Ever since we started running our “Some Like It Hot” column--rife with drought, pestilence, fires, and general climate change apocalypse--I’ve noticed that threats to electricity reliability are few and far between. In fact, there have not been any major ones this year. I readily admit that insurance is a necessary evil--but to a point. It’s never cheap. It’s best when you don’t need to use it. What you pay is not usually what you get insurance-wise, which you quickly discover when filing a claim. None of us wants to repeat the personal pain and damage to the state economy that we experienced due to the lack of reliability during the 2000-01 energy crises. Rolling blackouts are no fun and melt all the ice cream. The insurance premium is like shopping for premium items. Think of shopping for handbags. You can spend $1,900 on a Prada purse or $30 on generic leather. Both will hold the same stuff but one costs dearly for the excess and vanity stitching. The insurance premium that the state is paying for reliability is looking more like Prada than J.C. Penney’s. Despite the achingly hot weather, and a severe early fire season (which can often burn through transmission lines), not one Stage One alert was called this summer. While utilities via TV commercials ask for conservation, personal conservation hasn’t been necessary, according to the California Independent System Operator. On top of that, utilities this past year contracted with demand-response aggregators to drop consumption in case of a juice squeeze on the system. Apparently none of those contracts have been called upon, however details from the wholesale market deals are kept secret. Efficiency measures seem to help, but demand increases. The grid operator used to sweat when the system demand forecast was 40,000-plus MW. All summer that amount of demand’s been normal. Yet, the grid operator’s conserve-o-meter hasn’t budged from its “helpful” to “needed” position--much less the “critical” side. There are several kinds of reliability insurance that utilities are able to obtain--power purchase agreements with third-party generators; energy efficiency investments with performance bonuses; demand-response contracts, both with third parties and with the utility; and the most expensive, new utility power plants. Third-party generators operate their own power plants and sell through “power purchase agreements” to utilities. Usually these run 10 years or more with the costs and parameters set. Demand-response companies like Comverge, with 150 (n)MW in the state, Ancillary Services Coalition, and North America Power Partners have contracts to aggregate customers to drop load in case of emergency. The California Public Utilities Commission, which oversees these contracts, did not respond to requests for information on the cost of these contracts. Utilities claimed the contract details are secret. PG&E budgeted $975 million for energy efficiency this year in federal documents. Other utilities administer energy efficiency programs as well. Plus, utilities get bonus money from ratepayers if they meet their goals. In an August 29 Securities & Exchange filing, Southern California Edison estimated it will reap up to $146 million in bonuses for its 2006-08 energy efficiency program. The big deal, insurance-wise, is new utility built power plants. Let’s start with a little history. When the state deregulated the electric industry in the mid-1990s, it strongly suggested that utilities divest their fossil fueled power plants. While nuclear and hydroelectric were exempt, as well as PG&E’s Humboldt facility, utilities sold their power plants to entities like Dynegy, NRG, and Reliant. PG&E subsequently declared bankruptcy. Edison nearly did the same. The companies that bought their power plants at the time say they’ve struggled to make them profitable in the last few years. Enter the new utility generation era. Regulators have been smiling on utility investments in new power plants. While the state would rather have renewable electricity, it still grants around an 11+ percent rate of return on equity investments for new utility facilities. Imagine that--utilities are lining up for new power plants. Historically, utilities never liked dealing with third party contracts anyway. That’s one heck of a lot of insurance to ensure electricity reliability. As long as the state is in the reliability insurance business, perhaps it can make some money for its cash-strapped general fund by inventing new insurance policies for the public. Why overpay for insurance or handbags? I have a couple ideas for alternatives to such deep pocket(book) reliability insurance. Or at least some new insurance alternatives. How about BadMovie.com insurance? If you get a 2-hour DreckFest from Netflix, you can insure that your $4.99 will be refunded with a few bucks paid ahead on BadMovie insurance. Or us foodie Californians could develop the All Restaurant Insurance Agency. One bite of bad arugula and we get comped on a good glass of Zinfandel. Overbuild new fossil plants and customers get free double-pane windows. The question is: how much insurance is too much insurance at a cost that’s beginning to drain dry the clientele when the economy is like a bad movie to ratepayers.
