What’s Watt

Nothing about electricity deregulation in California is simple, starting with the name. After all, how “deregulated” is an industry if companies have to beg state officials for permission to raise prices?

Certainly the policy’s many advocates did not anticipate the current mess and its expensive ironies--namely, that investor-owned utilities, which pushed for deregulation just a few years ago, are now threatening bankruptcy because of it.

Or that the Public Utilities Commission, which ushered deregulation in, now complains that the system is “extraordinarily complex.”

Or that state and federal authorities are investigating power producers for jacking up wholesale prices, when the whole purpose of deregulation was to expose electricity trading to market forces.

Puzzled? Here, a primer on what’s watt in California’s chaotic electricity marketplace.

What was the big idea?

When the Legislature voted unanimously in 1996 to deregulate the electricity market, the goals were to lower utility rates, offer consumers a choice of electricity providers, promote wider use of renewable energy sources, unburden the giant commercial utilities and spur construction of cleaner fossil-fuel plants.

How was all that supposed to happen?

In a word, competition.

Previously, utilities both generated and delivered power. And because they had a monopoly in their service areas, the PUC and the Federal Energy Regulatory Commission set the rates that companies charged.

But California electric rates were among the highest in the nation, and free-market proponents argued that prices would drop if electricity providers had to compete for customers.

As a practical matter, entering the electricity distribution business would be tough: Utilities already control more than 40,000 miles of high-power transmission lines across the state.

So planners opened up the electricity-generating market, encouraging commercial utilities to sell non-nuclear power plants in California to other companies. Now utilities would buy power from producers presumably vying to be their suppliers.

What went wrong?

Conceived in the depths of an economic recession and just before the Internet boom, deregulation was based on the assumption that electricity demand would grow gradually.

Instead, it raced ahead as much as three times more quickly than predicted, straining the supply. In fact, although California’s per capita energy use is the third-lowest in the nation, California also generates less power per resident than any other state.

Out-of-state plants make up the deficit, but electricity supplies became so tight last year that the Bay Area got hit with a blackout and state authorities declared emergency shortages on 22 days--including the first ever Stage 3 emergency, which could have resulted in rationing.

Other reasons cited for the electricity crunch are the state’s older, less efficient power plants (55% are more than 30 years old); citizens’ unwillingness to tolerate new power plants close to their homes; slackening of electricity conservation efforts; an overtaxed transmission grid; increased power demand in Western states exporting electricity to California; and, yes, inadequate state regulation of wholesalers.

Why didn’t competition keep prices down?

Proponents say deregulation has been badly implemented. Critics say the policy could not possibly work, especially amid chronic electricity shortages.

Competition definitely occurs. But instead of wholesalers competing to supply the commercial utilities, as envisioned, utilities have been forced to compete for increasingly scarce power.

Spot wholesale electricity prices at peak summer demand rose from $49.56 a megawatt-hour in 1999 to $522.55 in 2000. The average wholesale electricity price has risen tenfold.

How does that affect my electric bill?

Depends on your utility company.

Under deregulation, the state’s investor-owned utilities agreed to freeze consumer rates until 2002 or until they paid off certain debts.

San Diego Gas & Electric retired its debts early and became the nation’s first utility to offer customers free market rates in 1999. At first they were low. But last summer, rates tripled--sparking outrage. Gov. Gray Davis in September signed emergency legislation limiting the utility’s rates to 6.5 cents per kilowatt-hour, down from 21.4 cents.

But Pacific Gas & Electric and Southern California Edison, not yet eligible to raise rates, had to absorb the extremely high prices they paid for power. Those companies, which serve 24 million people, say that since May they have spent $11 billion more buying energy than they can charge customers.

What now?

State authorities last week granted those two utilities a 9% increase in residential rates--adding about $5 per month to an average electric bill--and up to a 15% hike for commercial users. The companies say that still leaves them short.

Meanwhile, regulators have made it easier for investor-owned utilities to buy power on long-term contracts, insulating them somewhat from spot market pressures.

And on Monday, the governor is expected to announce other measures to ease the crisis, including a possible state-backed utility bailout.

Not every Californian is affected by utility woes, right?

Right. Publicly owned utilities--like those in Los Angeles, Pasadena, Burbank and Glendale--declined to participate in deregulation and held on to their power plants. So they’re much less at the mercy of wholesalers. Indeed, the Los Angeles Department of Water and Power--the nation’s largest municipal utility and the third-largest utility in the state--made $84 million in July and August, more than $50 million above projections, selling excess power to other utilities.

What’s a megawatt-hour, anyway?

A watt, named for inventor James Watt, is a measure of a small amount of power. One horsepower is equivalent to about 750 watts. A megawatt is 1 million watts. A megawatt-hour is 1 million watts generated or used for the period of one hour. A 40-watt lightbulb on for five hours uses 200 watt-hours or 0.0002 megawatt-hours of electricity. On a peak day in 1999, California used 50,743 megawatt-hours of electricity, or 50,743,000,000 watt-hours.

Sources:

California Energy Commission, California Public Utilities Commission, Federal Energy Regulatory Commission, U.S. Department of Energy, Edison Electric Institute, American Public Power Assn., Standard & Poor’s, Los Angeles Times