GAO-01-865R California Electricity Options for 2001

United States General Accounting Office

Washington, DC 20548

June 29, 2001

Congressional Requesters

Subject: California Electricity Market Options for 2001:

Military Generation and Private Backup Possibilities

Since May of 2000, California’s restructured electricity market has experienced

rapidly rising prices and uncertain reliability. These problems led to widespread

disruptions in service (referred to as blackouts) during the winter of 2000 and into

spring this year. In response to these problems, the state has taken initial steps to

increase electricity supplies—such as by streamlining the process of adding new

power plants—and reduce demand through conservation. The California

Independent System Operator (the agency in charge of balancing electricity supply

with demand) expects high prices and reliability disruptions to continue, and perhaps

worsen, in the summer of 2001.

In light of these concerns, you asked us to (1) describe the condition of California's

electricity market, including changes in demand, supply, and prices; (2) determine the

extent to which the Department of Defense (DOD) can help enhance western

electricity supplies during the summer of 2001; and (3) discuss available private

backup generation resources and any benefits and problems associated with their

deployment. We briefed you and your staff on the results of our work on May 15,

2001, using the enclosed briefing slides (see encl. I). A summary of the information

follows. A complete list of the requesters appears at the end of this letter.

California's Electricity Market Has Changed in Recent Years

California's electricity market has exhibited more rapid increases in demand than in

supply and recently has witnessed sharply higher prices. In addition, the California

Independent System Operator (ISO) expects electricity supply shortages this summer
2 GAO-01-865R California Electricity Options for 2001

to range between 3,000 and 6,000 megawatts.1 Because California’s electricity market

operates within a larger electricity system encompassing roughly 11 western states,

shortages in California may also affect states across the West.

• Demand for electricity in California has risen sharply in recent years. From 1990

through 1995, demand rose only 1 percent, but from 1995 through 2000, demand

rose 13 percent. Peak demand (that is, demand during the highest use part of the

day) also rose by 16 percent, or about 7,000 megawatts, from 1993 through 2000.

• Electricity supplies have not kept pace with demand. California generates about

80 percent of the electricity it uses and imports the rest from neighboring states.

California has added 2,800 megawatts in new generating capacity since the early

1990s. Transmission constraints and market forces limit the state’s ability to

import electricity and move electricity within the state.

• Wholesale prices are high and expected to remain so through the summer of

2001. Furthermore, the state's already high retail rates have recently increased,

which could make California’s electricity rates the second highest in the nation.2

DOD Could Help Enhance Western Electricity Supplies Through

Increased Generation and Conservation

DOD could help augment western electricity supplies in two ways. Specifically, DOD

could potentially reduce demand on the western system by generating an estimated

90 megawatts of electricity and implementing conservation initiatives. Use of DOD

assets raises environmental and mission concerns, however, and a number of

logistical issues are currently unresolved. Nonetheless, the California ISO told us

that DOD’s 90 megawatts of electricity, as well as its conservation efforts, would help

to reduce demand on the western electricity system this summer.

• In our analysis, the military services own an estimated 300 megawatts of

electricity generation capacity. 3 The services have 30 power plants in the

western states capable of generating 109 megawatts and 158 mobile generators

throughout the United States capable of generating an additional 189 megawatts.

However, according to DOD officials roughly two-thirds of DOD's generating

capacity cannot be used to assist the western system because it is being routinely

used, providing backup, being used for training purposes, or undergoing

maintenance. Therefore, roughly one-third of DOD’s generating capacity—16

 1

A watt is the basic unit used to measure electric power. A kilowatt is equal to 1,000 watts. A

megawatt is equal to 1,000,000 watts. A megawatt would provide electricity for about 1,000 homes at a

given moment. This 3,000 to 6,000 range does not reflect steps taken to minimize the shortage through

actions such as load curtailment and the use of reserve generation. A shortage of 6,000 MW is equal to

about 13% of the peak demand for the California ISO.

2

Electricity rates in Hawaii are currently the highest in the United States.

3

Our inventory of DOD’s generators includes generators with a capacity of 750 kilowatts and greater.

We also limited our inventory to power plants in the West and mobile generators in the continental

United States to identify the resources most immediately available to provide power to western system

states in the summer of 2001.
3 GAO-01-865R California Electricity Options for 2001

megawatts from power plants and 74 megawatts from mobile generators—could

potentially be used to reduce demand on the western system.

• While estimated costs to deploy and operate DOD’s mobile generators are high,

the California ISO anticipates that wholesale summer prices may be higher. DOD

estimated that costs to transport, set up, and operate generators would range

from $350 to $1,000 per megawatt-hour of power produced, assuming that the

generators would operate 20 days per month for 4 hours per day, over a period

from 1 to 4 months. We estimated that costs could be lower, ranging from $200

to $500 per megawatt-hour of power produced, in the event that the generators

operated 30 days per month for 8 hours per day over the same period. Even if

actual costs of operation reached the highest level estimated, however, the cost

of using DOD’s generators could still be below the market price for electricity.

The California ISO anticipates that wholesale 2001 summer prices may frequently

exceed $1,000 per megawatt-hour.

• Deployment of military generators raises environmental and mission concerns.

DOD’s mobile generators have pollutant emission rates two to eight times the

maximum allowed in the state. In addition, DOD officials expressed concern that

increased use of these generators would impair military readiness by restricting

the availability of generating assets and increasing maintenance requirements.

• Logistical issues further complicate the decision whether to deploy DOD assets.

Both DOD and Pacific Gas and Electric Co. (the principal power distributor in

Northern California) have proposed sites in California for mobile generators, but

other questions remain unanswered: (1) How long will it take to deploy

generators? (2) If diesel generators are used, how will the government address

the environmental consequences? (3) Who will direct the use of DOD’s

generators and assume the risk? (4) How will the services be reimbursed for the

use of their generators?

• DOD officials told us they can best contribute to easing the California electricity

crisis by reducing DOD's demand in California during peak consumption periods.

On May 3, 2001, DOD announced a plan targeting a 10-percent reduction in its

peak electricity demand in California in 2001, with the total estimated reduction

equal to about 42 megawatts. However, DOD’s plan commingles conservation

initiatives with generation. Specifically, the 10-percent target reflects plans to

reduce peak demand by 6 percent through conservation and 4 percent through

generation and the purchase of power. DOD’s plan also contains few details on

how such initiatives would be implemented or funded.

Use of Privately Owned Backup Generation Faces Obstacles

Although significant private backup generation capacity exists in California, its

potential use is limited because of business and environmental risks. Backup

generators, generally relatively small equipment driven by internal combustion

engines fueled by gasoline or diesel, are directly connected to single homes or

businesses to supply electricity in the event of an interruption in service from
4 GAO-01-865R California Electricity Options for 2001

commercial sources. Given the risks involved, increased incentives would be needed

to encourage businesses to use this backup generation, and a balance would need to

be achieved between the need for additional electricity and the need to protect air

quality.

• Privately owned backup systems in California have an estimated generating

capacity of 3,500 to 5,000 megawatts of electricity, but the potential for California

to benefit from this capacity is limited. Most privately owned systems are not

configured to add electricity to the commercial system. However, operating

these systems to meet the electricity needs of their private owners would reduce

demand on the western electricity system. Because most backup generators do

not have the capacity to fully power business operations, a business that agreed

to switch to backup generation during periods of high demand would face

significant risks. These risks include the potential need to shut down the

business or operate without a critical electricity-powered amenity, such as air

conditioning, during periods when operating solely on private backup systems.

• Existing incentives to increase the use of backup generation may be insufficient.

Costs to operate backup generators are generally higher than the retail price of

electricity, even with recent rate increases. In addition, businesses using backup

generators that do not have the capacity to fully power business operations

would probably require a greater incentive to switch to backup generators and

risk temporarily disrupting their business. Programs recently introduced by the

California ISO and the state are providing additional incentives, yet it is too early

to assess their effectiveness.

• Finally, most privately owned backup generators, which are primarily diesel

fueled, are located in heavily populated urban areas, such as the California

southern coast and San Francisco Bay area. Because of regulatory restrictions

and emissions rates that are four to five times those of other plants, extensive use

of private backup generation could result in violation of federal, state, and local

regulations and air quality standards. Recently, the federal Environmental

Protection Agency has taken steps to extend the allowable hours for operation of

backup generators. Moreover, the state exempts some backup generation from

regulation. Nonetheless, some local air districts continue to restrict the number

of hours generators are allowed to operate.

Agency Comments

We provided DOD with a draft copy of this letter for its review and comment. In

commenting on the draft, DOD agreed that our letter was generally accurate.

However, DOD said we did not fully address the environmental issues associated

with using diesel generators and expressed concern about whether their use was cost

effective.

In response to DOD’s first comment—that we did not fully address the environmental

issues associated with using diesel generators—we believe the letter and briefing
5 GAO-01-865R California Electricity Options for 2001

slides clearly point out that there are environmental and other obstacles to the use of

diesel generators in California. Specifically, while we reported that the ISO said that

DOD’s 90 megawatts of fixed and mobile generation would be helpful, we also

pointed out in the letter that use of mobile units poses environmental and mission

concerns as well as logistical issues. Given these trade-offs are a matter of policy,

GAO does not take a position on whether mobile diesel generators should be used.

We did not change the letter in response to this comment.

In response to DOD’s second comment--that the use of diesel generators may not be

cost effective--we believe the DOD is using the wrong cost comparison. They state

that “it is hard to foresee a scenario in which military installations were paying

electricity rates high enough to justify the expense of using mobile diesel generators.”

In making this statement, DOD is pointing out one of the basic problems with the

California market—namely, that retail rates paid by consumers, such as DOD and

others, are set by the state at a level below the wholesale costs to purchase

electricity. As we pointed out in the letter and briefing, expectations were that

wholesale market prices this summer could be higher than estimated costs of using

the mobile generators and, thus, wholesale market participants would be willing to

purchase electricity produced by these generators. Moreover, in the event that

having access to mobile generators forestalls blackouts that would otherwise occur,

the value of these units would be even greater, reflecting saved business and

consumer costs associated with the averted blackouts. Therefore, it is important that

the cost-effectiveness of mobile generators be considered in light of the wholesale

market clearing prices instead of the retail rate paid by DOD. We did not change the

letter in response to this comment.

Scope and Methodology

To describe California’s electricity market, we interviewed officials at California state

agencies and regional electricity organizations; obtained database files on electricity

consumption, generation, supply, and prices; and analyzed the data to identify market

trends. To identify generating capacity owned by DOD, we interviewed officials of

the Office of the Secretary of Defense and military services; obtained data on DOD

power plants and generators; and analyzed the data to determine generating capacity,

current use, costs to operate, and emissions. We also obtained information on DOD’s

conservation efforts and interviewed California state officials on air quality and

technical issues associated with using DOD assets. To identify private backup

generating capacity, we interviewed federal, state, and industry officials; obtained

information on private backup and mobile generation equipment; and analyzed the

data to identify barriers and challenges to deployment. We conducted our review

from March through May 2001 in accordance with generally accepted government

auditing standards.

- - - - -
6 GAO-01-865R California Electricity Options for 2001

If you have any questions about this letter or need additional information, please call

me on (202) 512-3841 or Daniel Haas on (202) 512-9828. Copies of this letter are also

available on GAO's home page at http://www.gao.gov. Other key contributors to this

report were Christine Frye, Randy Jones, Jon Ludwigson, and Frank Rusco.

Jim Wells

Director, Natural Resources

 and Environment

Enclosure
7 GAO-01-865R California Electricity Options for 2001

List of Requesters

The Honorable Mike Thompson

The Honorable Bob Filner

The Honorable Barbara Lee

The Honorable Gary Condit

The Honorable Joe Baca

The Honorable Robert Matsui

The Honorable Michael Honda

The Honorable Brad Sherman

The Honorable Lynn Woolsey

The Honorable Pete Stark

The Honorable Henry A. Waxman

The Honorable Susan Davis

The Honorable Sam Farr

The Honorable Ike Skelton

The Honorable Duncan Hunter

The Honorable Hilda L. Solis

The Honorable Grace Napolitano

The Honorable Juanita Millender-McDonald

The Honorable Darlene Hooley

The Honorable Zoe Lofgren

The Honorable Loretta Sanchez

The Honorable Gene Taylor

The Honorable George Miller

House of Representatives

(360055)
California Electric Markets

California Electricity Market Options for 2

Military Generation and Private

 Backup Possibilities
Briefing Covers Three 

Background on California Electricity MarketMilitary Could Help in Two Ways: Adding Genera

Through Conservation

Private Backup Generation Limited, Poses Risks
Background on California Elec

California Operates Within Large W

Source: Energy Information Administration.
Background on California Elec

Grid Constraints Limit Flows Into and 

Three Primary Grid

Capacity Constrain

• California-Oregon • Path 15• California-Southwe

Ties
Background on California Elec

From 1991-1999, State Ha

2,800 M

Source: GAO analysis of California Energy Commission data.

California On-Line Capacity by Year, 1970-1999
Background on California Elec

In-state Generation and Import

In-State Gfrom NatuNuclear, aHydroelecAnnual ImPacific NW Southwes

Source: GAO analysis of California Energy Commission data.Note: State generation includes out-of-state capacity owned and formerly owned by state retail utilities, ipower plants located in the southwestern U.S..

Electricity Supply, 1983-1999
Note: Includes capacity owned and formerly owned by state utilities located in the southwestern U.S..

Background on California Elect

Generation From Natural 

and Hydroel

Source: GAO analysis of California Energy Commission data.
Background on California Elec

Annual Imports From Pac

and S

Note: Does not include capacity owned/formerly owned by state utilities including capacity at plants locasouthwestern U.S..Source: GAO analysis of California Energy Commission data.

Electricity Imports, 1983-1999
Background on California Elec

Consumption Growing A

Consumptiosharply over •1990-1995: up •1995-2000: up Peak loads asharply•1993-2000: u

Source: GAO analysis of California Energy Commission data.

Consumption of Electricity, 1990-2000 (est)
Background on California Elec

ISO Expects Summer 2001 Shortages, W

California Independent System Operator (ISO) st

shows 3,000-6,000 MW gap

• Including substantial plant additions, due in July• Weather and outages could create problems early

Western Council estimates entire West could be 

• Drought could limit imports from Northwest and Canada• Weather could increase loads, limit imports from Southw
Background on California Elec

Few Plant Additions Scheduled Be

Source: California Energy Commission, April 20, 2001.

2001 Generation Progress Report (Megawatts On-line by Month)
M

DOD Could Hel

Providing additional generation

• DOD says 90 MW available from fixed and mobile gener• Costly, but may be lower than summer prices• Deployment would raise environmental and mission con• Deployment may require lead time and raise logistical is• ISO believes that this capacity could provide significant 

Conservation--reducing load/consumption

• DOD believes that conservation is best contribution• DOD provided few details of conservation efforts• Reducing load during peak hours can substantially reduc

system costs
M

DOD Says 90 MW 

Fixed and Mob

Military could make available additional generatio

• DOD estimates that 90 MW is available

• 16 MW fixed• 74 MW mobile

• Military owns 298 MW of electric generation

• 109 MW of fixed power plants located in West• 189 MW of mobile generating units located in U.S.

• Mobile generation often deployed in emergencies

Unavailable units operating or committed to miss

• Most fixed plants utilized on-base• Many mobile units performing backup or in maintenance• GAO did not verify reasons for unavailability
M

Mobile Generatio

U.S. Army’s Prime Power 4.5 MW Plant
M

Costly, but May Be Lower Than S

Military cost estimates for mobile generators are 

• Services estimated costs from $350-$1,000/MWh• GAO analysis identifies costs may range from $200-$50• Actual costs depend on duration and frequency of use

Summer wholesale prices may be higher

• FERC estimated costs of some existing generators in $3

$430/MWh range for early 2001

• ISO stated that prices in May top $200/MWh and it expe

prices during summer 2001 will often top $1,000/MWh

ISO Believes that 90 MW or more could provide b

• Provide last-minute stop-gap generation• Help in negotiations to buy electricity
M

Deployment Raises 

and Mis

Operation of plants poses environmental conseq

• Mobile units are mostly older, diesel-fueled with high em

• Emissions rates 2-8 times current allowable rate in Californ

• Air Resources Board concerned about diesel generation

Use of plants may compromise intended mission

• Control of asset• Limits mission readiness• Deteriorates equipment
M

Timelines and Lo

Complica

Logistical issues unresolved

• Where should mobile units going to California be located 

connect to the grid?

• Who should direct the operation of the generating capac

assume risk?

• How long will it take to deploy the generating capacity?

• Services provided varying estimates ranging from 30 to 90 

• How will the services be reimbursed for deployment?• How will the federal government and the state deal with

environmental consequences? (waiver, offset, other)
M

DOD/PG&E Identified 

DOD assumed siting at

various locations

• Fixed at Vandenberg,

Onizuka, Beale, and SaDiego Naval Air Station

• Mobile at Travis and

Pendleton

PG&E conducted prelimin

evaluation

• GAO asked ISO to iden

potential sites on militainstallations; ISO askedPacific Gas and Electric(PG&E) for locations wiappropriate sites

• ISO prefers locations in

Northern CA

More work may be require

before interconnection

Beale AFB

Travis AFB

Camp Parks

Onizuka AFB

Lemoore NAS

Camp Roberts

Vandenburg AFB

Camp Pendleton

San Diego NAS

DOD/PGEPGEDOD
M

DOD believes conservation is best contribution

• California is home to 10 percent of total DOD population• Largest single electricity consumer in the state• DOD accounts for about 1% of state peak load

DOD provided few details of peak demand reduc

• DOD announced plan targeting 10% reduction, but

this includes generation

• DOD to reduce peak demand by 25 MW• DOD to generate 11 MW with on-site plants and

6 MW renewable energy

• Some proposed DOD actions not yet funded
Private Genera

Role of Existing Back-Up Generation Limited, HaIncentives Needed to Boost OutputActions May be Needed to Allow Use
Private Genera

Role of E

Generation Lim

Potential of backup generation limited, poses bu

and environmental risks

• 3,500-5,000 MW of backup generation may be available

• Air Board estimated 11,300 units = about 5,000 MW• Energy Commission preliminary estimates of 8,000 units = 

MW

• Ability to rely on most systems is limited, poses business 

• Not configured for on-grid operation• Backup not adequate for full business operations

• Ability to operate limited, poses environmental risks

• Currently not permitted for full-scale operations• Mostly diesel engines in urban areas, uncontrolled for nitro

(NOx), particulate matter (PM), and sulfur oxides (SOx)

• Emissions rates 4-5 times those for other plants (NOx and 
Private Genera

Incentives Needed t

Need adequate incentive to encourage deployme

• Lack of data limits policy options

• Incomplete data on capacity, locations• No data on capability to serve business needs

• Recent rate increases provide inadequate incentive

• New rates still lower than potential average wholesale price• Rates continue to reflect state subsidy• Rates still not reflective of time-variable costs

• Programs by ISO and California offer promise

• Several programs, allow businesses to sell “load”• Some programs focus on enterprises with backup generatio
Private Genera

Actions May Be Needed to Allow 

Limit business exposure to environmental implic

• Extensive operations could violate existing federal/state/

quality rules

Actions taken help, but may not be enough

• EPA changed rule that restricted hours of operation

• Summer 2000• Monthly extensions

• State actions vary

• Some backup generation exempt from regulation• South Coast and San Joaquin have restricted hours of ope