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US energy infrastructure fails to take the strain

The power cuts that blacked out 50 mn consumers in the north-eastern USA and parts of Canada are the latest indication that all is not well in the American power industry. This latest problem appears to have been caused by the overloading of the transmission system when a section of the grid in Ohio became overloaded and, instead of being isolated from the rest of the system, overloaded other parts of the transmission network causing a rolling series of shutdowns known as a ‘cascade’. The grid, however, is far from being the only cause for concern in the US power industry. There has been a succession of problems with generation, electricity trading, and fuel prices, while in California power shortages have helped force the state governor to stand for re-election. The issue is becoming party-political elsewhere across the USA, as the Democratic Party begins the process of selecting a candidate to fight George W. Bush for the presidency in 2004. The political argument itself is rapidly developing into a debate over the merits (or otherwise) of electricity deregulation.

Infrastructure under stress

The USA does not have a national transmission grid. Three main systems cover the continental United States: one in the east, one in the west, and a third in Texas. These in turn are connected to transmission grids in Canada and Mexico. In this way, a failure in the US eastern system caused power outages in Toronto and other parts of Canada. The US grids are also interconnected with each other, but the number of links is inadequate to permit the smooth exchange of power across the entire network. From time to time, various regions have found it impossible to import sufficient electricity from other areas in periods when demand has been unexpectedly high, causing prices to rise sharply. This has been the case in recent years in the Mid-West, East, South-East, New York, New England, and, most spectacularly, in California. California has the additional problem of inadequate connexions between the north and south of the state.

The inadequacy of transmission links across the country has been recognized for several years, but little has been done to correct the situation. Some people accuse the power industry of short-sightedness and of an unwillingness to invest for the long term. The industry, however, is under constraints of its own. A major problem is the legal framework governing electricity transmission. Under a law of 1935, the siting of transmission lines is the responsibility of state governments rather than the federal government: unlike oil and gas pipelines, railways, and interstate highways, which all come under federal laws.

Planning controls in one state can prevent the import of electricity by a neighbouring state by banning the construction of a new power line to the state border. Some states specifically prohibit the building of transmission lines purely for the benefit of a neighbouring state. The one area where the federal government does have some control is where transmission lines cross federally-owned lands, such as National Parks. But here, again, approvals for new power lines are often refused or given only after prolonged delays.

Generation gap

The USA has around 800 GW of generating capacity. While there may not be a national shortage of capacity, there are regional imbalances such that some areas have to import power on a regular basis. The north-eastern states, for example, import from Canada’s Quebec Hydro. When demand surges unexpectedly, some areas cannot import all the additional power they need because of the state of the transmission system. Various regions suffer from high electricity prices on a regular basis owing to their inability to bring in power from regions with lower generating costs. The lack of sufficient connexions is forcing places such as New York to build new generating capacity simply to cope with short term or seasonal surges in demand.

The USA needs an estimated 200 GW of new generating capacity to meet the forecast increase in power demand over the next 10 years. Much of this is likely to be gas fired. The growth of gas-fired generation in recent years has been spectacular. From virtually nothing in the early 1980s, capacity has risen to more than 60 GW with over 100 GW under construction or planned. Interest in gas has been prompted partly by clean air and other environmental legislation and partly by the low gas prices of recent years. Domestic gas supplies, however, have failed to keep pace with the growth in demand for natural gas and prices look set to rise significantly. The gas industry also suffers from infrastructural problems that limit the transmission of gas across the country.

There are particular pipeline capacity shortages affecting states west of the Rockies, especially California, and on the eastern seaboard, where a lack of capacity has led to the survival of several oil-fired power stations long after they have vanished from other parts of the USA. Pipelines bringing gas from Canada are also at or near capacity. Plans are well developed to build a line connecting a large new field called Sable Island, off Nova Scotia, with the north-eastern USA, but Canadian supplies are expected to remain static over the next few years. Moreover, the development of Canada’s most important gas prospect, the Mackenzie Delta–Beaufort Sea area, is being held up for a variety of political and environmental reasons.

The USA is having similar difficulties in developing its Arctic gas reserves next door in Alaska, leaving liquefied natural gas (LNG) imports as the only other short-term option. Coal-bed methane is unlikely to be developed quickly enough to meet the expected shortages of the next few years (see ‘Looking Ahead’, June 2003).

here are problems with LNG, however, as well. While the USA probably has sufficient terminal capacity to meet the expected demand for LNG imports over the next few years, it is having difficulty sourcing sufficient supplies. The country’s four import terminals are operating at about half their design capacity. Strong demand in Asia and Western Europe has absorbed most of the recent increase in world LNG supplies. The Americans will probably have to wait until after 2005 for any large scale increase in LNG imports, when more LNG export trains are due to come on-stream.

Table A
USA: gas balance, 2002
	(bn cfd)
Consumption:	64.6
Production	53.0
Contracted Imports
Pipeline
Canada	10.6*
LNG
Trinidad & Tobago	0.4
Qatar	0.1
Algeria	0.1
Total*	0.6
Spot Imports	1.9
Exports
Pipeline	1.3
LNG	0.2
* total includes a small volume from Mexico
Sources: BP World Energy Review; Cedigaz; OET

Rising generating costs

Rising demand for gas has pushed prices up sharply in the last three years, adding considerably to generating costs. A further problem for electricity producers has been the increased volatility of gas prices in several markets during short-term shortages when alternative supplies were not readily available because of infrastructural constraints. In some cases, where wholesale power prices were capped by state regulators, these short-term price spikes had disastrous consequences: nowhere more so than in California.

In January 2000, gas prices across the state were about $2.65 per mn BTU. By December of that year, high gas demand, driven by soaring demand for power in the state, had pushed up prices in the San Francisco Bay area to $26.15 per mn BTU. Wholesale electricity prices went up sharply as well, as generators failed to keep pace with demand. Retail prices, on the other hand, remained capped. At the height of the power mania, spot electricity prices briefly touched $3,000 per MWh, whilst retail prices remained controlled around $100 per MWh. Utilities went bankrupt as a result and the state government was forced to import power on its own account, which it did by means of the largest municipal bond issue in US history, worth $13.4 bn. This all helped to precipitate a budget crisis for the state government which, in turn, triggered calls for the Democratic Party state governor, Gray Davis, to resubmit himself for election.

The situation in California, is complicated by claims that energy traders like Williams, Reliant, and Enron manipulated electricity prices, for example by taking power plants out of service when demand was high. Energy traders were also accused of manipulating gas prices. Some companies were ordered to pay compensation to the state government, though the amounts awarded were a small fraction of the $8.9 bn California says it was overcharged by the energy companies. The state, in return, has refused to pay some $1.8 bn to utilities that supplied electricity.

To regulate or not?

The issue in California and elsewhere has become further complicated by claims that much of the country’s electricity problems have been caused by deregulation. Over the last two decades, the US electricity industry has been deregulated in many states. Many vertically-integrated utilities have been unbundled and split into separate generation, transmission and distribution/retail entities. New participants have entered the market as independent power producers, or as energy marketers that frequently do not own power stations, transmission, or distribution assets. Deregulation, however, has not been uniform across the 50 states. There is no ‘single market’, for example, on the lines of that being established in the EU. Nor is there a federal requirement for utilities to be unbundled: though several have been. It is the individual states rather than Washington that draw up the rules and act as regulators through bodies known as Public Utility Commissions (PUCs) or Public Service Commissions (PSCs). The federal government does, however, have a limited regulatory role, which is exercised through the Federal Energy Commission (FERC), which is primarily concerned with the wholesale electricity market (except in Texas) and third-party access to the grid.

Retail choice exists in about half the 50 states but in many of these retail competition is restricted owing to restrictions placed on electricity retailers, designed to guarantee security of supply. The US Department of Energy (DoE) estimates that less than 6% of the retail market is fully liberalized. Competition is spreading only slowly, partly in response to the electricity crisis in California during 2000 and 2001. Deregulation is mainly most active in the north-eastern states and parts of the south-west, principally Texas. Some states have delayed deregulation and California has suspended it altogether.

California shows the way

California’s power market was deregulated in 1996, when the state’s vertically-integrated utilities were broken up. Liberalization was meant to reduce electricity prices, but rapidly rising demand, and a shortage of generating and transmission capacity led to a sharp rise in wholesale prices, especially in 2000 and 2001, which the retailers were unable to recoup owing to price caps imposed by California’s PUC. The PUC has now suspended deregulation and taken over the power distribution system following the collapse of many electricity supply companies.

The Californians are now trying to decide what to do next. Some want deregulation to remain suspended, but others argue that the crisis happened because the market had not been liberalized enough, The liberalizers criticize both the price caps on retail sales and also the state’s moratorium on new power station construction. The rest of the USA is looking on with great interest. Any new moves in California will nevertheless have to await the outcome of the gubernatorial election.

One major problem for California is the enormous debt levels run up by price-capped utilities during the wholesale electricity price explosion of 2000–1. Most of the companies that operated in the liberalized Californian market have disappeared or are in bankruptcy administration, and the state’s wholesale power-trading exchange has also gone. California’s electricity industry will be expensive to rebuild. Still more money will be required to modernize and expand the infrastructure in order to satisfy the expected increase in demand. The state’s electricity consumers are most unlikely to be willing to finance the industry’s reconstruction by paying greatly increased bills. For its part, the federal government is resisting calls for Washington to bail out California’s power industry. Debt financing can also be ruled out in view of the industry’s existing debt load. This appears to leave only higher state taxes. It was higher state taxes, however, that precipitated the election for the governorship.

New approaches

Some policy groups are trying a brand-new approach to the issue, by proposing to restrict the growth in electricity demand and thereby reducing the amount of money required for new infrastructure investment. One idea is to make peak-time electricity much more expensive for industrial and commercial users, forcing them to switch some of their consumption to off-peak times. This has been tried with some success in Texas and Georgia, and one utility in the state of Washington has even tried it with household consumers.

Another proposal is for small-scale generating units across the state to operate in parallel with conventional power plants. These units could allow electricity to be generated during peak periods. Some would like to see small-scale units providing electricity on a continuous basis to small, local areas in competition with the large utilities. It may be, though, that California’s (and the USA’s) problems are too severe to be solved by such small-scale measures and that big money is needed for large, high-tech solutions (see box). The question, if not the answer, has arrived in nice time for next year’s presidential election.

USA: Energy Policy Proposals

In May 2001, the National Energy Policy Development Group, under the vice-president, Dick Cheney, proposed the following measures designed to improve the operation of the US electricity industry.

l DoE to examine the benefits of establishing a national grid and to work to eliminate transmission bottlenecks;

l DoE and FERC to come up with financial incentives to encourage investment in transmission;

l Federal utilities to extend their own transmission grids where necessary;

l New legislation to make it easier for transmission lines to receive right-of-way approvals;

l The Western Area Power Administration to improve transmission between northern and southern California;

l DoE to increase research and development on transmission reliability and superconductivity.