

States that aren't yet deregulated are somewhat insulated because their utilities still own power plants and are committed by law to providing power to their customers first. But it is the rare utility, regulated or not, that doesn't have to buy electricity at times. And when that happens, that regulated utility can find itself competing for juice in the open wholesale market with California.

There are other entanglements. In early January, when it looked like Californians would be reading in the dark, the federal government ordered Oregon and Washington to send down emergency rations of its precious Columbia River hydropower. To produce the extra electricity, the two states drew down reservoirs earlier than usual, using water needed to both supply power to its own population and to provide flows for endangered salmon migrating to the Pacific Ocean.

Despite the intensity of the California crisis, most observers say the nationwide drive toward power deregulation will continue. "I don't think deregulation will be slowed down, because people recognize that California is an aberration," says Nick Muller, executive director of the Colorado Independent Energy Producers Association. "Deregulation has worked just fine in states like Texas and Pennsylvania."

In the West, the legislatures in Montana (HCN, 4/27/98: Montana's deregulation dilemma), New Mexico and Nevada have already passed deregulation bills. Others watch closely from the sidelines. In advance of changes in the laws, utilities and electric cooperatives are changing the way they do business, even in still-regulated states like Colorado. The giant Public Service of Colorado (now called Xcel Energy) has for several years offered its customers green power from wind farms. Innovations are also coming from the state's conservative rural electric cooperatives, as HCN publisher Ed Marston explains on page 16.

The prospect of deregulation combined with rapid rural growth is also encouraging places like Telluride, Colo., to consider adding small, decentralized, gas-powered generators to their classic menu of large, centralized, coal-burning power plants (see story by Hal Clifford).

Conservationists have gingerly embraced deregulation because it offers the possibility of a cleaner, greener future. Dismembering vertically integrated and state-regulated utilities into different businesses competing on an open playing field could give consumers choices. In theory, there would be price competition. They might be able to choose a utility powered mostly by wind farms, or one that would help the consumer use less electricity through efficiency.

So far, it's more promise than reality, says Rich Fergusen, research director of the Center for Energy Efficiency and Renewable Technologies in Sacramento. Most alternative energy, especially large-scale solar power, continues to be much more expensive than fossil fuel power, he says.

And then there are the customers. Choosing among six different electric suppliers isn't something most people want to take on.

"Most people don't want to be bothered about who they pay for power," he says. "Some people still think electricity comes with the house."

Energy conservation has also taken a hit in the era of deregulation. Nervous utilities have cut back on the monies committed to conservation programs, such as the retrofitting of energy-inefficient homes and businesses, says Mark Glyde, communications director for the Northwest Energy Coalition, a Seattle-based nonprofit.

But things are looking better these days. For one, conservationists and consumer advocates are working hard to ensure that future deregulation bills - a more accurate term is "reregulation" - include mandatory expenditures on conservation. The current West Coast crisis has also prompted the governors of Oregon, Washington and California to call on their citizens to do something almost unheard of since the 1970s Arab oil embargo: Reduce energy consumption.

That's sweet music to energy activists, but they also realize that a sustained movement toward conservation and renewables still depends on price. And price has always been a double-edged sword. The meteoric rise in natural gas prices has suddenly made wind power a viable alternative - witness the announcement of the world's largest wind farm to be built on the Oregon-Washington border this year (see story page 16). But it also means that fights over gas development on public and private lands in the region, starting with the Arctic National Wildlife Refuge in Alaska, will escalate. Independent power producers and utilities may also resurrect plans for new coal-fired, and even nuclear, power plants, as they become more economically attractive.

As a new energy system emerges, there are as many forecasts as there are forecasters. The question for the West is whether we will figure out how to feed this new beast without destroying our land, water and air.

Paul Larmer is senior editor of High Country News.