The State Needs to Act Now to Prevent Blackouts Later
The California electricity marketplace has now reached full-blown crisis proportion. Californians face the threat of rationing electricity, and the situation continues to deteriorate.
The root of the problem lies in the complex 1996 deregulation law governing California’s electric market and its implementation by state regulators.
But the issue now is really quite simple. Because deregulation forced Southern California Edison to sell many of its power plants, it must buy electricity from others--typically generators and trading firms owned by out-of-state companies. But that is only half of the story.
The “deregulation” law also set new regulations to freeze rates that Edison could charge its customers--about 10 cents per kilowatt hour, of which about four cents is needed for operating the wires and system that delivers electricity to customers’ homes. This combination of deregulation in the generation of electricity and continued regulation of retail rates has had serious consequences.
On the one hand, Edison is forced to pay out-of-control power costs, which the federal government has failed to restrain. On the other hand, we have frozen rates for customers, which state authorities have not lifted. As a result, Edison has been accumulating debt this month at the rate of about $1 million per hour--an under-collection in our procurement account that now totals more than $3 billion. Fortunately, Edison has not yet sold all of its utility power plants, and market revenues from those plants have reduced our outstanding debt for power to about $1.7 billion.
When consumers use power, banks finance those purchases through loans to utilities. Banks have made it clear they will not lend money for power purchases any longer without a clear indication that the money will be repaid. The only way Edison will have the ability to do so is through a commitment from the California Public Utilities Commission that Edison’s cost of buying power will be averaged over time into consumer rates. This is the only way to avoid the risk of rotating blackouts on our electric system and is required as a matter of law and equity.
Under California law, utilities make no profit on the function of procuring power for their customers. Instead, they earn only on investments in their physical plants. State regulatory bodies are required to put into rates a utility’s actual cost of serving customers. Each day of delay makes the level of debt required to maintain our system greater, and ultimately will result in greater costs to the consumer.
Some critics point to a rate freeze established under the 1996 deregulation law as reason for the inaction to date of California regulators. That rate freeze was to last only until utilities had recovered--through a surcharge to ratepayers--their “stranded costs,” which were costs incurred in building utility plants that were thought to be uneconomical under deregulation.
It has been painfully evident for at least the last half-year that utility generating plants and the cost invested in them are far from “stranded” or excessive; they are a bargain. These plants provide power at a fraction of the cost of power from other unregulated sources. There is no sound justification for the state to not lift the rate freeze now. Inaction is, in effect, a decision to allow utilities to fail and raises the likelihood of power rationing.
It is a mistake to imagine that weakening utilities is in consumers’ interest. Utilities shield California consumers from feeling the full force of a volatile wholesale market. In the absence of this protection, consumers would see more than the 300% to 400% price hikes that San Diegans saw this past summer. A stable rate structure is far preferable and necessary for the health and vigor of California’s economy.
On Thursday, state policymakers have an opportunity to begin to fix California’s badly broken power market by establishing a framework for stable rates for the future, thus preserving the health of the utilities that serve them and preventing the prospect of blackouts.
Without such leadership, Californians’ electric service will be in immediate jeopardy. California deserves action to end this crisis now and assure reliable electrical service. It’s time for leaders to act decisively and get back to the kind of electric service that the seventh-largest economy in the world requires--one that Californians have relied upon and Edison has been privileged to provide for more than 100 years.
