California is not the only state with unregulated power companies but its going to set a trend for the others.
Hey, Im in block 01 
Sort of like a recently banned poster? Nah, couldn’t be. Never mind… 
It seems that the legislature pretty much told Peace to figure out the deregulation plan and just voted to approve it.
We Californians were told that this was going to be the greatest thing since (insert metaphor here).
The problem is that the whole concept is so hard to get a grip on and figure out for the layman that no one thought to worry about the situation until the power has finally gone out.
The voters had a chance to modify utility deregulation with Proposition 9 in 1998. It got only 23% of the vote.
Here was the Legislative Analyst’s description of the measure
http://Vote98.ss.ca.gov/VoterGuide/Propositions/9analysis.htm
Until a year ago, I worked for electric utility in Texas. I worked on the public relations aspects of power generation and part of that job was promoting the benefits of deregulation to the consuming public. A deregulation bill was passed by the Texas legislature and a phased deregulation (or re-regulation as we called it) will begin in 2002.
I can’t speak for California, because I’m not familiar with their deregulation legislation, but I believe I can give some insight to the deregulation movement. But please bear in mind, this is only my opinion, based on insight exclusive to the Texas market.
The public utility commission set all power rates in Texas. Built into those rates were profit margins for the utilities so that they could pay employees, build new plants, transmission and distribution lines, maintain equipment and provide a modest return to investors. That’s why investment in utilities was considered safe for retirees and such – their rate of return, although small, was virtually guaranteed by the government.
As alluded to earlier, large industrial customers pushed for deregulation for simple economic reasons – they wanted cheaper power. Although their rates, as bulk consumers, were already less than residential customers (in most cases), they felt that competition would spur the construction of competitive power plants and drive prices down.
Meanwhile, utility executives in the ‘90s were watching all their counterparts in other industries getting richer and richer as the stock market rose. They – and utility investors – weren’t getting their slice of the pie. Deregulation seemed to be the answer. They already had older, competitive (through grandfathering exclusions to environmental regulations and depreciation) gas generation that could supply cheap power to large industrial customers – in other words, volume, volume, volume. All they had to do was make sure the “stranded costs” of their newer, more expensive coal and nuclear plants were recovered. Under Texas deregulation rules, the recovery of the stranded costs invested in nuclear generation were granted (this is greatly simplified, I don’t really want to write a book).
The large industrials were right – to an extent. Independent power producers are building or have built new gas generation plants in Texas that, combined with existing utility plants, exceed demand now and into the foreseeable future. The old utilities have their competitive gas and coal generation plants (coal generation is generally cheap in Texas because of the abundance of high quality, low sulphur Wyoming coal and lower quality Texas lignite). Plus, utilities will be able to recover at least some of their investment in nuclear generation by passing those costs to consumers.
So, what’s the problem?
First, despite their best efforts to say otherwise, deregulation will never benefit residential customers. Home power consumption is small and expensive outside of urban areas. If you look at a population map of Texas, you can see the problem. To serve homes in West Texas, for example, requires miles and miles of expensive transmission and distribution lines. It’s much more cost effective to provide power to big customers close to power plants. Even in urban areas, the profit margin is much greater in providing power to big industrial consumers. Quite simply, your local power utility really doesn’t want to be bothered with supplying electricity to your home because the profit margins are too small. And neither do the new independent power producers. Of course, the market always provides something to fill that kind of vacuum, but don’t expect anything soon.
Second, gas is no longer cheap. Utilities promised relatively clean, inexpensive power from gas generation. Oops.
Third, building transmission lines is a big pain in the ass. No one wants those things running through their property. Politicians and regulators are sensitive to this, so even if it is allowed, the cost of building new transmission is high. In Texas, the coming energy crisis will not be because of a lack of generation, it will be because of a lack of transmission. No one wants to build high voltage transmission lines because it’s too damned hard.
How does this apply to California?
The basic problems in California are the same as Texas. However, environmental considerations have made it virtually impossible to build new generation in California. The same considerations have made it virtually impossible to move power into California due to the lack of transmission lines.
I believe transmission remains regulated by the state in California. The ISO is the power transmission traffic cop, so to speak, and has no authority to build new transmission. Again, I’m not familiar with the politics of California, but it’s doubtful the state will have the cojones to authorize new transmission lines, so California is stuck.
In a perfect world, electricity deregulation is not a bad idea. It would mean cheaper power for all. But we don’t live in perfect world. I know that in the last two paragraphs, I seemed to lay the problem at the feet of environmentalists. In the previous paragraphs, I placed the blame on utilities and industrial customers. But, I really don’t want to point fingers. There is plenty of blame to go around.
Two quibbles with the excellent post by oliversarmy:
“The public utility commission set all power rates in Texas. Built into those rates were profit margins for the utilities so that they could pay employees, build new plants, transmission and distribution lines, maintain equipment and provide a modest return to investors. That’s why investment in utilities was considered safe for retirees and such – their rate of return, although small, was virtually guaranteed by the government.”
Assuming regulation in Texas was governed by the same principles that used to guide regulation in California, I think it would be more accurate to say in the second sentence “Built into those rates were operating costs so that they could pay employees, maintain equipment, etc. and profit margins for the utilities so that they provide a modest return to investors.” Money paid by customers cannot be used for investments such as building new plants, transmission and distribution lines. The investors pay for the investments. If the ratepayers pay for investments, they become investors.
“As alluded to earlier, large industrial customers pushed for deregulation for simple economic reasons – they wanted cheaper power. Although their rates, as bulk consumers, were already less than residential customers (in most cases), they felt that competition would spur the construction of competitive power plants and drive prices down.”
As oliverarmy points out elsewhere, it’s a lot cheaper to provide huge amounts of energy to a few big customers than to provide the same amount of power to many small customers. In a free market and under a regulated market as existed before the energy crunches of the 1970s, electricity prices reflected the actual costs of providing electricity and what the big customers paid for electricity reflected the low costs incurred by the electricity companies in providing it. However, in the 1970s, when energy prices rose, the politicians realized they could get some votes by pointing out that some big business in Long Beach buying 500 mwh a month was paying less per kwh than John Q. was paying for the 500 kwh a month he used to air condition his double wide 7 miles outside of Barstow. So the rate structure was changed so that small customers, the poor, etc. got a break. Of course, someone had to pay for what amounted to subsidies for the small customers and this meant that rates for big customers went up. The big customers were subsidizing the small customers. This created the situation where deregulation became attractive to big customers. They didn’t need to believe that “competition would spur the construction of competitive power plants and drive prices down” to expect that deregulation would save them money. If deregulation means that they won’t have to subsidize small customers (you and me) any more, they will save money.
Even after the energy crunch of the 1970s, and especially after the Churchill Falls fiasco, how could any electrical utility or regulator be so stupid as to not account for inflation or unexpected price fluctuations?
Somebody send this link to Gray Davis:
http://www.gov.nf.ca/releases/1996/exec/1119n06.htm
Note that I disagree with the premise underlying the speech (that it was anyone’s fault other than the incredibly stupid government of Newfoundland), but the facts are pretty solid.
I want to put some clarificatin on several of these points.
- There is a price cap on the spot price the California Independent System Operator (CAISO) will pay for energy. However, this only applies to in-state generation, Out of state purchases (called Out of market, OOM) can be purchased for any price. PG&E, SCE, and SDG&E are required to sell all of their generation to California, they are not shipping their power out of the state.
But, the independent power producers (not the utilities) in state are possibly doing something called megawatt laundering. A plant in Long Beach for example may sign a contract to sell their power to someone in Arizona, maybe even their own subsidiary. Now to the CAISO that looks like power outside the state and in order to get it back into California they will probably have to pay higher then the cap. The irony is the power doesn’t really go from Long Beach to Arizona and back to California, it just supplies the California grid directly.
Also, if Arizona, Washington, Oregon or whomever may be willing to pay more for electricity then California so the power producers in state may choose to sell there. ANd California tends to import energy, but if other places are paying more there may not be much energy available for import from other states.
The final point, is not true. You may be thinking of SDG&E where customers threatened not to pay their bills. But it is doubtful that was significant.
(My apologies in advance to Anthracite for any errors)
Whew, what a mess!
And the current rolling blackouts will have a negative effect on our slowing economy.
What went wrong:
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The imbalance between generation supply and burgeoning demand should have been noticed since 1995 but was not. California regulators (I’m including the Power Exchange [PX] and ISO geeks with the commissions here) probably knew but blithely assumed that out of state power would be both cheap and available on-demand.
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As noted above, the three California utilities were forced to sell off their non-nuclear generation without including long term fixed rate purchase contracts. Other states have done this by setting contract terms as long as 7-10 years at which time they expect (hope) new generation plants will be on-line.
California did this because the feared the “market power” of the local utilities would lead to oligopolistic price setting in which a few sellers set prices not illegally by collusion but by jointly reacting to each others moves. Of course, instead of the three California utilities, there are just a handful of generators who can easily (and legally) act in this way. But with the fact of a shortage of energy in state (20%) the question is only how high prices may go.
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Again, as noted, the regulators forbade any long term contracts between the utilities and major energy marketers. This was done to allow non-utility marketers to enter the market and prosper. The 10 percent rate cut and initial low prices prevented any switching by most customers - thus customers were stuck with utility delivery companies that could obtain power only on the short-term market.
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The power exhange and ISO last resort purchases provide a powerful market incentive that isn’t available in other states entering deregulation. Outside California, it makes sense for generators to enter into long term contracts for most of their power sales (depending on their risk profile).
In California, and nearby, it makes sense to look for the last minute PX and ISO for fat profits. The fact that a number of Northwest aluminum plants have shut down operations so they can sell their purchased power into California returning enough profits for their shareholders - and pay their workers as if they were on-line (!) is the most stunning example of this phenomenon.
- Governor Davis and the regulators blew the entire year of 2000. The first clue should have been heeded in January when natural gas prices (including futures options) began to spike. When gas prices held steady in the spring, regulators should have suspected that a natural gas shortage would lead to higher costs to produce electricity in the summer. The hope of course was that California would have another mild summer.
But it didn’t and the price spikes stunned deregulated San Diego and started spilling serious red ink on PG&E and So Cal Edison. That was the time to issue emergency decrees but aside from name calling - little was done.
That was also the time to start some serious work on energy efficiency and conservation. Since little was done here either, consumers will have to respond to market forces to economize (which will prove more efficient and long lasting.)
Well now there’s quick a pickle. PG&E and Edison are basically bust. The state is purchasing their customers’ power. The generators are revving up their legal teams. New generators are looking to locate out of state or build in state only if they can run at very high prices. Dubya is happy that the Democrats will get the lion’s share of the blame.
And everyone else is wondering and hoping that it won’t happen here…
This is strange. In California, my friend has Green Mountain Energy. His usual $50/month became $280/month. I don’t see how this can be cause GM is like in the MidWest…
Green Mountain has to buy its power from the Power Exchange just like nearly everyone else in California. Green Mountain also doesn’t control power transmission or distribution, just generation.