California Scheming
   by Lou Hampel

In last week's impromptu debate between Michael Gardner and bc, the subject of CA's energy woes arose.
There were a few misconceptions that I'd like to clear up.

First, I work in the public power industry, so my point of view will be different from someone who works for PG&E,
an energy marketer, or one of the many regulatory bodies that oversee the "deregulated" CA market.

Second, deregulation only works in industries where supply exceeds demand.
Let's look at some of the latest deregulation projects undertaken in the US:

·       Telephones.  If this industry were fully deregulated it would function perfectly.  Why?  There is tons of excess capacity, since the telephone network is basically a bunch of computers hooked up with fiber optics.  What has happened to the cost of electronics over the last two decades?  Capacity is basically free.  Of course, since the cross-subsidies that keep residence rates low go away with competition, the regulators have not allowed true competition to occur, just the bastardized hodgepodge that we have now.  See electricity.

·       Natural Gas.  There used to be more gas supply than was needed.  So, the price went down.  So far, so good.  But, when the price went down it some rigs, those with high production costs, stopped producing.  In the last two years, demand has risen so that now there is a lack of supply.  And, no new infrastructure (pipelines) has been constructed for years.  And, almost every new power plant is gas fired.  Guess what, prices have gone through the roof.  And, the number of producing rigs has exploded.

·       Electricity.  The energy "deregulation" bill passed the Democratically controlled legislature in California unanimously.  The idiot governor, Pete Wilson, signed it with glee.  The Public Utilities Commission implemented the bill and immediately got several things wrong:

o       The large investor-owned utilities (IOUs) had to immediately divest their power plants (except for nuclear and hydro).  These were snapped up by out of state companies for multiples of book value.  This was the first clue that something was amiss.

o       Control of transmission assets was turned over to an "independent" operator that was, essentially, free to charge whatever they wanted and make up whatever rules the wanted.

o       Retail rates were fixed while energy costs were market-based.  As long as supply exceeded demand things worked out.

o       And finally, the fatal error.  IOUs were not allowed to hedge energy costs.  They were permitted to buy only from the Power Exchange (PX).  The rationale for this was that power purchased off of the PX would be, ipso facto, reasonably priced.  Long-term contracts would be subject to after-the-fact scrutiny for reasonability.  A year ago long-term power could be had for $50-60/MWh.  The IOUs (and, later the state) were paying $300-500/MWh.

Deregulation began in early 1998.  Energy producers began to probe for weaknesses early on.  In the summer of 1999, spot prices went to $1000/MWh briefly, then returned to normal.  Last summer, when customer of San Diego Gas and Electric began, for the first time, to see pseudo market-based prices, the producers turned the screws.  Not that they were doing anything illegal - they simply played by the market rules.  Anyone with power to sell made a ton of money.  There were no rotating outages in 2000, but there was a physical problem in SF that caused a local outage.

So, why did we have rotating outages this last winter, when demand is the lowest?  There were several reasons.
First, PG&E and SCE had stopped paying power suppliers.  The suppliers did what every supplier does - they stopped selling.  You see, there are variable costs associated with power production.  And this winter the cost of natural gas
(by far the largest non-nuclear or hydro fuel) had gone through the roof.  Historical prices for natural gas were
$2-3/MMBTU.  Last winter they ranged from $10-50.  So, why burn fuel to produce power that you won't get paid for?  Doesn't take a genius to figure that out.

To get to Nikki's point that "people who get their electricity from publicly owned companies having no problems
whatsoever", not so fast.  There are plenty of problems with many publicly owned companies.  Many got their power
from the PX.  They were forced to purchase contracts at the height of power prices.  Sure, they have power, but at
prices five times what they can recover in rates.  Sacramento burned through their reserves in a year and was forced
to raise rates.  Nikki must live in LA.  Customers of LA Water & Power are not subject to outages, and they are
generating lots of power and selling it.  And, incurring Gov. Davis' wrath.

Could Davis have solved the problem in 20 minutes, as he stupidly said last year, by raising rates?  Maybe.
The only thing that is keeping CA afloat right now is conservation, and the best way to get people to conserve is
to give 'em a reason to.  The threat of blackouts has caused some conservation.  When the impact of the recently
enacted rate increases hit this month more conservation will undoubtedly ensue.

And now, in early June, prices have returned to "normal".  Why?  Well, Davis will tell you that he jawboned them down.
He'll tell you that the marketers were caught in a "pincer" between CA and DC.  Horseshit.  I think that a big part of it is
that the state is just about done signing long-term deals and, now that Davis has been fleeced, prices are returning to
their long run levels.  And, as an added bonus, the customers of the IOUs will get to pay above market rates for years
to come.  Just what everyone was afraid of when they did not permit the IOUs to get into long-term contracts.
Nice work, Gray.  This is what happens when the state water agency negotiates with electrical sharks.

Let me put in two cents on the subject of Gray Davis.  I've never voted for a Republican in my entire life.
And I won't vote for whichever asshole they nominate to face Davis.  But I will not vote for Davis, either, and don't give me
any of that Nader shit.  I have been privy to some of what Davis has tried in order to bully people into doing what he wants,
as opposed to what is the right thing to do.  The man is vindictive and petty, attributes that I have in the past associated primarily with Republicans.  I have every reason to believe that he acts the same way with issues other than energy issues.
He didn't start the energy problem, but he exacerbated it with his inaction.  If we are over the worst of it, it is despite him,
not because of him.

Privacy Policy
. .