Better Know Your Electricity History Series, Part 7: Crisis and Innovation

By Vernon Trollinger, August 19, 2015, News

Better Know Your Electricity History Series, Part 7: Crisis and InnovationSince the first incandescent light bulb lit up streets in 1879, electricity has been as indispensable a tool as fire. As a science and technology, it leap-frogged humans from the Industrial age to the Electronics Age to the Information age. As an industry, it has played both the conniving villain and the law-abiding citizen plagued with over-regulation.

In this final part of our “Better Know Your Electricity History” series, we’ll look at how late 1990’s deregulation mania spawned a monster that crippled California’s electric market and forced the resolution of regulatory oversight and ensured sustained grid reliability.

Deregulation Begins

On April 24, 1996, Federal Energy Regulatory Commission (FERC) issued its historic Order 888, mandating all public utilities owning interstate transmission lines to provide open access transmission service under nondiscriminatory transmission tariffs to all generators. The FERC also facilitated the development of independent system operations (ISOs) that would operate a region’s electricity grid free of influence from the utilities they served.

Opening access to transmission and the wholesale markets for all generators also opened the door to deregulating public utility monopolies.

The process would work like this: generation companies make the power and sell it the state’s wholesale market (managed by the ISO) either to wholesale traders or to marketers. Marketers then buy the electricity and sell it to end consumers, using the “poles and wires” of distribution companies (usually the original utility company) to deliver the energy. Customers must pay for the electricity commodity they buy and also for its transmission and distribution.

Often referred to by the term “Energy Choice,” 24 states began the legislative process to break apart their public utilities into three separate businesses: generation, marketing, and distribution. The idea was that competing energy companies would find ways to innovate and sell power cheaper in order to be profitable. In each state, the trick was to find the best formula of laws that would be fair and equitable to both energy providers and consumers.

But there was one lingering problem.

Reticence in the industry, the ISOs, and Washington, D.C. prevented the FERC from being vested with regulatory authority to implement and enforce standards for grid reliability. Order 888 may have opened up US grids for competition among generator companies, but there still wasn’t a regulatory organization policing the ISO’s (and later the Regional Transmission Organizations, or RTO’s) and protecting the reliability of US electric grids.

FERC’s role was little better than a referee, because compliance with general reliability rules between the ISOs and the industry was voluntary. Practices that might be stringently followed in one ISO might be bypassed or ignored in another. As FERC Commssioner James J. Hoecker observed in 1999, “There is no national electric reliability agency right now, and FERC has very limited authority over the issue at present.”

Better Know Your Electricity History Series, Part 7: Crisis and InnovationEnter California and Enron

Houston-based energy giant, Enron, vigorously worked to crack apart the old utility monopolies. It wielded enormous influence to deregulate the energy industry by lobbying legislatures and spending millions of dollars on campaign contributions in 28 states, including California.

Enron’s main business interests lay in trading in the tight margin wholesale natural gas and electricity markets where it would make deals buying and supplying energy. By 1999, Enron owned one generating company, Portland General Electric in Oregon, but for the most part, its business lay in buying, transmitting, and selling electricity.

In 1996, California and 23 other states began the process of deregulating their electricity markets. California was booming in the midst of the dot-com bubble, and electricity demand was rising – about 25% of power had to be imported just to keep up.

The state’s three public utilities (Pacific Gas & Electric, Southern California Edison, and San Diego Electric) were required sell off their generation plants to independent power producers (IPPs) and then purchase power from the newly created California Power Exchange (CPX) day-ahead market and spot market at the wholesale rates (about $45/MW). Utilities could not sign onto long-term supply contracts to hedge against demand prices spikes. Until this process was completed, consumer rates stayed capped.

San Diego Gas & Electric was the first to meet compliance, and on July 1, 1999, the company removed the rate caps. As a heat wave moved into to southern California, 1.2 million customers saw their utility bills rise by 200%.

Better Know Your Electricity History Series, Part 7: Crisis and InnovationThe newly-created California ISO (CAISO) also had authority over the California grid, and in the middle of this situation lay a problem. Path 15 was the sole north-south transmission project moving energy from southern California to the northern grid during winter and from the northern grid (with hydro power from Oregon and Washington) to the southern grid in summer. Between Los Banos substation and Gates substation, the line’s 5,400 MW capacity dropped to only 3,900 MW, creating a troublesome bottleneck and transmission congestion.

Congestion occurs typically because the system operator sees that a line will overload if too much power is dispatched during a scheduled period. CAISO’s operating rules paid companies to reduce or alleviated congestion, and congestion fees could be as high as $750/MW. Scheduling power transmissions on the day-ahead market matched power demands to the line’s transmission constraints to ensure a smooth flow of electricity. The ISO’s rules required that schedules had to be filed before any transmission could take place.

… But there was NO rule saying that anything had to be transmitted at all!

Enron Games the System

The energy crisis began in earnest on May 22, 2000 when extremely hot weather raised demand so high that reserves dropped to below 5% of capacity and forced CAISO to declare its first Stage Two power alert. The heat wave continued, and a few weeks afterward on June 14, CAISO imposed rolling blackouts in the San Francisco Bay Area to conserve power. By August, allegations of manipulation of the energy markets swirled in Governor Gray Davis’s office.

Better Know Your Electricity History Series, Part 7: Crisis and InnovationBy December 6, 2000, Enron traders in Oregon and Houston had secretly researched and designed ten schemes to fool and manipulate CAISO into paying congestion fees to Enron and its partners for transmissions that only existed on paper. One scheme known as “Death Star” scheduled energy to be moved on heavily utilized lines — such as Path 15. CAISO would then award Enron a congestion fee if it could alleviate the congestion. Enron traders would then move the energy moved out of the state. Power eventually sold at a loss still turned a hefty profit if it was used to land a congestion fee from CAISO.

Another plan, called the Forney Perpetual Loop, created the illusion of power flowing from John Day in Oregon through Path 15 or other congested lines and onto Mead, NV — but never involved any energy entering the grid at all! Based entirely on scheduling, the Loop manipulated the ISO’s computer system to indicate congestion warnings and cough up millions in congestion fees. At the same time, Enron persuaded businesses to sign long-term contracts for electricity service worth billions.

On December 7, 2000, beset with power plant “outages” and reserves falling near 3%, CAISO declared its first Stage Three power alert. Out-of-state power suppliers refused to sell to California’s penniless utilities. Wholesale prices surged to $1,400/MW. Governor Davis asked FERC to intervene with rate caps on the wholesale market. FERC chairman, Curt Hebert, refused, saying that the market would work it out. By mid-January 2001, the crisis began pushing the state’s utilities towards default. The state legislature scraped together $400 million of taxpayer money to purchase a few days worth of power, and a month later, it authorized $10 billion in long-term power-buying contracts.

Meanwhile, CAISO believed the power generators had overcharged during 2000 and filed a $6.2 billion refund request with FERC. By mid-March, FERC ordered six companies to refund $55 million to CAISO. The news came just as CAISO ordered statewide rolling blackouts lasting two whole days. Enron and other energy companies were vilified in the press and demonized on the lips of consumers. Jeffrey Skilling, Enron’s CEO, famously said during a March 2001 interview with PBS’s Frontline, “We are the good guys. We are on the side of angels.”

In April 2001, the California Public Utility Commission announced that California’s oil refineries would be included in rolling blackouts. Uncertainty about gasoline supply raised fuel prices nationally.

Blackouts continued through May 2001. Initial FERC investigations showed that El Paso Inc. had artificially limited the supply of natural gas to drive up prices — especially to natural gas generators. But El Paso was just the tip of the iceberg. In June 2001, the Bush administration announced interstate power price caps. The crisis eased, and prices in the state plunged.

Game Over for Enron

Enron collapsed in December 2001, creating the biggest bankruptcy in US history. Followed shortly thereafter by investigations in the discovery of the Enron trader tapes the following year, the evidence made plain that the California crisis was more than just a perfect storm of bad law, low capacity, and high demand. California’s crisis flash-froze deregulation measures in several states like Arkansas. Wholesale price caps were enacted in several northeastern markets in response. Energy trading companies saw their stocks devalue and pulled out of some states. Only Texas moved forward.

Better Know Your Electricity History Series, Part 7: Crisis and InnovationEPAct 2005 and Smart Grid

The attacks on September 11, 2001 highlighted the need for improved security for America’s energy infrastructure. And When the Northeastern Power Blackout of 2003 darkened eight states and parts of eastern Canada, the energy industry and US government both moved very quickly to address the grid’s problems. Not surprisingly, investigators underscored the one lingering problem from the decade before: “Make reliability standards mandatory and enforceable, with penalties for noncompliance.”

The Energy Policy Act of 2005 (EPAct) was a major rewriting of US energy policy. Among other things, it laid out new requirements for energy efficiency, energy efficient consumer products, federal programs to incentivize renewable energy (wind, solar, etc) projects, and tax incentives for fuel efficient vehicles. It also overhauled the regulatory powers of the FERC. As a result, FERC is now empowered to:

  • Oversee mandatory reliability standards of the bulk power network.
  • Issue procedures for the establishment, approval, and enforcement of mandatory electric reliability standards.
  • Issue rules to prevent market manipulation and use civil penalty authority to enforce its rulings.
  • Expand and modernize the existing transmission grid through investment incentives and new siting rules.

FERC was also given the authority to certify an Electric Reliability Organization to propose reliability standards or modifications to help protect and improve the reliability of the US grid. In 2006, North American Electric Reliability Corporation (NERC) emerged as that entity.

Lastly, EPAct repealed the Public Utility Holding Company Act of 1935. FERC now has expanded authority over mergers and acquisitions of utility holding companies. FERC has access to utility holding company books and records, and it can monitor these costs to ensure that rates are not excessive. In exchange, these same companies no longer register with the Securities and Exchange Commission (SEC) and are no longer restricted to doing business only in their geographic area.

The Energy Independence and Security Act of 2007 brought developments for building the Smart Grid. The act laid out adoption of energy-efficient light bulbs as well as using digital technology for controlling the grid, cyber security enhancements, and required integration of appliances and consumer devices, as well as research into electricity storage and peak-shaving technologies. Because of this act, grid standards now permit innovations such as the smart thermostat, the smart home, and even — among other fun “Internet of Things” technologies — the smart toaster.

It’s been 136 years since Edison’s light bulb shone above a street in New Jersey. It took another lifetime for electric lights to enter most American homes, and another lifetime to make electricity a necessity in the home. But in less than another lifetime, electricity has become indispensable in almost every facet of daily life. Now, new electronic technologies practically flash past our heads on a regular basis like lightning. Yet, throughout electricity’s development into the most important human tool ever made (next to fire), its history starkly illuminates both our foolishness of greed and our genius for innovation.

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