Electricity in California
How did things go so wrong?
Robert J. Michaels
Professor of Economics
California State University, Fullerton
Orange County Business Council
Jan. 11, 2001
The good [but expensive] old days
1960s -- production costs and rates falling1970s -- energy crises, environmentalism,
and Jerry Brown1980s -- passing through uneconomic plant
and contract costs1990s -- California rates 150% of national
average 1993: PUC staff issues the “Yellow Book,” blames regulation for problems
The promise of a new system
1970s: cost-cutting transactions by utilities And deferral of in-state construction
1980s: Independent power arises, wants freedom to trade Small, fuel-efficient, clean gas-fired plants 1992 federal legislation and transmission rights Large customers want rights Utilities claim “stranded costs” as obstacle
Changing Nature of Industry Cost Characteristics
$/MW
1930
1950
1970
19801990
MW50 200 400 600 800 1,000
Source: Williams Company and TR Casten, “Whither Electric Generation? A Different View”Energy Daily, September 7, 2000.
1999 California Power Sources
Coal 19.8 % 1990 SW imports 12.0%Hydroelectric 23.5 % 1999 “ “ 8.5%Gas 31.0 %
Nuclear 16.2 % 1990 NW imports 12.6%
Biomass 2.0 % 1999 “ “ 9.5%
Geothermal 4.9 %
Solar 0.4 % 1990 Ca non-utility 20.2%
Wind 1.5 % 1999 “ “ 34.7%
April 20, 1994: The Blue Book
Proposes comprehensive “direct access”
Utilities to open lines to user transactions
Phase-in to recover stranded costsSCE proposes compulsory “Poolco” Two years of conflicts and lobbying
September 1996 -- A.B. 1890
Freezes retail rates, 10% cut for small usersUtilities required to use short-term PX
All power sells day-ahead at highest bid Utilities must divest some (not all) powerplants
Stranded costs recovered as difference between rates and PX prices, 2002 deadline
ISO to operate system, real-time markets No precedents for PX and ISO markets Switch from state to federal (FERC) regulation
Markets begin --1998 to May 2000
California energy prices fluctuate predictably Move with short-term prices elsewhere in west Allegations of market power Prices in $30 - $80 / MW range at most times
Rules make entry of new sellers hard PX sells 80% of power in state Municipal utilities largely untouched by changes
SDG&E freeze ends mid-1999 Required to pass through PX prices afterwards
2000 -- the endless summer
Short-term prices rise all over the westCal utilities’ energy costs above frozen rates
FERC cuts allowable ISO and PX prices Duration of losses threatens insolvency
Non-Cal utilities buy only small amounts of power in short-term markets
Cal utilities can only buy short-term, can’t hedge It’s what they wanted in 1996
Why, and why now?
Summer weather, NW water situationRising fuel and emission permit costsCalif demand far higher than expectedCalif in-state supply falling shortWest-wide market equalizes pricesDid producers act monopolistically?
2001 -- Critical Times
Utilities at limits of ability to borrow Up to $ 1 million / hour in new debt What might bankruptcy mean?
FERC will not force producer refunds Blames California for own situation Has overriding interest in region, not state Found no evidence of monopolization Low likelihood of winning them in court
Utility solvency requires large rate hikes
The State-of-the-State Speech
Proposals for state takeovers only conceal risks and losses
Proposals to keep power in-state probably illegal
Political uncertainty discourages new plants
No acknowledgement of hard choices that must be made immediately