Simple Steps May Ease Self-Inflicted Electricity Woes

Let’s be clear, the fact that the state botched the job of deregulation to begin with is one reason California’s electricity market is such a mess.

But failure to build a single new power plant in the state even as California’s economy expanded its use of electricity is the basic cause of today’s shortages and soaring prices in San Diego, Orange County and other areas.

Still, some simple steps can be taken by regulators, legislators and Gov. Gray Davis to provide immediate relief.

The state’s major utilities should be free to buy power wherever they can get it. They should not have to buy exclusively from the Power Exchange, the Pasadena-based power pool that was set up by the 1998 deregulation to achieve auction-based prices for roughly 80% of the state’s electricity.

Approval should be expedited for adding smaller generating plants that supply power at times of peak demand. That could alleviate a tight supply-demand situation over the next year or two while larger plants are built.

Long term, the state needs to speed up the approval process for building new electricity plants. The state also should force utilities to invest in the still-regulated system of power transmission lines, which now has weaknesses in the San Diego and San Francisco areas.

Perhaps the most glaring fact about California’s electricity problem is how few companies have stepped up to supply power to this enormous market, the nation’s biggest. Only 15 or so suppliers, including federal agencies, the state’s own utilities, municipal companies and private generating firms, supply power to California’s system.

By contrast, Pennsylvania, which has an electricity market less than 12% the size of California’s, has 130 separate suppliers of electricity today, reports John Quain, chairman of that state’s Public Utility Commission.

It’s no coincidence that Pennsylvania has seen monthly electric bills drop 3% on average since deregulation. “It’s worked out terrifically,” Quain says.

What did California do wrong? It allowed the state’s major utilities--Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric--to recover 100% of their unrecovered or “stranded” costs for nuclear and hydroelectric plants and for past power purchase schemes mandated by the California legislature to encourage alternative sources of energy.

Then California’s legislators told the utilities to sell their conventional power plants to private generating companies, all of which would sell their power to a central Power Exchange.

The California scheme was flawed, at once over-regulated and yet commercially clueless in not foreseeing trouble from a single power pool fed by only a handful of suppliers.

How did Pennsylvania do it? It allowed the state’s utilities to recover no more than 67% of their stranded costs for nuclear plants--reasoning that company shareholders should accept some of the risk of their investments. And rather than set up a central power exchange, the state allowed its utilities and newcomers to the state’s electric system to compete for business.

Competition, after all, is what deregulation is supposed to encourage. And competition is not happening in California.

It should be noted that the summer is relatively cool in the East this year and extraordinarily hot throughout the West. All the Western states are suffering electricity problems. That’s another reason for California’s trouble.

Normally, 28% of California’s electricity comes from U.S. and Canadian government systems and from utilities in Oregon and Washington, Nevada and Arizona. But this year, because of lower hydroelectric supplies and higher demand from booming economies in those other states, power for California is in shorter supply and more expensive when the state can get it. Now there are accusations that some suppliers to California have taken advantage of their market leverage to extract premium prices for power.

There’s nothing illegal in angling for a better price or in using futures markets and other trading techniques, as some generators may have done. If any stepped over the line to illegal collusion, federal and other investigations will determine the facts.

But who gave the generators the market leverage to exploit us? The California regulators, legislators and utilities did. Told to sell their generating plants in 1998, the utilities sold dozens of plants in package deals of two and three to single buyers. They received premium prices from buyers such as AES Corp., Duke Energy, Southern Co. Reliant Energy, Dynegy and NRG. The premiums were paid for the market leverage that multiple plants afforded the buyers.

Nobody in the utilities reckoned that they were handing market leverage to potential commercial adversaries. Nobody in the Legislature or the regulatory staffs reckoned that the central Power Exchange could be held up by market leverage.

As outsiders often say about Californians: “Maybe it’s the sunshine makes them slow.”