IV. Infrastructure Constraints
The infrastructure reasons behind San Diego's future energy problems include:
- Restrictions in the amount of large-scale electricity that can be generated in the area
- Only two transmission lines able to import power from outside of the area into San Diego
- Only one natural gas pipeline throughout the region
- Absence of means by which small customers can respond to price signals. (lack of real-time meters or two-way communications)
The state ISO is currently looking into building costly new transmission lines that will lead deeper into Nevada and Northern California. These multi-million dollar construction projects would be long-term commitments that would lock San Diego into paying off these major capital projects. This investment may be made without adequately comparing lower cost and shorter-leadtime options.
Due to deregulation, SDG&E's holding company, Sempra, is poised to import power to San Diego from its privately-owned affiliate plants located outside of the region - but at a cost. Sempra stands to financially benefit if these large transmission investments are made. They would own this new asset (paid for and risk assumed by ratepayers) and the new lines would lead to power plants owned and/or operated by Sempra affiliates.
In the absence of a proactive local vision "plan", San Diegans will inadvertently assist Sempra in tightening its stranglehold over the local energy market and lock the region into higher rates over the long-term,
Instead, the region should be investigating new innovations in energy technologies that can generate electricity locally.
A. Generation Constraints
Three costly power plants provide a little over half of San Diego's power and almost all of San Diego's local load balancing.5 Located in Encina, Chula Vista, and San Onofre, these plants have provided the majority of local generation since 1985. The San Onofre Nuclear Generating System, (SONGS) is still partially owned by SDG&E. The Encina and Chula Vista plants have been sold, at substantial premiums, to other owners. In total, they provide 1641MW or 39%, of the 4141MW's of the anticipated demand for San Diego customers in 1999. There is only one new power plant expected to be built in San Diego prior to 2003, and there is great uncertainty as to whether it will be built at all.
The existing local generation serving San Diego is largely provided through Reliability Must Run (RMR) contracts between the owners of generation at Encina and South Bay and the Independent System Operator (ISO). "Must Run" contracts are the equivalent to military style "cost plus" contracts in which the plant owners get paid whether the plants run or not. The contracts were created to prevent the problems created when a few large generating plants can influence the electric rates of an entire region. "Must Run" contracts are extremely lucrative for investors and expensive for consumers.6 In short, "Must Run" contracts provide premium returns for investors, but at "controversial prices" to consumers.
San Onofre Nuclear Station is one of the most expensive power producers in the state. Yet, it is likely to become an "RMR" plant in 2003 and may need to continue generation for the indefinite future. Even though consumers are already paying a Nuclear Decommissioning Charge every month, RMR designation would be a very expensive de facto nuclear subsidy that will further burden San Diego electric customers for years to come.
As the crisis in electric power generation emerges, SDG&E has chosen a strategy of pushing for more electrical transmission grids to connect SDG&E to power plants outside San Diego. The objective is obvious; Sempra would financially benefit if it could direct new transmission links to power plants that it will own and operate outside of the region. This expensive ratepayer-financed effort to increase SDG&E imports will make San Diego a less competitive geographically isolated energy market while at the same time furthering local dependence on a corporation that will be totally unfettered by state-level regulations.
Because the factors discussed above have distorted the local electric market, only two companies have expressed interest in building additional plants in San Diego. PG&E Generating, an affiliate of the PG&E utility, recently filed for permission to site a 510 MW plant in Otay Mesa.
In a best-case scenario, it could be operating by 2003. However, PG&E Generating faces a number of substantial hurdles, including:
- Inflated cost of natural gas sold by Sempra to run PG&E's electricity generating turbines;
- $60 million in SDG&E mandated transmission upgrades to pipe in more electricity over further distances (plus as much as $30 million for additional taxes on these upgrades)
- The need to offset air pollution by establishing emissions credits
Duke Power, another potential generator that already operates Chula Vista's gas turbines, recently expressed concerns that it will not be able to construct new generating plants at its Otay Mesa site. Currently, it is committed to build a new plant to replace the South Bay site sometime before 2008, but the commitment is not binding. Because of SDG&E's political and economic dominance in the region, very few alternate generation sites have been identified.
The likelihood of success in constructing new, low cost, power plants in the region are very low. The purchasers of SDG&E's Encina power plant paid almost four times book value of the plant - a very hefty premium that indicates their belief that their plant will be indispensable to keeping the lights on in San Diego. As will be explained below, theirs was a good bet in light of other hurdles faced by would-be new generators.
B. Electric Transmission Constraints
San Diego is at an energy crossroads in regards to transmission. It must generate more electricity locally and reduce its demand for electricity rather than build more power lines to import the needed electricity. In theory, growing electricity demand combined with the lack of power plants to meet that demand, and rising prices should attract investors willing to invest in the new deregulated electricity market. But that's not happening.
Why aren't the traditional market mechanisms working? Geographically, San Diego is located at the far corner of the state with a Southern border that is shared with Mexico. Thus, the region has limited access to imported power. In addition, there are only two transmission lines leading into the region and SDG&E owns both. The Northern Transmission Link runs up to the SONGS plant and relies upon the power generated by nuclear plants in order to bring power to San Diego. The second line is the Southwest Power Link, which delivers power from as far away as Arizona and New Mexico. Both of these lines are limited in the amount of power they can carry, so SDG&E cannot import enough power to provide all of its needs. Local power plants must be operated during a significant number of hours of the year to provide reliable service. The transmission lines have been able to supply approximately half of SDG&E's power needs up until the present. But the increase in demand and the reduced availability of power in the Southwest have changed the equation. Those transmission lines have reached their maximum capacity to import power and the power that is available to them is not cheap.
As a short-term strategy, SDG&E plans several incremental expansions of the electricity grid to increase imports. For the next three years, the costs are not substantial and the incremental nature of the upgrades is prudent.
However, within the next five years, SDG&E argues that major investments, including a large 500 kV line (such as Valley to Rainbow) will be needed because of the absence of new local power plants. Ten years ago, this new power line transmission was estimated to cost at least $55 million in 1989. In today's dollars it is likely to cost SDG&E customers double that estimate.7
Aside from being expensive, the lead-time necessary to build the line will likely exceed five years. Thus, the company is pushing for construction to begin immediately, albeit prematurely without considering the other available options.
It is also promoting the entrenched status quo of additional, more expensive, transmission fixes. These projects, once built, will be paid for by ratepayers over a period of 30 years or more, increasing customer charges for potentially misguided investments. If the transmission lines are not needed or become obsolete, the cost will be imposed upon San Diegans, just as the cost of overpriced nuclear power plants had to be absorbed by customers as part of the political deal that spawned AB1890. The result: an increasing dependence on out-of-state generators and a transmission line subject to interruptions (by natural or man-made events). Sempra benefits from more revenue from transmission and distribution charges, as well as sales by plants in Nevada and elsewhere that it owns.
The benefits to San Diego are less clear. San Diego will continue to be dependent upon three power plants: San Onofre, South Bay, and Encina. All three plants (and the new proposed Otay Mesa plant) will likely receive "Must Run" plant designation. This designation is important because "Must Run" contracts provide premium returns for investors, but at high prices to consumers. This is equivalent to a premium insurance policy, since these plants must continuously run in order to keep the distribution system "balanced" and free from power outages and voltage fluctuations.
What this means to San Diegans is that it faces a "Hobson's Choice" where neither choice is palatable. Additional line extensions to connect to more distant sources of electricity will burden consumers with charges for decades to come. And it threatens to further entrench San Diego in an inherently inefficient system of creating and transmitting electricity. Alternatively, building new centralized power plants in the area is a difficult and expensive endeavor exacerbated by Sempra's grip on the local natural gas market and distribution design system, as will be discussed in the next section. .
C. Gas Transmission Constraints
Natural gas is currently the preferred fuel for electricity generation in San Diego. However, the only gas pipeline into the region is owned and operated by Sempra Energy, SDG&E's holding company. The rates proposed by Sempra's gas affiliate, Southern California Gas Company are regulated by the Public Utilities Commission and Federal Energy Regulatory Commission, but too frequently the Commission accepts whatever rates are proposed by the company.
By pegging the price of natural gas in San Diego to the cost of high-priced Southern California natural gas, the CPUC gives Sempra the ability to discourage new power plant companies from investing in San Diego.
Here's how it works: Sempra charges SDG&E more for gas than any other customer in Southern California. For example, customers and generators in San Bernardino County pay less for natural gas than San Diego residents. The CPUC enables these higher revenues to Sempra in part because San Diego is what's called a "load pocket," an isolated energy cul-de-sac. This isolation makes San Diego vulnerable to market power imbalances that resemble a traditional economic monopoly. If the emerging San Diego energy crisis is to be addressed, the CPUC must adjust its gas pricing structure to prevent further market power abuses.
Because natural gas is the preferred fuel for electricity generation, and Sempra and SDG&E have an iron grip on imports. The high cost of shipping natural gas makes it difficult to attract the investors necessary to finance the construction of new plants or less localized applications of natural gas.
Given the CPUC's approved pricing structure for Sempra's natural gas, it is more expensive to run electric generating plants in SDG&E's territory than in the rest of California. This is a problem for generators; the allowed Power Exchange prices for the electricity are the same throughout Southern California. Consequently, the combination of higher gas prices in San Diego and the uniform Power Exchange prices across Southern California effectively discourage investors from building new electric generating capacity if they wish to sell their power into the state electric market.
The bottom line: Sempra and SDG&E's dominance of the San Diego electric market is fueled by Sempra's virtual monopoly over natural gas. This economic dominance benefits Sempra at least two ways:
- SDG&E's strategy is to push for higher transmission capacity and fewer local power plants in order to guarantee that its partially owned San Onofre nuclear power plant will be eligible for lucrative Reliability Must Run (RMR) payments. SDG&E will justify this designation based on transmission reliability considerations and the lack of new San Diego power generation. By manipulating the price of natural gas, SDG&E could saddle San Diego electric customers with high San Onofre electric costs for decades.
- SDG&E's plan is to use a consumer-financed expansion of its electric transmission power grid to build connections to Sempra's Nevada electric power plant that will meet San Diego's future ; reliabilityneeds. If successful in building the transmission lines, Sempra's overcharge for natural gas in San Diego will pay off handsomely. It will effectively discourage the development of local power generation to justify charging the ratepayers for the cost of expanding the electric power grid to connect to one of their power generating complexes in Nevada.
The CPUC and the new Independent System Operator (ISO) implicitly allow SDG&E to abuse its traditional monopoly powers to inhibit competition and indefinitely maintain artificially high electricity rates. The current pricing structure, together with selective discounting, cleverly prevents the construction of new gas pipeline capacity into San Diego. This unfortunate situation enhances the position of Sempra's SoCal Gas as the sole provider of gas to SDG&E, and undermines competition in San Diego.
One solution to this scenario is the construction of a natural gas pipeline through Northern Mexico into San Diego. Just such a project has been explored by a number of private natural gas pipeline companies. But they have not been realized, in part because of Sempra's public position that it will take all necessary steps to discourage such competition from within Mexico. In 1999, it sponsored SB418; this was legislation that would exempt Sempra from certain public goods charges (paid by other California gas pipelines) in anticipation of a possible Mexico pipeline.
And Sempra's close political connections with Mexico government officials have been publicly touted.
To further exploit its monopoly power, Sempra is currently attempting to charge elevated natural gas rates to companies that operate electric generators within the San Diego region. If adopted, local power generators will pay up to $16 million more annually. The current prices paid by SDG&E electric generators average 11.5% more than electric generators located in SoCal's service area, thereby discouraging the operation of existing generators and the location of new generators in San Diego.
A cost differential of 26�per therm (with a $2.00 per Dth gas commodity price) and SoCal's higher transportation rates, effectively increases gas prices for local plant investors 11.5% over SoCal's gas rates for electric generators. Since all entities in California sell into the same Power Exchange (PX) and Independent System Operator (ISO) market, any higher operating cost puts generating units located in SDG&E's service area at a disadvantage, creating a huge disincentive to build new capacity in San Diego.
The impacts of this stranglehold on the local gas pipeline are greater than simply making generation more expensive in San Diego or thwarting new technologies from entering the local market. It also permits continued emissions by inefficient, older gas turbine plants, increases indirect RMR costs for consumers, and causes the construction of unnecessary transmission lines. In other words, SDG&E will contribute to the growing problems of more pollution, higher prices, and a convoluted infrastructure.
If natural gas rates were lowered, generators could add cleaner, more efficient ways of producing electricity inside the SDG&E load pocket. This would help reduce or end San Diego's dependence on other more polluting units in less desirable locations (e.g., South Bay or San Onofre Nuclear Power Plant).
The benefits of new plants are numerous. First, more efficient and competitive new units may not require special Reliability Must Run (RMR) payments, or at least, lower RMR costs. This will directly benefit ratepayers by eliminating expensive "cost-plus" generation. Second, new plants will produce more electricity at lower costs thus leading to lower RMR and market-based rates. Third, new generation in San Diego may allow SDG&E to avoid significant and costly transmission expansion to meet load growth and increasingly stringent ISO requirements.
D. ISO / SDG&E Plans to Build Transmission Lines will have Profound Impacts on Short and Long-term Energy Needs.
The State Independent System Operator (ISO) has begun a process in which it hopes to build a number of multi-million dollar transmission lines to the East and South of San Diego. The ISO believes that these transmission lines will enable SDG&E to import low-cost electricity from Northern California, other Western States and Mexico. Continuous upgrades to the transmission grid are a timeworn utility solution, and may be exactly the wrong solution for San Diego. Instead, the region should be looking to new technological innovations. After all, that was one of the major points to the restructuring of California's energy markets.
One of the main benefits from the electric restructuring "experiment" being conducted in California is that it releases the utilities' grip on generation technology and allows for new technologies to enter the market. Just as the break-up of AT&T allowed consumer access to new phones, services, and choices, the deregulation of electricity is geared to open up innovations in electric generation and service. New advances in distributed generation technology, such as fuel cells, photovoltaics, and micro-cogeneration, combined with new metering and communications abilities allow innovations in energy that could not occur in a utility-dominated industry.
The new trends in generation, energy-efficiency and communications technologies present an opportunity to reduce the region's reliance just one company. For example, the residential customer could install a small fuel-cell generator in the basement of a home that would supply all of the household electricity needs using natural gas. Investment in a fuel cell could be fully paid off within five to ten years given current cost projections. Because this form of energy production occurs at the residential site, the inefficiencies associated with transmission losses (up to 8%) are no longer an issue. The customer will be in a position to tell SDG&E that their house no longer needs to be connected to SDG&E's distribution system; SDG&E could no longer charge them for the unending monthly cost of maintaining the distribution lines. If customers are able to generate their own power and detach from the "grid", then SDG&E's sole asset - its distribution and transmission lines - will be severely devalued.
Yet, if more customers decide to invest in new technologies, the burden of transmission costs will shift to SDG&E's remaining customers. Those customers would see that they are being saddled with higher rates for maintaining the grid, making the investment in new technologies all the more alluring. This kind of economic death spiral is a serious economic threat to SDG&E and its remaining customers. While this scenario is only one of many possible outcomes, it is one that makes electric distribution companies very nervous.
Fuel cells, photovoltaics, advanced micro-turbines and other emerging power generation technologies are innovations that present tremendous potential for small customers to have choices apart from SDG&E. Efficiency rates of these innovations range from 40 to 80% (if integrated with a cogeneration system), and are far superior to the efficiency rates of current large-scale power plants. These increased efficiencies do not begin to account for the additional environmental benefits these new technologies have over previous sources of electricity.8
Another promising development in energy services is the emergence of "smart meters" and "smart appliances".
Computer chips and software have been developed that would allow meters and customer appliances to be controlled remotely. The technology exists to allow power consumption in a home to be controlled based upon the price and availability of power - without the consumer having to do anything. These same technologies give customers access to better information about their power consumption. And they would have the ability to use power when prices are lower (off-peak). Much like long-distance telephone pricing, consumers would have the ability to save substantial amounts of money by using power when there is less demand for it.
Because electricity is a "real-time" commodity that can not be stored, the price differences between "peak" and "off-peak" power is substantial. In California, peak prices for power during the summer have soared 100 times greater than during "off-peak". Imagine buying gasoline for $1.00 per gallon on certain days of a week and $100 per gallon on other days. In effect, customers without these "smart meters" do exactly that - and they end up paying the average of those peak and off-peak prices.
The San Diego region could be making a huge long-term mistake if it ignores the potential of new innovations in generation and service and returns to an addictive reliance on transmission lines to serve the region's energy demands.
However, if the ISO process is allowed to continue, it is likely that SDG&E will commit to irreversible large-scale transmission projects. San Diego must take steps to prevent this scenario from occurring.
