Mexico could emerge as a major power supplier to southern California and Arizona in the next 5 years, contributing to the division of the western US grid into northern and southern markets, Arthur Anderson LLP analysts said at a Washington, DC, press conference.

Canada is already a major hydroelectric supplier to the Northwest, including northern California. Arthur Andersen officials declined to forecast how much power could be imported from Mexico, except to say it could be “substantial” if everything goes “swimmingly,” including construction of new transmission lines between Mexico and the US.

Meanwhile, they said, California risks becoming an “energy island” as a result of near-term reduction in available regional resources for export to California and increased emphasis on security control to protect against overall western grid failure as subregions have problems.

In the longer terms, development of new plants using plentiful coal resources and clean coal technology will alter the pattern of imports into California, including the probability of rising electricity exports from Mexico. California�s reliability and price problems have triggered a re-emergence of energy crisis measures from the 1970s, Arthur Andersen said. As the problem escalates, end users are taking matters into their own hands, investing in solutions they control.

The distributed generation market is being aggressively developed among large retailers, industrial users, and residential customers. Arthur Andersen predicted this will lead to development of micro grids connecting consumers in local areas and to related changes in traditional grid systems from modifications in interconnection agreements to changing definitions of reserve margins and system reliability.

Arthur Andersen prinicipal Dave Germane said price caps in the West would be largely unworkable because of the mix of private and public generation and because of the interdependence among the Alberta, US, and Mexico markets. “Where would you stop?”

Experience has shown when reserves dip below 10-12% prices climb to more than $1,000/Mw-hr, he said. Where there are no price caps, new generation quickly moves in to fill the gap and prices have come down, he said. California’s retail price caps and multiple explanations for the crisis have added to the uncertainty. By limiting fast track siting to small generators, the state added to the confusion, Arthur Andersen said.

Regulatory risk has prolonged the crisis, executives said. The state has precipitated a state’s right vs. federal oversight crisis by not following a Federal Energy Regulatory Commission order in selecting new members of the board of the California Independent System Operator, said Germane.

“This is a significant issue. I don’t know what FERC will do,” he said. New commissioners are being named, and it’s not clear how they will respond. “But I don’t see how FERC can avoid enforcing its order or changing its order to conform to what the state did.” Tensions between state and federal regulators over policies on deregulation will continue grow if states delay or abandon retail competition, Arthur Andersen predicted.