“California’s Electricity Options and Challenges, Report to Governor Gray Davis,” joint report of the Electricity Oversight Board and the Public Utilities Commission, undated.
by Michael Kahn, and Loretta Lynch
The report explains California’s electric power system before and after deregulation, and examines the origin of the power shortages during the summer of 2000. Despite being couched in dry bureaucratese, the report is a damning indictment of deregulation and its aftermath. For example, the report states “Generators created these deviations in order to be paid a higher price.” Below are selected excerpts. Text in brackets are editorial comments.–Paul Gipe
Philosophical Shift
“But in the early 1990s rising retail prices and a philosophical shift away from cost-of-service regulation and toward competition led to calls for reform.”
“Before the 1980s. . . Utilities were held accountable for reliability by the PUC and the public . . .”
“The 1980s. . . By this time, nuclear plants were built and running, and the cost of producing that power increased utility rates.”
“The Early 1990s. . . The PUC’s and past administrations commitment to integrated resource planning waned. . . by the mid-90s, policy shift away from cost-of-service regulation and toward reliance on pure market forces.”
“. . . in 1996 AB 1890 [the deregulation statute] . . . [transferred] pricing of California’s electricity generation to FERC by creating the California Power Exchange . . . [and] Set rates in a way that accelerated payoffs of the capital cost of utility power plants by permitting utilities to ‘freeze’ artificially high rates and use revenues exceeding cost to pay down capital investment.”
The New Wholesale Market
“. . . When supply purchased in the PX [Power Exchange] market is less than the State’s demand for electricity, the ISO [Independent System Operator] makes up the difference by purchasing electricity to balance the load and meet specified ‘reserve’ levels. . .
“. . . The use of price caps recognizes the potential for sellers’ market power or customers’ inelastic demand to drive up prices.”
“. . . California moved first and furthest in divesting the utilities of their power plants. it created an exchange–the PX–to run wholesale power auctions and shape wholesale power products, like futures. . . The separation of these functions also complicates the operation of California’s wholesale electricity market.”
“Other states do not expose ordinary customers to market imperfections to the same degree.”
“. . . The California ISO has no responsibility to California consumers. Indeed, it seeks to control the transmission system in several states as a regional operation.”
Summer 2000 Blackouts
“On June 14, PG&E was required to intentionally interrupt nearly 100,000 customers for the first time in its history. This remarkable event was not related to insufficient supply . . . Rather, it was related to grid instability in the Bay area. . . instability was created by generator decisions to generate energy without notifying the ISO [.] Generators created these deviations in order to be paid a higher price within the ISO Control Area . . . Voltage instability related to gaming on the previous days, import limitations, power plants out, and record temperatures set the state for disaster. . .”
Price Increases
“Wholesale prices were seven times higher than on equally hot days in 1999.”
“Peak volume was actually less on expensive days in 2000 than 1999 peaks.”
“The price increase is not explainable by increased costs, weather, volumes or even the existence of a much higher wholesale price cap, in 2000. . .”
“. . . Many energy companies, including some participants in the California market, made very high profits during the second quarter. . . plant operators are reporting extraordinary profits for the summer. One company . . . reported a 176% profit increase for the quarter ending June 30.”
Flawed Free-Market Philosophy and Gaming
“. . . Because the purchase is not discretionary, market theories of willing sellers and buyers with alternatives do not apply.”
“The ISO’s ‘real-time’ market, creates a sellers’ market.
“Sellers know unfulfilled demand in the real-time market must be met, no matter what the price.”
“Sellers can work to use this demand to drive all prices higher.”
” . . . buyers have no alternatives. All demand must be met.”
“. . . The ISO is a captive–as the buyer of last resort, it cannot refuse to buy at premium prices. . .”
“. . . power-plant operators were able to bid high selling prices with the near certainty of selling power on those days. The owners’ bids did not correspond to their variable costs, but were based on the high and inelastic demand. . .”
“. . . During some periods, it is in the generator’s interest to withhold some power because in so doing it can drive prices up . . . ‘if firms of noticeable size are not exercising market power, they are doing so out of the goodness of their heart, and against the interests of their shareholders.'”
Information Hoarding
“. . . The EOB and the CPUC have been unable to obtain information about generator and marketer bidding behavior, partly because the ISO and PX have refused to provide that information to state agencies. . .”
Population Explosion
” . . . population . . . is increasing by 600,000 people annually. . .”
Running Existing Plants Too Hard
“Deregulation of generation may have also motivated owners to run California plants longer and harder, leading to subsequent reductions in reliability.”
“. . . [after deregulation maintenance] downtimes need not be scheduled when they would be least disruptive to the system. Maintenances was scheduled for June that could have been done before summer, or at least coordinated with other plants’ maintenance to keep a comfortable reserve margin.”
“Some maintenance took much longer than expected . . .”
Gutting Efficiency & Renewables Contributing Factor
“The state has reduced the role of energy efficiency and construction of renewable energy resources in recent years.”
“Investment in generation slowed when regulators put the risk for building generation on investors in 1995.”
“In 1995, FERC and CPUC action suspended a process where utilities would have entered into contracts for clean, renewable power.”
“State regulators in the 1990s abandoned integrated Resource Planning–in favor of letting the market decide where and when to build new power plants and where and when to take energy efficiency measures. . .”
“The changing regulatory environment through the 1990s caused risk-bearing investors to wait until clear rules were established before applying to build new power plants.”
“In the AB 1890 negotiations, proponents of renewable energy supplies and energy efficiency won legislated funding for energy efficiency [and] renewable resources. However, pursuing a competitive market structure, policy makers made funding these program a low priority. . . The current funding for these programs is almost 70% less than it was in the early 1980s. . .”
The Loss of Public Control
“. . . Scheduling coordinators could evolve into large, unregulated oligopolies that have the opportunity to set the price of power and power products. . .”
“. . . Lagging investments in power plants result partly from regulatory uncertainty and a reliance on competitive markets to assume a comprehensive planning function that the state had previously performed on behalf of consumers and the state’s economy. As power plants aged, California’s economy grew and policy-makers retreated from aggressive efforts to promote energy efficiency and investments in renewable power resources. . .”
“. . . California’s current electricity industry structure place autonomous, self-governing entities in roles formerly performed by government or utilities–planning, building, maintaining, and operating generation and transmission, and setting prices. This decoupling of accountability from control, and the dispersion of responsibility to market participants and away from government and utilities means that the events of Summer 2000 could be a permanent feature of the California economy.”
“. . . In addition, as private entities, the ISO and PX are not fully subject to State laws regarding the conduct of their business. These boards conduct some of their business privately–in executive session–and then assert that they are not required to report the results of these deliberations. . . federal regulators pursue national interests, not necessarily those of Californians. For example, the FERC doe snot incorporate California’s strong environmental values in its decision-making.”
Obligation to Serve
“. . . the current structure in California breaks the link between power plant owners and ultimate consumers . . . neither the ISO nor any State agency has the authority to direct a generator to continue producing power in an emergency. For a century . . . regulators and utilities . . . were directly accountable to the people. Today . . . decisions [are] entirely in the hands of power plant owners, whose interests conflict with those of consumers.
No Quick Fix
“. . . our current crisis cannot be resolved overnight or merely by passing new statutes. . .”
“. . . Policymakers should consider an aggressive program of energy efficiency programs and renewable energy development to ease the shortages . . .”
