While I am tempted to provide an analysis of why California is in this mess, I will keep my observations brief and state that up to mid-year 2000 there wasn’t an obvious problem. The number of Stage 2 (less than 5% reserve) and Stage 3 (less than 1.5% reserve) days was minimal in 1999. However now as everyone is running to place blame and many say deregulation is wrong, the reality appears that there is lots of blame to spread around and if California hadn’t micromanaged the deregulation process it may have worked.
What happened to change the conditions and cause the problem? One condition that made the events inevitable was the massive change in the price of wholesale electricity. Last year this time the price of one-megawatt hour of electricity sold for $30; last month, it spiked as high as $1400; this month it may be $250-$300. The increase in the cost of natural gas is partly responsible for the increases but high demand and shortage of supply are the real culprits. The state legislature mandated that utilities buy their power on the open market and then limited the price charged to California consumers until March 31, 2002. The obvious outcome is the utility getting farther in debt each day; their financial ratings suffer and the suppliers no longer want to sell them power fearing lack of payment.
The number of power plants in California has not increased for a number of reasons while the population and demand for power increased. On a normal day in Northern California the current power deficit averages 2,000 to 3,000 megawatts per hour according to California Independent System Operator, the agency set up to monitor the states power grid. On February 16, 2001 there were almost as many unplanned power generation site outages as there were planned. This makes CA-ISO’s job difficult since they have to solicit, evaluate bids and acquire power to compensate for the deficit on an hourly basis. Having the high deficit under normal conditions makes any change that increases the demand, such as extremely hot or cold weather, put the total system at risk. During my research I discovered that it was not uncommon to under plan requirements by 25% and as a result the agency scrambles to acquire sufficient power at a premium “hour ahead” rate rather than the “day ahead” rate. Given that some out of state suppliers have shortages due to extremely dry weather affecting their hydroelectric generation, the potential for not finding sufficient power quickly and at a reasonable price is high. The other mistake made during California deregulation was the prohibition of negotiating long-term contracts between utilities and power generators. Legislators were concerned at the time that utilities would get locked into higher prices and would be unable to take advantage of dips in the electricity market. Obviously the reverse happened and the State of California was forced to negotiate long term contracts using taxpayer dollars.
One amazing mistake is the belief in 1996 by a majority of the state’s residents that California didn’t need to build any new power plants. They just could continue to buy power rather than being self-sufficient. This belief may have been reinforced by the fact that, with its tough environmental laws, California is one of the more adverse places in the country to build new power facilities. For more than 20 years there has been no significant increase in the power supply of the region. This may be changed in the future but there will be no help in the short run. Six plants are under construction, and another 11 in process with a total generation capability of 12,000 megawatts of power, enough energy for 1.2 million homes. Getting all the plants on line will take two-to-four years.
California residents and businesses will have to plan for ongoing power deficits for the next few years.
Companies needing to operate without planned or unplanned interruptions lasting hours need to protect themselves by acquiring sources of emergency power. Small businesses may want to ensure their workstations and point of sale systems are supported by uninterruptible power supplies so they can do an orderly shutdown of systems. Companies having security systems may want to ensure their battery backup will last for at least twelve hours. Card access systems should have emergency power supplies with sufficient power to last the outage. Door security systems should be checked to ensure they fail-safe rather than fail-closed causing potential life safety issues. Companies anticipating use of contracted generator suppliers should validate the availability of equipment and ensure the vendor has not over committed.
Companies should establish contacts with the utility companies and ensure they are included in the notification process. If the company is fortunate enough to be on the same power grid as the airport, a hospital, police department or other high priority operation they may not have a problem. Regardless of your company location if you must have uninterrupted operations, you better have an emergency power system. Companies having generator sets for their data centers should evaluate the sufficiency of power during long-term outages. Run the generators for more than the one hour that is unfortunately a common test run time for many companies.
One hour will not ensure the generators will continue to function for longer times. Run the generators under full load because when you lose power that is what you will have to do. Speculation about what the generators are engineered to do may be different than what they actually do. Many companies find out the hard way and the company suffers severe financial losses.
What basic planning principles did the involved parties forget?
Risk Assessment - Did they assess price risk? Given that natural gas is a limited resource and demand is ever increasing shouldn’t they have anticipated that prices may go up?
Anticipate worst-case scenario: Did the planners really look at the potential worst-case scenarios. Demand will exceed supply. Supply may not be available at all. If they had new plants, they may have continued to be designed to use multiple types of fuel.
Have backups for critical resources: Have alternate fuel should primary supply not be available.
Buy and store larger supplies of fuel to hedge against a major price increase or unplanned shortage. Many companies elected not to use existing underground storage facilities because of the cost and they did not believe that prices would actually rise so high.
Cole Emerson, CBCP, is President of Cole Emerson and Associates, Inc. He is an internationally recognized expert in the field of business continuity planning. Mr. Emerson is Chairman of the Board of Directors for DRII.
