Is energy deregulation right for Colorado?

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Millions of years ago, dinosaurs walked the earth. They didn’t have to worry about heat when it was cold outside or lighting a gas stove to cook food. Little did Tyrannosaurus Rex realize that his remains, also known as fossil fuel, would provide man with needed energy to survive many epochs later.

Energy exists as both solids and fluids, and embraces a variation of colors and smells. Its potential seems endless, yet capturing its power can be laborious and expensive. No one knows that better than Phillip Tollefson, executive director of Colorado Springs Utilities.

“Everything we do is really intended to accomplish one thing, and that’s (to) boil water,” said Tollefson. “It makes heat. That’s the goal, whether it’s a nuclear plant or a coal plant or a natural gas plant or a geothermal plant.”

While politicians have debated for years over where to drill for oil or mine for coal, its necessity – and decreasing availability – has regularly been in the headlines since California experienced its first rolling blackout in mid-January, affecting hundreds of thousands of businesses and residents.

The energy crisis has reared its ugly head out West, and many people are now asking, “Will it happen to us?”

The Colorado General Assembly has been concerned about the availability of energy for years. It authorized the creation of an Electricity Advisory Panel in 1998. The mission of the 29 member panel was to study the electric utility industry in Colorado to determine whether restructuring of the retail electric industry was in the state’s best interest.

In its October 1999 report, 17 panel members voted down restructuring. Among a list of 16 points, the report stated that Colorado’s electrical rates are already lower than other states’. States that have restructured usually produce monthly consumer bills that increased by about 29 percent over a 20-year period. The report highlighted other possible effects of restructuring, including a potential loss of 29,000 jobs in Colorado, mostly in manufacturing and high-tech sectors. Additionally, Public Service Co. (now Xcel Energy, which services most of the Denver area) would be able to sell power to other markets, thus decreasing Colorado’s access to this resource. The modeling the panel consultant developed indicated there would be higher electricity costs that would “translate into a poorer business environment and fewer jobs,” Tollefson added.

The remaining 12 members who voted in favor of restructuring said customers would receive a 5 percent to 15 percent reduction in their monthly bills, the report said, and would attract power plant construction competition. Their interpretations, said Tollefson, were based on other industries, such as the airline and telecommunications industries where deregulation was successful. Rather than basing their opinions on academic modeling, Tollefson said those panel members believed that the free market would always drive down prices.

What is restructuring?

Restructuring, commonly called deregulation, allows states to choose whom to purchase power from, at what cost, and over what period of time. It also allows consumers to choose their electricity provider in much the same way they choose a telephone carrier.

When a state is not deregulated, the federal government makes these decisions. Deregulation took hold in the United States in the mid-1990s when natural gas was abundant and its cost was low. Twenty-four states and the District of Columbia are deregulated. Colorado is not among them.

Restructuring goes to the heart of an issue that many states now face. California’s utilities restructured in 1996. What the state didn’t anticipate was the possibility of increased costs of buying power wholesale from other states through spot market purchasing – a means by which one state purchases power from another at a moment’s notice.

On some occasions, both of California’s main power plants sold power to other states at a low wholesale price. Then, when California needed to buy power back, it was charged as much as three times the selling price. Invoices sent to customers had a price cap imposed by the state, leaving the power plant in a financial quandary with increased expenses and no way to recoup them. By not entering into long-term sale and purchase contracts to lock in low prices with nearby states, these power companies had to eat the financial losses. Also, despite a 4-percent load growth, California hasn’t built any new power plants within the past 10 years, adding to its dependence on other states. And other states, such as Oregon and Arizona, didn’t have energy to spare.

Pennsylvania, on the other hand, has been an inspiration to states that are considering the switch. More than 11 percent of consumers have switched providers since deregulation occurred in 1998, saving the average household about $10 per month.

Pennsylvania had adequate capacity compared to demand, said Tollefson. It also had more power plants. The state put emphasis on customer education and left the decision of deregulation up to a bilateral agreement between the buyer and the seller. This made the incumbent utilities offer a price for competitors to beat. The state also encouraged long-term agreements with other states rather than relying on low spot-market pricing.

The advantage to deregulation is that it “tends to make energy supply more plentiful,” said Rep. William D. Sinclair, R-Colorado Springs. But similar to what happened when deregulation took hold of the airline industry in the mid-1990s, it “drives out the little guy and raises rates.”

“There’s a lot of complications,” said the House Transportation and Energy Committee member. “What happens to rural electric organizations is that as big (urban) companies provide more and more (energy), there are trends in providing services that muddy the waters.

“As cities and urban areas grow … there’s a built-in mechanism to incorporate those (rural) unincorporated areas. When that happens, utilities want to supply (energy to) newly incorporated (areas). There has to be some balance there.”

Although deregulation has been successful in some instances, the problem has been how to implement it within basic guidelines. Diametrically opposed viewpoints include allowing limited monopolistic companies vs. supporting competition, competition between municipally owned electric companies vs. large investor-owned industries, and bestowing small electric cooperatives the authority to regulate themselves.

Although Tollefson doesn’t support restructuring as it was defined by the panel, he supports the theory – but only if certain conditions are in place. To reduce adverse impacts, he recommends assistance for low-income consumers, tax incentives to small energy companies for development and operation, and keeping all records open to the public for inspection.

“We know from customer research that 80 percent of our customers think (deregulation) is a good idea,” said Tollefson, adding that the majority believe that because deregulation of other entities, such as the airlines, has been successful, it won’t be different with retail energy.

Keeping up with demand

Colorado is connected to the western grid system. There is another grid system that extends from the East Coast to Kansas , and Texas has its own. Nearly 90 percent of Colorado’s energy needs are between Fort Collins and Pueblo, and that zone expands about 25 miles wide as it centers around Interstate 25.

Ninety-three percent of Colorado’s energy comes from the burning of coal. That’s also true of the energy in the Pikes Peak region. Most coal in Colorado comes from northwestern Colorado, southwestern Wyoming and northeastern Utah.

Hydroelectric power generates 3.9 percent of energy needed in Colorado while the Pikes Peak region relies on this power for about 5 percent of the state’s energy needs. Petroleum makes up 0.1 percent of the state’s usage and natural gas provides 2.7 percent of the state’s propulsion.

California, on the other hand, derives more than 42 percent of its energy from hydroelec
tric power. It also uses nuclear power, which generates more than 30 percent of its energy, and natural gas, which burns 23 percent of needed energy.

The state hasn’t built a new power plant in the last 10 years, forcing officials to buy power from out of state. Hydroelectric power usually purchased from Oregon, Idaho and Washington has been in short supply due to increased populations in those states. Increased environmental preservation has affected the supply, as well. That means California has had to look at other means of obtaining energy.

When it purchased spot market power from neighboring states, they weren’t so neighborly. Rates were sky high and the California power companies were legally unable to pass that excess charge onto customers.

Colorado Springs Utilities is not yet faced with that kind of problem. CSU has about 640 megawatts capacity of energy at any moment. About 38 megawatts is hydroelectric power. The rest is imported coal and natural gas. In 2000, CSU generated about 82 percent of its usable power itself. It bought about 11 percent under long-term, fixed-rate contracts. About 5 percent to 7 percent is power bought on the spot market.

Still, Colorado has its challenges. During peak time (3 to 6 p.m.) about 8,000 megawatts are needed. Statewide, power plants generate about 5,500 megawatts. The remaining amount is imported from Utah and Wyoming. To keep up with the growing demand of energy due to increasing population, between 200 megawatts and 250 megawatts will need to be added each year.

With the Pikes Peak region eating up nearly 800 megawatts at any peak moment, Tollefson would like to see a 15 percent reserve of about 120 megawatts. Presently, there is a reserve of about only 5 percent.

However, keeping up with energy demand is already difficult, said Tollefson. This is mostly due to the difficulty of obtaining a permit to build a new power plant. No one wants a power plant in their back yard.

“Most people don’t want power plants located very close to them,” he said. “For a variety of reasons, it’s often cheaper to have them located closer to the source of fuel.”

Industry officials say increasing natural gas prices are partially the result of consumer and environmental group opposition that has hampered the targeting of new drill sites over the past few years.

Another problem has been electrical line continuity. When an electric line runs across the state, each county must agree to host the electric lines and decide where to string them. This doesn’t always mean a straight line. And this poses a serious problem for electric companies since zigzag lines are more costly and time-consuming to build.

Deregulation in Colorado

Tollefson does not believe that deregulation is the answer for Colorado. In his detailed report to the General Assembly, he explained that his first concern was the definition of “restructuring.” He supports competition that restructuring could bring but questions the risks.

If uniform restructuring rules were properly established, Tollefson believes that CSU could compete. However, competition, economic development and lack of future investments in local energy facilities were at the forefront of Tollefson’s concerns.

Because of the industry’s uncertain future, investors are loath to invest in new generation and transmission projects. This can create a barrier to the estimated need of an additional 4,750 megawatts of electricity by 2017.

Tollefson is also concerned about proper development of a workable wholesale market. Because of market dominance by larger plants, such as Xcel Energy and CSU, independent power plants would need to be in place to facilitate healthy competition.

He said that in the past he has seen better products, better customer service and greater efficiency introduced in markets that have restructured due to competition. Of the states that have gone forward with restructuring so far, all have rates higher than Colorado’s. Tollefson is taking a wait-and-see attitude before endorsing such as dramatic and drastic move.

Tollefson said that the panel members who supported deregulation expected to benefit economically. This would include consumer organizations that thought they would get better customer service or more options, larger businesses that thought they would get better prices on electricity and independent power producers who thought they would make money. Some environmental groups saw it as a vehicle to advance their agenda.

Closer to home

Colorado Springs has six nearby generating plants that service about 500 square miles of businesses and homes in Colorado Springs, Manitou Springs, the U.S. Air Force Academy, Fort Carson, Peterson Air Force Base, and portions of Security.

The Nixon power plant, located about 17 miles south of Colorado Springs, is our newest and most efficient plant. This coal-burning plant produces about 240 megawatts of energy at any given moment and a combined cycle unit will be built at the plant with construction scheduled to begin this month. The cost will be about $280 million.

The present single-cycle unit acts like a jet engine that has a combustion turbine unit. The new combined-cycle unit will have two such engines where the heat will be used in conjunction with a steam generator to further increase the efficiency of the overall plant. Use of this 500-megawatt unit will be split with Coastal Power Corp. and CSU will add 250 megawatts of new power to its existing 240 megawatts of power from the Nixon plant. The new unit will be up and running by May 2003.

The Drake power plant, also a coal-burning plant located south of downtown on Conejos Street., can produce about 240 megawatts at any given time. The cost to build a similar plant would be about $500 million.

Our third coal-burning plant is the Birdsal plant in northern Colorado Springs. This facility can also burn both recycled oil and natural gas.

The Springs is also home to three hydroelectric units. Two are located on Pikes Peak and draw power from the mountain’s lakes. One runs west from the Cog Railway in Manitou Springs and can easily be misinterpreted as a ditch running down the mountain. The third water-powered source comes from Rampart Reservoir where underground pipes collect the energy as water pressure accumulates.

While the cost of natural gas has increased 20-fold in California since last year, it has only doubled here. In the West Coast state, it increased from $2.20 per million British Thermal Units (equivalent to 1,000 cubic feet) to $50 per million BTUs. In Colorado Springs, natural gas increased to about $8.75 per million BTUs in January. It was about $4.20 last October and hovered around $1 in 1995.

Natural gas for the Pikes Peak region comes from northwestern Colorado, northeastern Utah and southwestern Wyoming. There is potential for exploration on federal lands in northwestern Colorado and the Western Slope and President Bush is considering opening those lands for drilling.

CSU has seen an increase in electrical systems operations of 9 percent from 1999 (with an average of 627 megawatts) to 2000 (averaging 669 megawatts). The average load is expected to increase each year by about 20 to 25 megawatts. However, it increased more than 40 megawatts from 1999 to 2000. The peak amount used was late last year when 743 megawatts were needed, compared with 1999’s peak at 683 megawatts. The difficulty lies in anticipating when consumers will need more electricity.

“We have to make it at the exact moment people are using it,” said Tollefson.

The cost of spot-market power budgeted for Colorado nearly tripled last year from almost $12 million to about $32 million. CSU budgeted about $40 million for 2001 but it now looks as though costs will total about $57 million.

“There is no way to predict spot-market buying,” said Tollefson, adding that the West Coast’s problems have dramatically affected spot-market buying.

The Energy Information Administration reports that U.S. energy demand is expected to grow at an average annual rate of 1.3 percent over the next 20 years, with oil import reliance jumping fr
om 51 percent to 64 percent. Energy efficiency will grow 1.6 percent annually while the economy will grow 3 percent per annum.

Within the next 20 years, coal generation is expected to drop from 51 percent to 44 percent in the United States, but total U.S. consumption is expected to increase from 1,035 million tons to 1,297 million tons. Natural gas generation is expected to rise from a 16-percent share to a 36-percent share with demand increasing 62 percent.

The cost of coal increased somewhat as well. It was originally estimated that costs would be about $41 million in 2001. It now looks as though it will be about $45 million. Last year saw an increase of about $5 million over predictions as well. Natural gas costs increased last year from about $2 million to nearly $15 million. This year, the gap will be about $8 million.

CSU’s annual budget is $720 million with more than $50 million (most in U.S. Treasury securities) in its current fund balance. The company brings in between $2 million and $4 million each day and spends about the same amount.

Due to another expected increase in spot-market costs for natural gas, Tollefson said customers should anticipate a 15-percent to 25-percent increase in their natural gas bill in April or May. Businesses could see a 30-percent increase. This will probably translate into a 10 percent to 12 percent increase in the customers’ overall bill.

“We’re looking at everything we can to control costs … buying additional back-up generators … changing maintenance schedules so they run as reliably as possible this summer,” said Tollefson. “We’re perusing a real variety of measures to do that.”

Legally speaking

Rep. Sinclair said the legislative committee has not dealt with the energy issue this year since transportation funding has been at the forefront of many legislators’ minds. He said he believes that the problems California has been experiencing will not directly affect Colorado in the form of less available energy, nor does it look as though this state might fall victim to blackouts anytime soon.

“It shows you what a mess electric deregulation would be,” said the majority whip. Some Colorado legislators have been “pushing the issue” for the past five to seven years, he said. “I don’t think they have the nerve to bring it up (now),” he continued. “I’m concerned about Colorado Springs … and we have excellent municipal utilities. Although rates have risen because of total market costs rising, it is not similar to places like California.”

Sinclair’s concern about Colorado’s future in energy is similar to Tollefson’s in that not enough power plants are being built to keep up with consumer demand.

Sinclair represents District 16, which is composed of approximately 66,000 residents in the east-central portion of Colorado Springs.

Sinclair has a record of voting down deregulation because of what he sees as the possibility of permanent residential price increases. He said Colorado residents would be hard-pressed to find anyone in the state’s House of Representatives who would support deregulation.

“In the House of Representatives, (the vote to deregulate) failed miserably and that has been the case historically for four or five years,” said Sinclair.