    California Electricity Market Options for 2001: Military
    Generation and Private Backup Possibilities (29-JUN-01,
    GAO-01-865R).

    California's restructured electricity market has experienced
    rapidly rising prices and uncertain reliability since May of
    2000. During the winter of 2000, and the following spring,
    disruptions in service, or blackouts, occurred. In response to
    these problems, the state has taken initial steps to increase
    electricity supplies--such as by streamlining the process of
    adding new power plants--and reduce demand through conservation.
    The California Independent System Operator, the agency in charge
    of balancing electricity supply with demand, expects high prices
    and reliability disruptions to continue, perhaps worsen, in the
    summer of 2001. This report reviews (1) the condition of
    California's electricity market, including changes in demand,
    supply, and prices, (2) the extent to which the Department of
    Defense (DOD) can help enhance western electricity supplies
    during the summer of 2001, and (3) available private backup
    generation resources and any benefits and problems associated
    with their deployment. GAO found that (1) electricity demand has
    increased sharply in recent years while supply has not kept up
    with the demand, causing higher prices, (2) DOD could help
    augment western electricity supplies by generating an estimated
    90 megawatts of electricity and implementing conservation
    initiatives, and (3) the use of private generation is limited
    because of business and environmental risks.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-01-865R
        ACCNO:   A01243
      TITLE:     California Electricity Market Options for 2001: Military
                 Generation and Private Backup Possibilities
         DATE:   06/29/2001
      SUBJECT:   Electric energy
    	     Electric power generation
    	     Energy conservation
    	     Energy consumption
    	     Energy costs
    	     Energy demand
    	     Energy shortages
    	     California

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    GAO-01-865R

    GAO- 01- 865R California Electricity Options for 2001 United States General
    Accounting Office

    Washington, DC 20548

    June 29, 2001 Congressional Requesters

    Subject: California Electricity Market Options for 2001: Military Generation
    and Private Backup Possibilities

    Since May of 2000, California?s restructured electricity market has
    experienced rapidly rising prices and uncertain reliability. These problems
    led to widespread disruptions in service (referred to as blackouts) during
    the winter of 2000 and into spring this year. In response to these problems,
    the state has taken initial steps to increase electricity supplies- such as
    by streamlining the process of adding new power plants- and reduce demand
    through conservation. The California Independent System Operator (the agency
    in charge of balancing electricity supply with demand) expects high prices
    and reliability disruptions to continue, and perhaps worsen, in the summer
    of 2001.

    In light of these concerns, you asked us to (1) describe the condition of
    California's electricity market, including changes in demand, supply, and
    prices; (2) determine the extent to which the Department of Defense (DOD)
    can help enhance western electricity supplies during the summer of 2001; and
    (3) discuss available private backup generation resources and any benefits
    and problems associated with their deployment. We briefed you and your staff
    on the results of our work on May 15, 2001, using the enclosed briefing
    slides (see encl. I). A summary of the information follows. A complete list
    of the requesters appears at the end of this letter.

    California's Electricity Market Has Changed in Recent Years

    California's electricity market has exhibited more rapid increases in demand
    than in supply and recently has witnessed sharply higher prices. In
    addition, the California Independent System Operator (ISO) expects
    electricity supply shortages this summer

    2 GAO- 01- 865R California Electricity Options for 2001

    to range between 3,000 and 6,000 megawatts. 1 Because California?s
    electricity market operates within a larger electricity system encompassing
    roughly 11 western states, shortages in California may also affect states
    across the West.

    * Demand for electricity in California has risen sharply in recent years.
    From 1990 through 1995, demand rose only 1 percent, but from 1995 through
    2000, demand rose 13 percent. Peak demand (that is, demand during the
    highest use part of the day) also rose by 16 percent, or about 7,000
    megawatts, from 1993 through 2000.

     Electricity supplies have not kept pace with demand. California generates
    about 80 percent of the electricity it uses and imports the rest from
    neighboring states. California has added 2,800 megawatts in new generating
    capacity since the early 1990s. Transmission constraints and market forces
    limit the state?s ability to import electricity and move electricity within
    the state.

     Wholesale prices are high and expected to remain so through the summer of
    2001. Furthermore, the state's already high retail rates have recently
    increased, which could make California?s electricity rates the second
    highest in the nation. 2

    DOD Could Help Enhance Western Electricity Supplies Through Increased
    Generation and Conservation

    DOD could help augment western electricity supplies in two ways.
    Specifically, DOD could potentially reduce demand on the western system by
    generating an estimated 90 megawatts of electricity and implementing
    conservation initiatives. Use of DOD assets raises environmental and mission
    concerns, however, and a number of logistical issues are currently
    unresolved. Nonetheless, the California ISO told us that DOD?s 90 megawatts
    of electricity, as well as its conservation efforts, would help to reduce
    demand on the western electricity system this summer.

     In our analysis, the military services own an estimated 300 megawatts of
    electricity generation capacity. 3 The services have 30 power plants in the
    western states capable of generating 109 megawatts and 158 mobile generators
    throughout the United States capable of generating an additional 189
    megawatts. However, according to DOD officials roughly two- thirds of DOD's
    generating capacity cannot be used to assist the western system because it
    is being routinely used, providing backup, being used for training purposes,
    or undergoing maintenance. Therefore, roughly one- third of DOD?s generating
    capacity- 16

    1 A watt is the basic unit used to measure electric power. A kilowatt is
    equal to 1,000 watts. A megawatt is equal to 1,000,000 watts. A megawatt
    would provide electricity for about 1,000 homes at a given moment. This
    3,000 to 6,000 range does not reflect steps taken to minimize the shortage
    through actions such as load curtailment and the use of reserve generation.
    A shortage of 6,000 MW is equal to about 13% of the peak demand for the
    California ISO. 2 Electricity rates in Hawaii are currently the highest in
    the United States.

    3 Our inventory of DOD?s generators includes generators with a capacity of
    750 kilowatts and greater. We also limited our inventory to power plants in
    the West and mobile generators in the continental United States to identify
    the resources most immediately available to provide power to western system
    states in the summer of 2001.

    3 GAO- 01- 865R California Electricity Options for 2001

    megawatts from power plants and 74 megawatts from mobile generators- could
    potentially be used to reduce demand on the western system.

     While estimated costs to deploy and operate DOD?s mobile generators are
    high, the California ISO anticipates that wholesale summer prices may be
    higher. DOD estimated that costs to transport, set up, and operate
    generators would range from $350 to $1,000 per megawatt- hour of power
    produced, assuming that the generators would operate 20 days per month for 4
    hours per day, over a period from 1 to 4 months. We estimated that costs
    could be lower, ranging from $200 to $500 per megawatt- hour of power
    produced, in the event that the generators operated 30 days per month for 8
    hours per day over the same period. Even if actual costs of operation
    reached the highest level estimated, however, the cost of using DOD?s
    generators could still be below the market price for electricity. The
    California ISO anticipates that wholesale 2001 summer prices may frequently
    exceed $1,000 per megawatt- hour.

     Deployment of military generators raises environmental and mission
    concerns. DOD?s mobile generators have pollutant emission rates two to eight
    times the maximum allowed in the state. In addition, DOD officials expressed
    concern that increased use of these generators would impair military
    readiness by restricting the availability of generating assets and
    increasing maintenance requirements.

     Logistical issues further complicate the decision whether to deploy DOD
    assets. Both DOD and Pacific Gas and Electric Co. (the principal power
    distributor in Northern California) have proposed sites in California for
    mobile generators, but other questions remain unanswered: (1) How long will
    it take to deploy generators? (2) If diesel generators are used, how will
    the government address the environmental consequences? (3) Who will direct
    the use of DOD?s generators and assume the risk? (4) How will the services
    be reimbursed for the use of their generators?

     DOD officials told us they can best contribute to easing the California
    electricity crisis by reducing DOD's demand in California during peak
    consumption periods. On May 3, 2001, DOD announced a plan targeting a 10-
    percent reduction in its peak electricity demand in California in 2001, with
    the total estimated reduction equal to about 42 megawatts. However, DOD?s
    plan commingles conservation initiatives with generation. Specifically, the
    10- percent target reflects plans to reduce peak demand by 6 percent through
    conservation and 4 percent through generation and the purchase of power.
    DOD?s plan also contains few details on how such initiatives would be
    implemented or funded.

    Use of Privately Owned Backup Generation Faces Obstacles

    Although significant private backup generation capacity exists in
    California, its potential use is limited because of business and
    environmental risks. Backup generators, generally relatively small equipment
    driven by internal combustion engines fueled by gasoline or diesel, are
    directly connected to single homes or businesses to supply electricity in
    the event of an interruption in service from

    4 GAO- 01- 865R California Electricity Options for 2001

    commercial sources. Given the risks involved, increased incentives would be
    needed to encourage businesses to use this backup generation, and a balance
    would need to be achieved between the need for additional electricity and
    the need to protect air quality.

     Privately owned backup systems in California have an estimated generating
    capacity of 3,500 to 5,000 megawatts of electricity, but the potential for
    California to benefit from this capacity is limited. Most privately owned
    systems are not configured to add electricity to the commercial system.
    However, operating these systems to meet the electricity needs of their
    private owners would reduce demand on the western electricity system.
    Because most backup generators do not have the capacity to fully power
    business operations, a business that agreed to switch to backup generation
    during periods of high demand would face significant risks. These risks
    include the potential need to shut down the business or operate without a
    critical electricity- powered amenity, such as air conditioning, during
    periods when operating solely on private backup systems.

     Existing incentives to increase the use of backup generation may be
    insufficient. Costs to operate backup generators are generally higher than
    the retail price of electricity, even with recent rate increases. In
    addition, businesses using backup generators that do not have the capacity
    to fully power business operations would probably require a greater
    incentive to switch to backup generators and risk temporarily disrupting
    their business. Programs recently introduced by the California ISO and the
    state are providing additional incentives, yet it is too early to assess
    their effectiveness.

     Finally, most privately owned backup generators, which are primarily
    diesel fueled, are located in heavily populated urban areas, such as the
    California southern coast and San Francisco Bay area. Because of regulatory
    restrictions and emissions rates that are four to five times those of other
    plants, extensive use of private backup generation could result in violation
    of federal, state, and local regulations and air quality standards.
    Recently, the federal Environmental Protection Agency has taken steps to
    extend the allowable hours for operation of backup generators. Moreover, the
    state exempts some backup generation from regulation. Nonetheless, some
    local air districts continue to restrict the number of hours generators are
    allowed to operate.

    Agency Comments

    We provided DOD with a draft copy of this letter for its review and comment.
    In commenting on the draft, DOD agreed that our letter was generally
    accurate. However, DOD said we did not fully address the environmental
    issues associated with using diesel generators and expressed concern about
    whether their use was cost effective.

    In response to DOD?s first comment- that we did not fully address the
    environmental issues associated with using diesel generators- we believe the
    letter and briefing

    5 GAO- 01- 865R California Electricity Options for 2001

    slides clearly point out that there are environmental and other obstacles to
    the use of diesel generators in California. Specifically, while we reported
    that the ISO said that DOD?s 90 megawatts of fixed and mobile generation
    would be helpful, we also pointed out in the letter that use of mobile units
    poses environmental and mission concerns as well as logistical issues. Given
    these trade- offs are a matter of policy, GAO does not take a position on
    whether mobile diesel generators should be used. We did not change the
    letter in response to this comment.

    In response to DOD?s second comment-- that the use of diesel generators may
    not be cost effective-- we believe the DOD is using the wrong cost
    comparison. They state that ?it is hard to foresee a scenario in which
    military installations were paying electricity rates high enough to justify
    the expense of using mobile diesel generators.? In making this statement,
    DOD is pointing out one of the basic problems with the California market-
    namely, that retail rates paid by consumers, such as DOD and others, are set
    by the state at a level below the wholesale costs to purchase electricity.
    As we pointed out in the letter and briefing, expectations were that
    wholesale market prices this summer could be higher than estimated costs of
    using the mobile generators and, thus, wholesale market participants would
    be willing to purchase electricity produced by these generators. Moreover,
    in the event that having access to mobile generators forestalls blackouts
    that would otherwise occur, the value of these units would be even greater,
    reflecting saved business and consumer costs associated with the averted
    blackouts. Therefore, it is important that the cost- effectiveness of mobile
    generators be considered in light of the wholesale market clearing prices
    instead of the retail rate paid by DOD. We did not change the letter in
    response to this comment.

    Scope and Methodology

    To describe California?s electricity market, we interviewed officials at
    California state agencies and regional electricity organizations; obtained
    database files on electricity consumption, generation, supply, and prices;
    and analyzed the data to identify market trends. To identify generating
    capacity owned by DOD, we interviewed officials of the Office of the
    Secretary of Defense and military services; obtained data on DOD power
    plants and generators; and analyzed the data to determine generating
    capacity, current use, costs to operate, and emissions. We also obtained
    information on DOD?s conservation efforts and interviewed California state
    officials on air quality and technical issues associated with using DOD
    assets. To identify private backup generating capacity, we interviewed
    federal, state, and industry officials; obtained information on private
    backup and mobile generation equipment; and analyzed the data to identify
    barriers and challenges to deployment. We conducted our review from March
    through May 2001 in accordance with generally accepted government auditing
    standards.

    - - - - -

    6 GAO- 01- 865R California Electricity Options for 2001

    If you have any questions about this letter or need additional information,
    please call me on (202) 512- 3841 or Daniel Haas on (202) 512- 9828. Copies
    of this letter are also available on GAO's home page at http:// www. gao.
    gov. Other key contributors to this report were Christine Frye, Randy Jones,
    Jon Ludwigson, and Frank Rusco.

    Jim Wells Director, Natural Resources

    and Environment Enclosure

    7 GAO- 01- 865R California Electricity Options for 2001

    List of Requesters The Honorable Mike Thompson The Honorable Bob Filner The
    Honorable Barbara Lee The Honorable Gary Condit The Honorable Joe Baca The
    Honorable Robert Matsui The Honorable Michael Honda The Honorable Brad
    Sherman The Honorable Lynn Woolsey The Honorable Pete Stark The Honorable
    Henry A. Waxman The Honorable Susan Davis The Honorable Sam Farr The
    Honorable Ike Skelton The Honorable Duncan Hunter The Honorable Hilda L.
    Solis The Honorable Grace Napolitano The Honorable Juanita Millender-
    McDonald The Honorable Darlene Hooley The Honorable Zoe Lofgren The
    Honorable Loretta Sanchez The Honorable Gene Taylor The Honorable George
    Miller House of Representatives

    (360055)

    Enclosure 1- 1

    California Electric Markets

    California Electricity Market Options for 2001: Military Generation and
    Private

    Backup Possibilities

    Enclosure 1- 2

    Briefing Covers Three Broad Areas Background on California Electricity
    Market

    Military Could Help in Two Ways: Adding Generation and Through Conservation

    Private Backup Generation Limited, Poses Risks

    Enclosure 1- 3

    Background on California Electricity Market

    California Operates Within Large Western System Source: Energy Information
    Administration.

    Enclosure 1- 4

    Background on California Electricity Market

    Grid Constraints Limit Flows Into and Through State

    Three Primary Grid Capacity Constraints

    * California- Oregon Border  Path 15

     California- Southwest Ties

    Enclosure 1- 5

    Background on California Electricity Market

    From 1991- 1999, State Has Added About 2,800 Megawatts (MW)

    Source: GAO analysis of California Energy Commission data. California On-
    Line Capacity by Year, 1970- 1999

    Enclosure 1- 6

    Background on California Electricity Market

    In- state Generation and Imports Supply State

    In- State Generation from Natural Gas,

    Nuclear, and Hydroelectric Sources

    Annual Imports from Pacific NW and

    Southwest Vary

    Source: GAO analysis of California Energy Commission data. Note: State
    generation includes out- of- state capacity owned and formerly owned by
    state retail utilities, including

    power plants located in the southwestern U. S.. Electricity Supply, 1983-
    1999

    Enclosure 1- 7 Note: Includes capacity owned and formerly owned by state
    utilities located in the southwestern U. S..

    Background on California Electricity Market Generation From Natural Gas,
    Nuclear, and Hydroelectric Sources

    Source: GAO analysis of California Energy Commission data.

    Enclosure 1- 8

    Background on California Electricity Market

    Annual Imports From Pacific Northwest, and Southwest Vary

    Note: Does not include capacity owned/ formerly owned by state utilities
    including capacity at plants located in southwestern U. S..

    Source: GAO analysis of California Energy Commission data. Electricity
    Imports, 1983- 1999

    Enclosure 1- 9

    Background on California Electricity Market

    Consumption Growing Across Sectors

    Consumption growth up sharply over past 5 years

    1990- 1995: up only 1%

    1995- 2000: up 13%

    Peak loads also up sharply

    1993- 2000: up 16% Source: GAO analysis of California Energy Commission
    data.

    Consumption of Electricity, 1990- 2000 (est)

    Enclosure 1- 10

    Background on California Electricity Market

    ISO Expects Summer 2001 Shortages, West Also Tight

    California Independent System Operator (ISO) study shows 3,000- 6,000 MW gap

     Including substantial plant additions, due in July

     Weather and outages could create problems early

    Western Council estimates entire West could be tight

     Drought could limit imports from Northwest and Canada

     Weather could increase loads, limit imports from Southwest

    Enclosure 1- 11

    Background on California Electricity Market

    Few Plant Additions Scheduled Before July 2001 Source: California Energy
    Commission, April 20, 2001.

    2001 Generation Progress Report (Megawatts On- line by Month)

    Enclosure 1- 12

    Military Options

    DOD Could Help in Two Ways

    Providing additional generation

     DOD says 90 MW available from fixed and mobile generators

     Costly, but may be lower than summer prices

     Deployment would raise environmental and mission concerns

     Deployment may require lead time and raise logistical issues

     ISO believes that this capacity could provide significant boost

    Conservation-- reducing load/ consumption

     DOD believes that conservation is best contribution

     DOD provided few details of conservation efforts

     Reducing load during peak hours can substantially reduce total system
    costs

    Enclosure 1- 13

    Military Options

    DOD Says 90 MW Available From Fixed and Mobile Generators

    Military could make available additional generation

     DOD estimates that 90 MW is available

     16 MW fixed

     74 MW mobile

     Military owns 298 MW of electric generation

     109 MW of fixed power plants located in West

     189 MW of mobile generating units located in U. S.

     Mobile generation often deployed in emergencies

    Unavailable units operating or committed to missions

     Most fixed plants utilized on- base

     Many mobile units performing backup or in maintenance

     GAO did not verify reasons for unavailability

    Enclosure 1- 14

    Military Options

    Mobile Generation in Operation U. S. Army?s Prime Power 4.5 MW Plant

    Enclosure 1- 15

    Military Options

    Costly, but May Be Lower Than Summer Prices

    Military cost estimates for mobile generators are high

     Services estimated costs from $350-$ 1,000/ MWh

     GAO analysis identifies costs may range from $200-$ 500 /MWh

     Actual costs depend on duration and frequency of use

    Summer wholesale prices may be higher

     FERC estimated costs of some existing generators in $300- $430/ MWh range
    for early 2001

     ISO stated that prices in May top $200/ MWh and it expects that prices
    during summer 2001 will often top $1,000/ MWh

    ISO Believes that 90 MW or more could provide boost

     Provide last- minute stop- gap generation

     Help in negotiations to buy electricity

    Enclosure 1- 16

    Military Options

    Deployment Raises Environmental and Mission Concerns

    Operation of plants poses environmental consequences

     Mobile units are mostly older, diesel- fueled with high emissions

     Emissions rates 2- 8 times current allowable rate in California (7lbs/
    Mwh)

     Air Resources Board concerned about diesel generation

    Use of plants may compromise intended mission

     Control of asset

     Limits mission readiness

     Deteriorates equipment

    Enclosure 1- 17

    Military Options

    Timelines and Logistical Issues Complicate Deployment

    Logistical issues unresolved

     Where should mobile units going to California be located and connect to
    the grid?

     Who should direct the operation of the generating capacity and assume
    risk?

     How long will it take to deploy the generating capacity?

     Services provided varying estimates ranging from 30 to 90 days

     How will the services be reimbursed for deployment?

     How will the federal government and the state deal with environmental
    consequences? (waiver, offset, other)

    Enclosure 1- 18

    Military Options

    DOD/ PG& E Identified Potential Sites

    DOD assumed siting at various locations

     Fixed at Vandenberg, Onizuka, Beale, and San

    Diego Naval Air Station

     Mobile at Travis and Pendleton

    PG& E conducted preliminary evaluation

     GAO asked ISO to identify potential sites on military

    installations; ISO asked Pacific Gas and Electric

    (PG& E) for locations with appropriate sites

     ISO prefers locations in Northern CA

    More work may be required before interconnection

    Beale AFB Travis AFB

    Camp Parks Onizuka AFB

    Lemoore NAS Camp Roberts

    Vandenburg AFB Camp Pendleton

    San Diego NAS DOD/ PGE

    PGE DOD

    Enclosure 1- 19

    Military Options

    Conservation

    DOD believes conservation is best contribution

     California is home to 10 percent of total DOD population

     Largest single electricity consumer in the state

     DOD accounts for about 1% of state peak load

    DOD provided few details of peak demand reduction plan

     DOD announced plan targeting 10% reduction, but this includes generation

     DOD to reduce peak demand by 25 MW

     DOD to generate 11 MW with on- site plants and 6 MW renewable energy

     Some proposed DOD actions not yet funded

    Enclosure 1- 20

    Private Generating Facilities Role of Existing Back- Up Generation Limited,
    Has Risks

    Incentives Needed to Boost Output Actions May be Needed to Allow Use

    Enclosure 1- 21

    Private Generating Facilities

    Role of Existing Backup Generation Limited, Has Risks

    Potential of backup generation limited, poses business and environmental
    risks

     3,500- 5,000 MW of backup generation may be available

     Air Board estimated 11, 300 units = about 5,000 MW

     Energy Commission preliminary estimates of 8, 000 units = about 3, 500 MW

     Ability to rely on most systems is limited, poses business risks

     Not configured for on- grid operation

     Backup not adequate for full business operations

     Ability to operate limited, poses environmental risks

     Currently not permitted for full- scale operations

     Mostly diesel engines in urban areas, uncontrolled for nitrogen oxides
    (NOx), particulate matter (PM), and sulfur oxides (SOx)

     Emissions rates 4- 5 times those for other plants (NOx and PM)

    Enclosure 1- 22

    Private Generating Facilities

    Incentives Needed to Boost Output

    Need adequate incentive to encourage deployment

     Lack of data limits policy options

     Incomplete data on capacity, locations

     No data on capability to serve business needs

     Recent rate increases provide inadequate incentive

     New rates still lower than potential average wholesale prices

     Rates continue to reflect state subsidy

     Rates still not reflective of time- variable costs

     Programs by ISO and California offer promise

     Several programs, allow businesses to sell ?load?  Some programs focus on
    enterprises with backup generation

    Enclosure 1- 23

    Private Generating Facilities

    Actions May Be Needed to Allow Use of Backup

    Limit business exposure to environmental implications

     Extensive operations could violate existing federal/ state/ local air
    quality rules

    Actions taken help, but may not be enough

     EPA changed rule that restricted hours of operation

     Summer 2000

     Monthly extensions

     State actions vary

     Some backup generation exempt from regulation

     South Coast and San Joaquin have restricted hours of operation
    *** End of document. ***