OK, I’ve heard all the media hype, and comedian’s picking on the stupidity of California’s power deregulation, and I’ve seen a couple explanations as to why it’s caused the power companies there to go bankrupt and create the havoc the nation is watching erupt.
Can someone who’s informed on the topic please explain why someone thought this was a good idea and what the justification of it is? All the explanations I have seen so far make it seem like an elementary school student could know it was a bad idea from the start. There has to be more to the story.
The shortened and simplified version I’ve heard (paraphrasing here):
By the law passed in 1996, power companies could only charge $6 bucks a unit for power (fictitious number for the sake of having nice round numbers). At the time, that was ok, because it only cost something like $4 to produce or purchase elsewhere. Over time, the cost of power rose to above $6 a unit, therefore the power companies started operating at a loss and as the California state government wouldn’t allow them to charge more, the power companies have gone belly up.
OK, I have a very difficult time believing that the California state government was stupid enough to allow this to happen, when the cost of power rose above the cost of generating/purchasing it, they should have made a change, but did not? Did it happen too quickly?
My somewhat limited understanding of the situation:
Before deregulation, utility companies’ rates were set by a government commission, as were the companies that actually produced the power. The utility companies pushed for deregulation, hoping to continue to charge similar rates, but paying less since the cost to produce power would logically decrease (or so they thought.)
Unfortunately for them, they were so excited about their dream of insane profits that they didn’t even consider the possibility that by deregulating the generating companies, the price they paid for power might actually go up.
A very real case of greed coming back to bite someone in the butt.
To the best of my knowledge, the entire idea was that by deregulating the industry, and having competing power producing companies, the increased competition would drive rates lower. In addition, the reduced state bureaucracy would be an implicit tax cut. In reality, what happened was that the power generators formed an oligopoly and drove up prices.
This isn’t to say that power deregulation is a bad thing. For example, it has been a glowing success in Pennsylvania.
Thank you for the link, but I’d already read something similar. I was hoping someone would be able to translate it to something even a little more understandable, but after re-reading the article you pointed me to, I’m not sure anyone can.
Economics can be just as mysterious to non-speciaists as quantum mechanics.
Never was it more true: If it ain’t broke, don’t fix it!
The PUC set rates. If we wanted cheaper electricity, all the PUC had to do was tell the utilities, “In X years you will have to cut the price of electricity Y cents per kilowatt.” Simple. But that was not the purpose. The real purpose was to increase the profits of the utilities.
Keep in mind that the utilities in some cases sold off their generators to their own subsidiarys, so now the utilities are charging exorbitant prices to themselves and complaining about their debts!
I heard it explained this way:
Pete Wilson and the utilities in what the pundit said was literally a back room deal set up this deregulation scam:
The Utilities would sell off their generation capabilities and buy power back at unregulated market prices. They would charge the consumers based on regulated PUC (Public Utilities Commission) rates.
The utilities believed that the unregulated price of power would average out to be less than the regulated price they charged customers. In other words, they might pay more for a few peak months in the summer, but pay much less for the rest of the year. Result: Big profits for the utilities.
However, as someone said, the power generators did not play along and (As the LA Times said Sunday) manipulated the market so that the price stayed high during the off-peak times. Since, unlike the gas companies, the electric utilities can not pass the increased cost to consumers they are losing money big time and cannot purchase enough electricity to keep the lights on. Result: Rolling blackouts. Big Bummer.
Well Anthracite explained it beautifully to me the other day, and I should just leave it for her, but let me see if I can get the gist of it.
One: There were problems since before Deregulation. Deregulation was meant to help. It did not help anything, it did not hurt anything. It just kinda made things more complicated. So complicated in fact that many of us will never understand it.
Two: There is a price cap on electricity. California cannot buy out of state, and it is cheaper for PG&E and Southern California Edison to simply sell out of state. That’s not their fault, it’s the voters fault. Added to that, many many people in Southern CA refused to pay their electricity bill last summer. That was very bad, and SCE lost a significant amount of money.
Three: There needs to be more power plants here. However, certain enviromentalist clubs will not let that happen. Even if the plants follow the “word and spirit of the law 100%”. They want everybody in CA to learn how to conserve energy. They sue the people building the plants until it’s not worth it for them to stick around.
There is more, but this is basically what Anthracite told me, and I trust her more than anyone else on the subject.
It’s not just PG&E or SDE, it’s a combination of the government, the voters, the enviromentalists, the consumers, and the power plants.
We’re all working to screw us over.
Galen: You’ve got a funny idea of how economics works. All we have to do is order the electric company to produce power at such and such a rate, and it’ll just happen by magic? Gee, why not order them to produce power for free? And give us free cars! And free houses!
Um, if we order the electric companies to sell us power at below cost, then we’re going to have go subsidize them with taxpayer money. And we have that little thing called the constitution, which prohibits the the public taking of private property without just compensation. Which means that we can’t just order you to provide your work for free, right? Same with the power companies. The same constitution that protects you from slavery also protects the owners of power companies from slavery.
Anyway, I’m just waiting for Anthracite to explain everything for us, and tell us how California can get out of the mess it’s in.
“OK, I have a very difficult time believing that the California state government was stupid enough to allow this to happen, when the cost of power rose above the cost of generating/purchasing it, they should have made a change, but did not?”
Yes, the California government IS that stupid. The proof: the “deregulation” system forbids utilities from entering into long-term supply contracts for electricity! They have to buy electricity each day at the highest bid price for that day. In other words, the utilities couldn’t plan ahead for wholesale electricity rate increases even if they HAD foreseen it.
Here in Chicago, people are screaming that the gas companies (Peoples Energy for the city, Ni-Gas [or whatever they’re calling themselves these days] in the suburbs) didn’t lock in natural gas prices with long-term contracts. There in California, the state COMMANDED the electric utilities not to plan ahead and to pay the highest price. IMHO, that can’t realistically be called “deregulation.”
And the state’s proposed remedy (beyond demonizing deregulation in public speeches): state takeover of the electric system with the state power authority entering into long-term supply contracts with generating companies. The very contracts that were a serious no-no for the utility companies. Bah!
I can probably speak on this issue as well as anyone, but I am reluctant to post anything.
Let me just say this, the utilites DID NOT initiate, author, or push deregulation. Deregulation got it’s first support from large customers, it was not the idea of the utilities. large customers thought their elctricity rates were too high, esp. given the recession California was in during the early 90’s. In 1994, the California Public Utilities Commission put out their ‘Blue Book’ outlining deregulation. It was not favorable to the utilites and they opposed it, their stocks fell dramatically on it’s publication. But there was considerable pressure from regulators and large customers for deregulation and the three major utilities eventually got on board, hoping to be a part of the solution. Get on board, or get run over.
Deregulation, in California bill 1890, passed unanimously in the state legislature. It was mostly crafted by state Senator Steve Peace, a Republican legislator from El Cajon, and the utilites had their say in it, and so did the consumer groups, and the new energy owners, and the large customers, basically anybody who had a stake. Anyone claiming there was a backroom deal is being disingenuous. It was a front-room deal where nobody could see the forest for the trees. TURN, the biggest ratepyers advocacy group in the state supported it. What really happened was Steve Peace, determined to create a legacy (and boy has he), steamrolled an agreement together, and managed to convince the whole legislature and Governor to approve a plan they really did not understand.
And as could be expected, a plan, fast-tracked through, trying to placate several interests all at once, managed to create this Frankenstein monster.
of course, there is one very simple and straightforward solution. Have consumers pay the true cost of power.
Sadly, dublos, you have hit upon the gist of the problem.
I would say that the fundamental issue is the one outlined by pepperlandgirl, quoting Anthracite. It’s a (not so) basic supply and demand issue, namely there’s a lot of demand in California and not enough supply. So the price goes up.
The deregulation was set up so that PG&E and Edison could no longer produce their own electricity. They were required to sell off all of their power producing facilities and buy their power on the open market. The hope was that new power plants would be built in the open market, increasing supply, and driving prices down. The conditions of the deregulation explicitly forbade PG&E and Edison from entering long-term contracts with the power generation companies. It was feared that these long-term contracts would limit the ability of PG&E and Edison to pass reduced costs onto consumers, should the price of electricity decrease.
However, the electricity market is volatile, and the restrictions on entering long-term contracts ended up working against the utilities. They were forced to buy electricity on the open spot market and then required, by law, to sell it at a heavy loss to consumers (the average figures I’ve heard are on the order of $0.30 / KHW on the spot market. I pay ~$0.10 / KWH on my monthly electricity bill).
I’m not entirely sure why the deregulation laws required that PG&E and Edison be forced to freeze their rates. I imagine it’s partially due to an expectation that power generation costs would rise in the short term (or rather, would rise because regulation had kept them artificially low) and lawmakers didn’t want these temporary cost increases passed onto the consumer.
So then, here we Californians are, in a state of emergency, filled with warnings of rolling blackouts. And all the while, the lawmakers are scrambling to find solutions to the problem while the government is buying electricity at heavy losses on behalf of the utility companies anyway. So much for decreased government intervention.
I have read other news accounts saying that the people who are part of the California ISO (the organization responsible for purchasing the power for the utility companies) are not very well-versed in day-to-day market activities and have been taken advantage of to some extent. Haggling for a good price is not their speciality.
The California power market was never deregulated: it’s like being pregnant, either you is or you ain’t. There are a huge number of laws surrounding where, when and how power plants can be built, as well as how and for how much that power can be sold. The average granola-toking watermelon digs regulation, “'cause, like, those rich power companies will screw ya, man” -but most don’t/won’t ever know how much gov’t money those same rich power companies got previously under regulation. They just knew their electric bill was lower back then. - MC
For those interested in knowing more, here’s a report from the CPUC to Governor Davis, released Aug 2000 after the San Diego crisis. Maybe not a complete answer, but it provides a lot of background information if you really want to understand the issue.
BobT, as I understand it, the ISO ( http://www.caiso.com ) is not intended to buy a lot of power on a regular basis; they’re there to “keep the lights on”, so to speak. They are willing to pay for power at the high prices that would result if the supply ever dropped too low for demand. Those selling the power realized all they had to do was restrict the amount of power they sold to the utilities, then sell it to the ISO at whatever price they would pay.
Adding to the above - PG&E, SCE, and SDG&E’s rates were frozen until their stranded costs (mandated investments in power plants, wires, and other physical property) or March of 2002, whichever came first. After the rates were unfrozen, the Power Exchange (PX) price’s for electricity were supposed to be passed through dirrectly to the consumers. SDG&E collected its stranded costs and was passing it’s costs through to it’s customers. PG&E and SCE finished collecting their stranded costs at the end of the Summer by selling the last of their natural gas fired power plants (about 3/4 of the utility owned generation), and filed with the state PUC to start passing the costs through to the customers, but were denied because the customer’s would be pissed at the state when their rates went up.
The important thing to know here is that PG&E and SCE both actually lowered the amount of money they get for transmitting and distributing the energy through their wires, and that the cost increase is going to the new owners of the generating stations. They are currently charging about $30 per MWh. Even with the increased cost of natural gas, there is no way in hell it is costing them more than $6.5 per MWh. They are called merchant generators, but should be called pirate generators. Before FERC “fixed” the dysfunctional energy market, it was only about $14 per MWh. Damn good thing they fixed it. Incompetent bastards.
Not to be a nitpicker, but Steve Peace, who is now in the California State Senate is a Democrat, not a Republican.
At Sen. Peace’s website http://democrats.sen.ca.gov/senator/peace/
he always says that the bill that established the present deregulation plan for California, was authored by a Republican assemblyman, Jim Brulte, who is now in the State Senate.
Peace has plans to run for statewide office in 2002, as he will be termed out in the State Senate, although it may be difficult for him to find a lot of support. He is identified all the time by the press here as the man who started utility deregulation and he has virtually disappeared from public view in the last few months.
It’s surprising that no one has come forward claiming that they were against deregulation all along, and foresaw exactly what was going to happen. Possibly because nobody was against it, and nobody foresaw this? Although you have to wonder why anybody with moe than a 3rd grade education would buy into a business plan where your wholesale costs are variable and your retail costs are fixed.
As a lifelong Californian, let me just add that: it feels like all major policy decisions affecting the state in the past 25 years have been made by the voters, via the initiative process–with one major exception. And boy howdy, did they ever screw up that one.