California Electricity Market: Outlook for Summer 2001		 
(29-JUN-01, GAO-01-870R).					 
								 
The electricity industry is restructuring throughout the United  
States and in other countries. However, some restructuring	 
efforts have exhibited problems during this transition. 	 
California and the west have witnessed extraordinarily high	 
wholesale prices and sharp limitations on the availability of	 
electricity. In California, high prices have led to financial	 
problems for the state's utilities, power outages, and rate	 
increases. In other Western states, the high prices have also led
to impacts including rate increases for consumers. This report	 
assesses the outlook for California's electricity supplies this  
summer. GAO found that, due to a lack of timely direct access to 
key information and limitation in other data, it is not able to  
provide an assessment of the likely condition in California. In  
order to make an independent, reliable assessment, GAO would need
access to data underlying key supply and demand factors, such as 
power plant outages and electricity supplies that could be	 
imported into California. Furthermore, GAO found that forecasts  
of California's electricity market show stark differences in the 
expected conditions this summer.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-870R					        
    ACCNO:   A01317						        
  TITLE:     California Electricity Market: Outlook for Summer 2001   
     DATE:   06/29/2001 
  SUBJECT:   Electric energy					 
	     Utility rates					 
	     Energy shortages					 
	     Energy supplies					 
	     California 					 

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GAO-01-870R
     
GAO- 01- 870R California Electricity Market United States General Accounting
Office

Washington, DC 20548

June 29, 2001 The Honorable Stephen Horn Chairman, Subcommittee on
Government

Efficiency, Financial Management and Intergovernmental Relations Committee
on Government Reform House of Representatives

Subject: California Electricity Market: Outlook for Summer 2001 Dear Mr.
Chairman: The electricity industry is restructuring throughout the United
States and in other countries around the world to be more competitive.
However, some restructuring efforts have exhibited problems during this
transition. Beginning in May 2000, restructured electricity markets in
California experienced unprecedented disruptions. Since that time,
California and the West have witnessed extraordinarily high wholesale prices
and sharp limitations on the availability of electricity. In California,
these high prices have led to financial problems for the state's utilities,
widespread power outages, and rate increases. In other states across the
West, the high prices have also led to impacts including rate increases for
consumers. These price and reliability problems have persisted through the
winter and spring and are expected to worsen during the summer of 2001.

Concerned about the availability and reliability of electric power in
California, you asked for our assessment of the outlook for California?s
electricity supplies this summer. We briefed your staff on the results of
our work on May 10, 2001. This report summarizes those results.

Background: Restructuring Is Changing Electricity Markets in California and
Across the United States

The electricity industry and its markets are undergoing substantial change
in California and across the United States. Historically, the U. S.
electricity industry has been highly regulated. The federal government has
regulated interstate wholesale sales and transmission of electricity, while
the states have regulated retail markets by planning for demand growth,
reviewing and approving costs, and establishing rates of return with public
involvement throughout the process. Under this system, federal regulators
approved wholesale electricity prices while state regulators set retail
electricity prices. In contrast, with the movement to restructure the
electricity

GAO- 01- 870R California Electricity Market 2 industry, prices will
eventually be based on markets and no longer set by regulators.

In states such as California, electricity companies may now build power
plants without the approval of state electricity commissions, although other
approvals, such as those for environmental and other siting matters are
still necessary. However, companies choosing to build these power plants are
no longer guaranteed repayment of the costs of building them. In California
and elsewhere, restructured markets increasingly involve multistate
suppliers competing for customers and market share through a network of
regional electricity transmission interconnections extending across multiple
states. This increased emphasis on markets and competition has, in some
measure, reduced the transparency of market transactions, costs, and
revenues as well as public involvement in the process.

GAO Unable to Provide Independent Outlook for the Summer of 2001; Other
Studies Have Mixed Projections

In summary, due to lack of timely direct access to key information and
limitations in other data, we are not able to provide our own assessment of
the likely conditions in California this summer. In order to make an
independent, reliable assessment we would need access to data underlying key
supply and demand factors, such as power plant outages (i. e., plants that
are not available to generate and sell electricity) and electricity supplies
that could be imported into California. Furthermore, we found that existing
forecasts of California?s electricity market show stark differences in the
expected conditions this summer. For example, studies by California?s Energy
Commission, the California Independent System Operator (ISO- the entity that
manages most of the California electricity system), and the North American
Electric Reliability Council 1 (NERC) have drawn widely different
conclusions- ranging from a surplus of 10,600 megawatts (MW) to a shortage
of about 13,000 MW. Without conducting our own assessment, we are unable to
meaningfully narrow this considerable range of estimates.

Lack of Access to Key Information and Data Limitations Prevented Us From
Making an Assessment

During the course of our work, we were unable to obtain detailed supply and
demand information and thus could not assess the likely summer 2001
conditions. We requested this information from entities including the Office
of the Governor of California, the California Energy Commission, the
California ISO, and the California PUC but were provided only general
information.

While there is general agreement about the historical demand factors that
are important in estimating California? s electricity needs, recent events
could alter these historical relationships. In the past, electricity demand
has been largely a function of known factors, such as temperature and
overall economic activity. However, several programs have recently been
initiated to reduce demand on the state's electricity

1 NERC, among other things, evaluates and reviews the reliability of
existing and planned generation and transmission systems. NERC operates as a
voluntary organization of electricity suppliers and owners of transmission
systems.

GAO- 01- 870R California Electricity Market 3 system. For example, in public
statements by the Governor and during our meetings

with his senior staff, these officials said that consumers in the state will
reduce demand by 10 percent or more in response to public information
announcements and state conservation programs. In addition, the California
PUC, in March and May 2001, increased electricity rates to many customers in
the state. In order to make an accurate and reliable assessment of the
demand for electricity in the state it would be necessary to incorporate
demand reduction by consumers in response to these conservation programs and
the recent rate increases. We attempted to develop an understanding of the
potential influence of key energy conservation measures put into place by
the state of California but state officials did not respond to numerous
requests for information about these programs and the markets that they are
expected to influence. We also attempted to determine the likely impact of
the recent rate increases in the state on electricity demand, but the PUC
was not able to provide information on how rates would increase for various
customers in California because the issue had not yet been resolved.

Experts disagree on the likely contributions of the various electricity
supply factors during this summer. These supply factors include power plant
outages, contracts to purchase electricity, electricity supplies that could
be imported into California, anticipated environmental and other limitations
on electrical generation from hydroelectric and other energy sources, and
new plant additions. Recently, some of these factors have varied
considerably from their historical pattern and thus could have a significant
impact on the electricity supply outlook for this summer. For example, power
plant outages (the aggregate generating capacity unavailable to supply
electricity) have increased four- fold over the past year compared with
historic averages and were as high as 11,000 MW in December 2000. This
represents roughly 25 percent of California?s peak electricity demand of
about 48,000 MW. To assess available supply, we asked the California ISO for
detailed information about these outages, but only general information was
provided because the information was considered proprietary.

Contracts to purchase electric power are also important in understanding
available supplies. As a result of the deterioration in the financial
condition of the state's utilities, and other factors, California is now the
primary purchaser of electricity for the state's customers. Since January
2001, the state has been in the process of signing multiyear contracts to
purchase electricity. To help us conduct an assessment for this summer, we
made several requests for these contracts to help us determine the
proportion of summer demand that the state has under contract and under what
terms and conditions. However, officials with the Office of the Governor did
not provide the requested information. Despite our assurances of
confidentiality, these officials express concerns that if such information
was made publicly available it could jeopardize future contract
negotiations.

Similarly, we were unable to develop our own assessment of how electricity
imports from other states could affect the situation in California due to
limitations with the scope of data that is collected and maintained by
states. State agency officials in several neighboring states told us they
believe they have a good understanding of their respective overall
electricity situation. However, they said that they generally

GAO- 01- 870R California Electricity Market 4 did not maintain readily
available details or databases on certain aspects of their

electricity situation, such as the amount of imports and exports of
electricity transmitted into and out of the state. For example, officials
from several states told us that they did not regularly collect data that
would enable them to make a detailed assessment of how much electricity
could be available for export to California. These state officials said that
such details could be made available to the state if needed, but that they
would have to collect it from the utilities and other power plant generators
in the state. These state officials also said that the type of information
state governments need has been changing as the electricity industry has
restructured. Given the importance of imports to California's electricity
market- they account for about 20 percent of annual supplies- information on
available exports from neighboring states is critical to an assessment of
the state's electricity supply situation.

Other Assessments Present Wide Range of Estimates of Summer Conditions
Assessments by the California Energy Commission, the California ISO, and the
North American Electric Reliability Council range from a surplus of 10,600
MW to a shortage of 13,000 MW as the potential market conditions for
California in the summer of 2001. The state of California in its November
2000 forecast, the most recent that the state would provide to us, predicted
that there would be surplus capacity of between 1,900 MW and 10,600 MW.
Although we made numerous requests for an updated assessment, state
officials did not provide one. According to electricity industry experts we
spoke with, some of the key assumptions used to develop this assessment no
longer reflect the likely summer conditions. For example, the state assumed
that the ISO would be able to reduce overall demand on the electricity
system by discontinuing service to some "interruptible" customers (i. e.,
customers who are charged a lower rate in exchange for agreeing to allow the
ISO to discontinue service a certain number of hours per year during times
of high demand). However, according to these experts, because of extensive
interruptions in service to these customers during the winter of 2000/ 2001,
this program will not be able to curtail service to these customers during
the summer. A second forecast, prepared by the California ISO in March 2001,
estimated shortages ranging from 700 MW to 3,600 MW. This forecast used less
optimistic assumptions regarding summer electricity supplies, with the most
pressing shortages occurring during June and July. A third forecast,
prepared by NERC in May 2001, estimated that California would most likely
face shortages of between 4,500 MW and 5,500 MW and outages during 260 hours
of the summer, with possible shortages of up to 13,000 MW under some
conditions. In developing this forecast, NERC used even less optimistic
assumptions regarding key supply factors, including power plant outages,
reductions in the availability of in- state hydroelectric power, electricity
imports from neighboring states, and new power plants coming on line. In
total, these four factors accounted for a variation of as much as 10,100 MW
from the state's own estimate. However, this forecast also incorporated
about 3,200 MW of demand reduction from conservation programs and consumer
response to rate increases.

While each of these estimates relied on similar information, they drew
widely different conclusions about likely market conditions in California.
In general, these

GAO- 01- 870R California Electricity Market 5 three forecasts relied on
substantially similar estimates of likely peak summer

demand (that is, the highest level of electricity demand during the summer).
However, there were significant differences in estimates of key supply
factors. The range in these various estimates would have sharply different
effects on the state of California and its consumers. For example, under one
analysis the state would have over 10,600 MW of surplus capacity and
consumers would not experience any disruptions, while another calls for
substantial shortfalls in availability of electricity to the state and the
possibility of outages for the equivalent of 13 million homes. We were
unable to meaningfully narrow the discrepancies in these estimates.

Conclusions

Lack of access to information and limitations associated with information
that was available constrained our analysis. Throughout the course of our
work we made numerous requests for detailed information and data, but only
general information was provided. The general information was not adequate
to allow us to draw our own conclusions regarding how individual supply and
demand factors would likely affect California?s electricity market nor for
us to provide an overall assessment of the market this summer. With the
increased emphasis on company- to- company competition, information vital to
performing detailed analyses may increasingly be considered confidential,
proprietary, or commercially sensitive and, as a result might not always be
made available to us. This comes at a time when electricity markets are
evolving in such a way that the effects of the California electricity
situation may have far- reaching implications for companies, organizations,
and people far outside the state?s borders.

Scope and Methodology

In attempting to develop our own assessment of the summer of 2001, we (1)
discussed the outlook for several key supply and demand factors with the
Office of the Governor of California, the California Energy Commission, the
California Electricity Oversight Board, the California Air Resources Board,
the California Public Utilities Commission, the California ISO, NERC,
officials from western state governments, and other industry experts; (2)
made numerous requests for analysis and data from the Office of the
Governor, the California Department of Water Resources, the California
Energy Commission, and NERC; (3) reviewed other data maintained by the
Department of Energy's Energy Information Administration, the Federal Energy
Regulatory Commission, the National Oceanic and Atmospheric Administration,
and other federal agencies; (4) discussed the likely summer conditions and
the California electricity market with the Federal Energy Regulatory
Commission and industry experts; and (5) discussed possible alternative data
sources with industry experts.

To describe the assessments of the summer of 2001, we reviewed reports
prepared by the state of California Energy Commission, the California ISO,
and NERC. We also discussed these findings with the staff of the California
Energy Commission and the California ISO. We conducted our review from March
through May 2001 in accordance with generally accepted government auditing
standards.

GAO- 01- 870R California Electricity Market 6 - - - Unless

you publicly announce its contents earlier, we plan no further distribution
of this report until 14 days after the date of this letter. At that time, we
will send copies of this letter to appropriate congressional committees and
interested Members of Congress. This letter will also be available on GAO's
home page at http:// www. gao. gov.

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- 3841. Other
key contributors to this report were Richard Iager, Jon Ludwigson, Frank
Rusco, and Barbara Timmerman.

Sincerely yours, Jim Wells Director, Natural Resources

and Environment (360040)
*** End of document. ***