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January 22, 2001

California Powers Down

Can the state's energy crisis be eased through better IT systems and greater use of online trading exchanges?

By Steve Konicki and Alorie Gilbert

More on energy:

sidebar: California Governor Declares Power Emergency (1/17/01)

Utilities And Energy Companies Turn To Exchanges (1/8/01)

TechWeb: California Governor Declares Power Emergency (1/17/01)

EETimes: After plague of blackouts, Hsinchu hears vow of better power in 2001 (1/8/01)

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s California's energy supply dwindled last week--and then ran out completely--employees of the state's Independent System Operator methodically worked the phones in search of available power outside the state. They took what they could get, in some cases in increments of just 10 minutes' worth. So it's come down to this: The technology capital of the world is using Alexander Graham Bell's 19th-century invention to solve a 21st-century problem.

California may need to take a page from its own book to solve the crisis. The IT infrastructures of several of the main players in the fiasco fall short of the state-of-the-art E-business systems that's widely available from Silicon Valley technology companies, say people familiar with the situation. "The situation screams for E-commerce efficiency and for E-market speed," Aberdeen Group analyst Ethan Cohen says.

The state may be at a turning point, which raised at least the possibility of better E-business systems and practices and more regular and widespread use of electronic marketplaces to locate and buy much-needed electricity. E-marketplaces operated by Altra Energy Technologies, Automated Power Exchange, Enron, TrueQuote, and others give buyers immediate and wide visibility into the electric-power markets, facilitating both short-term and long-term contracts. California needs help with both.

In declaring a state of emergency, Gov. Gray Davis called on state lawmakers to pass legislation that would change the way California's utility business is run. Davis vows the state will begin buying power via long-term contracts that promise to be less expensive than those on the day-to-day, or spot, market. He empowered the state's Department of Water Resources to help in the acquisition of electricity, and freed up state funds to pay for it.

John Keast, former CIO and chief technology officer of Pacific Gas & Electric Co., says government agencies and utilities should use the situation as a wake-up call to build an improved E-business infrastructure to manage California's energy needs. "An E-marketplace would have better-positioned PG&E in the current crisis," he says. In fact, Keast says he floated such a proposal while at the utility, but it "fell on deaf ears." Keast left PG&E in 1999 and is now CEO of Tasavo Inc., an Internet-based financial-settlement and risk-management company in Palo Alto, Calif. Tasavo's offices were idled by the Jan. 18 blackout.

California's utilities and energy middlemen already have some E-business operations in place. A spokesman for the California Power Exchange, the agency that fulfills the bulk of the state's energy needs, says CalPX shops on exchanges such as EnronOnline and Red Meteor, but only for buying short-term contracts, ranging from a day to a week. "No one paid attention to long-term contracting until it was too late to get attractive prices," he says.

California's Independent System Operator, a quasigovernmental agency that operates the state's transmission infrastructure and buys electricity in a shortage, runs a no-frills private online exchange. It posts anticipated energy needs on its Web site and accepts electronic bids from suppliers. If the energy is needed, the agency notifies the supplier via E-mail. But no back-and-forth negotiation is involved, nor does the agency use third-party E-marketplaces. "We do scour the markets--by phone," says Loreen Tabbut, the ISO's VP of information services.

The agency is preparing a plan for the Federal Regulatory Energy Commission on better ways to manage California's power supply. As part of that plan, due next week, a new IT infrastructure for buying and selling electricity will be developed, Tabbut says. The technology details have yet to be decided.

If California's ISO is looking for ideas, it might pay attention to the regional power authority for the Midwestern states. The Midwest ISO is building what it considers a model for other ISOs, one that will manage the transmission facilities for 12 states. The project includes an independent online exchange where prices, quantities, and availability dates will be posted by suppliers, and which the ISO can use to negotiate with those suppliers.

The Midwest ISO, based in Indianapolis, will use Lodestar Corp.'s billing software and test Lodestar's Transaction Management Hub for contract management. It hasn't yet chosen a marketplace operator. "We're looking for an independent market operator, savvy in the commodities markets, who will provide truly transparent pricing that's known to all market participants," says a spokeswoman. The Midwest ISO believes its approach will reduce the chance of power shortages.

California's three largest utility companies--PG&E, Southern California Edison, and San Diego Gas and Electric--purchase most of their power through the state-controlled CalPX. And while CalPX provides some of the same functions of an online exchange--in particular the buying and selling of electricity--it's not a public exchange. And it has other drawbacks, such as the fact that it handles only short-term contracts.

"Until the utilities have a mix of longer-term and intermediate contracts, then the thing is going to be very volatile," says Dave Nuttall, VP of power systems for Altra Energy. "We can set that up and arrange for that to be delivered." The Houston company operates Altrade, an online trading platform where companies meet to trade electricity, natural gas, natural gas liquids, and crude oil. The company also sells software that helps energy companies trade, schedule, transport, and account for energy transactions. PG&E uses Altra's software, but not its exchange.

Online exchanges, largely built during the last two years, offer technology-driven advantages. Automated Power Exchange says its Web-based system gives customers immediate notification of what's for sale, what's been sold, and at what price. With CalPX's batch-oriented mainframe system, buyers and sellers often don't know the outcomes of their bids or final sale prices until day's end.

Automated Power Exchange, which focuses exclusively on the wholesale electricity market, agrees that one of the problems that led to California's energy debacle was CalPX's short-term buying strategy. If the utilities purchased power through Automated Power Exchange, which has relationships with 30 major regional generators able to serve California, they could negotiate long-term contracts as well as those on the spot market. "That flexibility would create a much more stable and controllable cost structure and would have kept them out of the crisis we're facing today," contends Rich Amen, CEO of the Santa Clara, Calif., company.

Public online exchanges have varying technical requirements, ranging from simple browser access to special software required on the computers of participating companies. But there are no real technical barriers to keep California utilities from participating. TrueQuote, which handles only the sale of power, not delivery, says all that's required to use its service is Internet access and a Web browser. The company also has brokers available by phone.

But it's the ISO's heavy reliance on telephone calls that has some industry observers privately snickering. "We call it B-to-B--Bubba to Bubba," says Karl Jessen, VP of strategic alliances with Lodestar. Jessen says the century-old electric industry in California needs to be rebuilt using the market rules of the new century--and using E-business technology to gain the kind of advantages that are now commonplace in other industries. "It makes ultimate sense," he says. There are plenty of people in California right now who would agree with him.