Monday, January 15, 2001

Silicon Valley needs electricity like people need water. Yet the residents there have refused to allow the construction nearby of the power plants and facilities needed to keep up with their growing demand for electricity.
As a result, the epicenter of the nation’s technology-driven “new economy” like the rest of California faces the threat of power shortages in the next three years that could drain the lifeblood of the region’s economic growth.
The power crunch is so serious that Intel Corp., the world’s leading computer chip maker and one of California’s most successful businesses, said last week that it will not expand any further in Silicon Valley because it has no assurance of future power supply.
California is in the midst of a power crisis that industry analysts say is largely of its own making and has significant implications for and lessons to be learned by the rest of the country.
Already, consumers around the nation are paying record high prices for the natural gas needed to heat their homes, partly because of soaring demand for the fuel from California utilities. Washington Gas customers last month paid nearly twice as much, $224.50 on average, as they did a year ago because of shortages brought on by the California crisis and unusually cold weather.
At a time of rapidly weakening economic growth around the nation, economists say the energy price shock and other economic disruptions emanating from the nation’s largest state may be tripping the national economy into a recession.
And in a sign that the state’s problems could quickly turn into a wider financial crisis, Wall Street got rattled Jan. 5 after major credit agencies warned of the impending bankruptcy of California’s huge utilities unless the state or federal governments arrange a bailout. The down-draft in utility and bank stocks sent the Dow Jones Industrial Average plunging by 250 points.
The shock to already troubled markets prompted the Clinton administration to call state officials to Washington for continuing negotiations aimed at forging solutions to avert a crisis. Attending were California Gov. Gray Davis, federal energy regulators and leaders of the state’s utilities and power generators.

Recession threat

State wants price caps

Supply crisis builds

Despite the emotional debate within California over the causes of the crisis, energy specialists are nearly unanimous about the source of the problem: the state for a decade has failed to build any new power-generating facilities to keep up with demand.
Stringent environmental rules have made it difficult to build and operate such facilities profitably, while “not-in-my-back-yard” sentiment has kept power generators out of key areas that are thirsty for power, such as Silicon Valley, where demand for electricity is expected to double in two years.
The drama playing out in California involves other sometimes complex factors, including the botched partial deregulation plan that allows spot markets to determine the price of wholesale power while consumer electricity rates remain frozen.
The region also has been suffering from a drought that has dried up usually available sources of hydroelectric power.
These factors all set in at a time in the late 1990s when demand for electricity was surging. Some analysts attribute the unexpectedly quick growth of power usage to the emergence of the Internet and other high-technology companies that until last year seemed oblivious to the fact that they were quickly running out of fuel.
“Silicon Valley is one of the biggest demand regions in the state, and they are probably the most at risk for generation problems,” said Mike Zenker, a California utility specialist with Cambridge Energy Research Associates.
Since the crisis set in last year, Silicon Valley executives have tuned in to the problem and are working actively for a resolution, he said.
But the state’s belated efforts to gin up supply by quickly approving the construction of six new power plants will not bear fruit for another two to three years, leaving the state’s utility customers dangling without a safety net.
The entire West needs the equivalent of 40 new power plants to catch up with burgeoning demand, and power plants can’t be built overnight, he stated.
The vilification of the energy industry by state politicians, meanwhile, has been counterproductive, Mr. Zenker said, noting that three investigations by federal and state regulators found no evidence of wrongdoing. The supposedly “corrupt” power generators are the same ones that must build the power plants and facilities the state needs.
Threats to “disgorge” the profits they need to finance the considerable expense of building the power plants has only discouraged construction, Mr. Zenker said, with one power generator recently citing “political risks” as a reason to avoid development in California.
“Frankly, what’s gone on in the state in the last six months has only prolonged the problem and raised the cost for consumers,” he said.
“The actions taken so far by regulators only put down hurdles in front of generators. Price caps, threats of forcing refunds of profits, threats to reregulate power generators all of those things create a very uncertain environment for people who are proposing to build power plants.”
The state’s stringent environmental rules and “nimby”-inspired restrictions already make building power plants there “a risky business,” he said.
Most of California’s existing power plants and all of those under construction are fired by natural gas, the cleanest burning fuel, to meet the state’s strict clean-air standards and skirt opposition from local activists who don’t want bigger, dirtier generating facilities nearby, he said.
Natural gas prices are much higher than those for coal or oil, so the result is that electricity rates already are 50 percent higher in California than they are elsewhere in the country.
But Mr. Zenker said that may not be for long, since the rest of the country is going down the same path as California with environmental and zoning restrictions that prevent anything but gas-fired plants from being built close to densely populated cities.

California leads the way

Deregulation suspect

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