California energy "deregulation"

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

LA TIMES, December 21, 2000 (op-ed)

Electricity Deregulation Was Doomed From Start

By PAUL RICHINS JR.

 With wildly optimistic promises of improved services, expanded products
and lower rates, electricity deregulation in California was signed into law
four years ago. Today, it is obvious that deregulation is not working as
envisioned.

 Concerns of rolling blackouts and the pleas from the California
Independent System Operator--which controls the state's power grid--to
conserve energy this holiday season are symptoms of fundamental flaws in
the structure of California's electric markets. Natural gas--used to fuel
many electricity power plants--that traded for $2 to $3 per million British
Thermal Units last year has nearly doubled this year, at times spiking as
high as $25 to $50. Electricity that sold for $15 to $50 per megawatt hour
is nearing $1,500 in today's energy markets.

 Contrary to the rhetoric that there is an orchestrated effort by power
plant owners to run up the price of electricity, there are no such villains
in this sad saga. The power plant developers should not be blamed for the
predicament, nor should the well-intentioned legislators.

 Without fully understanding the principles of economics and the
complexities of the electric system, the Legislature unknowingly designed a
noncompetitive market in which savvy businessmen would be selling their
wares. Rather than looking for a scapegoat, a more honest approach was
offered by Richard A. Bilas, a member of the Public Utilities Commission
and an outspoken advocate of deregulation. In a conversation with a
colleague, he lamented, "I hate to admit this, but I don't know what's gone
wrong. Where did we screw up?"

 The benefit of 20-20 hindsight, along with a basic understanding of the
electric system and economic principles, is instructional in explaining
what went wrong.

 * Electric generation competition is constrained by electric
transmission. Over the past decades, the electric transmission system was
designed and built by the monopoly utilities to move electricity from their
power plants to the users. An obvious but important fact of physics is that
the flow of electricity is constrained by the capacity of the existing
electric transmission system. These physical operating limits are, in
themselves, serious impediments to competition because the transmission
lines cannot carry unlimited amounts of electricity to market.
Supply-and-demand imbalances are particularly acute in
transmission-constrained areas. Therefore, plants that interconnect to the
existing electric transmission system at those strategic points will hold a
decided advantage in the market.

 * The electric generation industry has few competitors. For markets to be
competitive there must be many buyers, many sellers and few barriers to
enter the market. In the electric generation market there are many buyers
of electricity but few sellers and considerable barriers. To be a serious
player and provide some small component of competition, a corporation would
have to commit more than $1 billion in capital investment. The electric
generation industry is one of the most highly capital-intensive and most
specialized in the world. Consequently, few corporations are active in the
electric generation industry. Because there are significant barriers and
few corporations in the industry, prices can be artificially raised.

<ellipsis>

 Applying the principles of supply and demand to set the price of a
commodity such as electricity is fundamentally flawed. It is doubtful that
the market, regardless of the changes and fixes that are proposed, will
ever achieve acceptable competitive market prices. Others may disagree but
the debate is healthy and may lead to an eventual solution.

 - - -

 Paul Richins Jr., an Economist and Project Manager With the California
Energy Commission, Has Worked on Local and Statewide Energy Issues for the
Past 18 Years. the Opinions Expressed Here Are His Alone

for the whole thing, see
http://www.latimes.com/news/comment/20001221/t000121540.html

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine