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. ***