California's power crisis - every cloud has a silver lining

‘Broken’ and ‘dysfunctional’ are two of many unflattering words used to describe the state of California’s deregulated electricity system. Wholesale power caps have been cut from $1000/MW to $250/MW. San Diego residents are urged to ignore their current bill and only pay as much as they paid for energy last year. A recent report is critical of the current system and, while not calling for re-regulation outright, concludes that restructuring was a bad idea.

With rolling blackouts and soaring prices, California has become a model for what not to do in deregulation. However, deregulation is not the sole cause of the crisis. Perhaps the biggest problem is the supply shortage. For the past three years, with the current backlog in generating plant construction, utilities have felt the power crunch in the summer months and have lost millions of dollars in the volatile wholesale market.

San Diego Gas & Electric, the first utility in the state to recover its stranded costs, passed on the price crunch to its customers and the public outcry has been sharp. In a quick fix attempt, price caps were lowered to $250/MW. This move, however, is denounced by economists as it creates an artificial demand price. Supply and demand in a free market can-not hope to balance if the market is manipulated.

USE OF GREEN POWER INCREASES

Out of all that has gone wrong in California’s pioneering effort to deregulate, what has gone right is oft overlooked. The success of green power was an unexpected benefit to restructuring, and the accomplishments are related in large part to deregulation. Green power includes such renewable energy tech-nologies as wind power, solar, geothermal, bio-mass and small hydropower (less than 30 MW).

Since California’s market opened at the end of March 1998, there has been a fairly slow and steady rate of customer switching – about 2.2% of eligible customers. What is significant, however, is that nearly all of them switched to green power suppliers. At its peak, more than 200 energy service providers had registered with the California Public Utilities Commission (PUC) to participate in the direct access market. The majority did not have green power offerings. In February 1999, only six energy service providers remained active, and all marketed green power. In June 2000 there were 23 green power marketers registered with the California PUC providing service to residential and commercial customers.

The Los Angeles Department of Water and Power (LADWP) has the most successful green pricing programme in the country. Launched in May last year, the programme had 31 000 customers by April 2000. It purchases four to five million kWh of renewable energy each month through the Automated Power Exchange (APX), and 1.2 MW from a landfill-gas project.

The Sacramento Municipal Utility District (SMUD) also has a successful green pricing programme supporting 6 100 customers (April 2000). The utility has also installed more than 450 residential and 30 commercial PV systems through its PV Pioneers I programme, launched in 1993. Participants pay a small fee to have a grid-connected PV system installed on their roof. The electricity produced is fed back into the grid. PV Pioneers II was launched late in 1998 and is expected to result in 400 system installations a year. Customers may purchase a PV system under a net-metering agreement, with SMUD ‘buying down’ more than half the system cost.

RE-REGULATION NOT THE ANSWER

While it is clear that California’s electricity system is experiencing severe problems, it is not so clear that re-regulation is the answer. Restructuring has for the most part been a positive experience in Pennsylvania. From the initial opening of the market at the beginning of 1999 to July this year, almost 530 000 customers have switched suppliers. Interestingly, though, Pennsylvania has not had the success in green power that California has. Less than 100 000 of the customers that switched chose a green power supplier.

In reviewing various successes and failures in deregulated states, it seems there may be a great need for federal legislation regarding restructuring. Every state that has passed restructuring legislation has done so differently. Some who are contemplating competition have put plans on hold pending the eventual resolution in the California market. New Mexico, which had approved a start date of 2001, has now delayed until 2002.

In addition state by state planning can have severe consequences from a regional standpoint. A coalition of 23 states has petitioned Congress to make them exempt from deregulation. The movement, the Low-Cost Electricity States Initiative (LCESI) has actually been in existence for over a year, but is using the problems in California to gain momentum. The LCESI has highlighted the complexities involved in fifty different approaches to deregulation. How is power to be transported over distances if states that remain regulated deny access to transmission lines?

The problems in California are largely a result of mistakes in the restructuring legislation, combined with a burgeoning demand that has not been met. No new power plants had been built in recent years, due to the uncertainty that surrounded restructuring. Instead of a call for re-regulation, California’s example should be used to help states develop better restructuring plans and, ultimately, serve as a catalyst for federal legislation to help guide the process.

Every new market experiences glitches; electricity is no different. Ultimately deregulation has benefited consumers, and to return to the monopoly system would create more harm than good. It would also effectively end the fledgling green power market by taking away the competitive forum that allowed its development in the first place.

For more information contact Rolf Gatlin at Frost & Sullivan, 7550 IH 10 West, Suite 910, San Antonio, TX 78229, Tel: +1 210.348.1017, Fax: +1 210.348.1003,
E-mail: rgatlin@frost.com, http://www.frost.com