Don't Blame Markets for California's Energy Mess

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12/15 00:01

Don't Blame Markets for California's Energy Mess: David DeRosa

By David DeRosa

New Canaan, Connecticut, Dec. 15 (Bloomberg) -- Pundits are weighing in on the deregulation of electricity as the cause for California's energy predicament. The truth is that decades of market interference in California are to blame.

The electric utility industry consists of three segments -- generation, transmission and distribution. Generation is where power is created. Transmission refers to the movement of wholesale, high-voltage electricity through a power grid. Distribution is the slicing of high-voltage power into lower voltages and delivery to residential and commercial users.

The California Independent System Operator, a public agency, has responsibility for managing three quarters of the transmission system in that state. California's problems are with generation and transmission. What has exacerbated the situation is the phenomenal growth in power use by the state's computer-related industries.

For decades, the state has allowed citizens groups, environmentalists, state regulators and other self-appointed stakeholders in the power market to effectively prevent the construction of new generation plants. This is the root cause of the problem: California doesn't have enough generation capacity.

No major new power plant has been built in California in 10 years, and most of the existing generators are old and require lots of idle time for maintenance, planned or unplanned.

The Golden State now finds itself in the vulnerable position of having to buy electric power from neighboring states.

California buys a lot of power from Oregon and Washington. But hydroelectric power output in those states has been compromised by drought conditions. Moreover, demand for electricity in these states has risen because of colder-than- normal weather.

Price Controls Mean Shortages

To make things worse, the California ISO has a nasty practice of placing caps on the price it will pay for electricity. When market prices exceed the agency's cap, out-of-state utilities refuse to sell megawatts to California because they can get a higher price elsewhere.

Is that a big surprise? California can't set the price of electricity any more than it can control the wind and the tides. But it can effectively disconnect itself from the other parts of the Western states transmission grid by forcing price caps.

Yet Governor Gray Davis and Senator Diane Feinstein have taken the further counterproductive step of calling on federal regulators to cap the price of wholesale electricity in the Western region. In a joint statement, Davis and Feinstein claimed ``because of California's size, the state is ripe for electricity price gouging.''

Well, how about the other side of the coin? What have the California utilities done to preclude their being ``gouged'' by the so-called ``needle peaks'' in pricing? Why isn't it incumbent on them to make contractual agreements to mitigate the risk of such peaks?

Richardson Steps In

Enter U.S. Secretary of Energy Bill Richardson, who yesterday ordered the utilities in the Pacific Northwest to deliver power to California. Citing the Federal Power Act, he told the Bonneville Power Administration and the Western Area Power Administration ``to get as much power into California immediately today.''

Whether Richardson has the authority to issue such commands will doubtless end up being decided in the courtroom. The subtlety here is that Richardson may have the right to order Bonneville and Western Area around because they are indirectly under the control of the Department of Energy for some purposes. Yet that authority wouldn't extend to other power sellers.

Out-of-state utilities had previously refused to sell to California because of concerns about the financial solvency of the California ISO. They probably don't like price caps, either.

Richardson further said the Department of Energy would set the price for this electricity he mandated for California. Get this: Richardson said the price would ``ensure generators receive a fair return.''

The thing that makes electricity different than other commodities is that it can't be stored economically in mass quantities. As such, it is prone to big price swings when generation breaks down, transmission fails, or when demand soars. So there are going to be times when the price of electricity per megawatt hour goes from $30, say, to thousands of dollars.

But what Richardson undoubtedly meant is that the electricity that he commandeered would be priced, by him, at something less than the market price.

Fair return, Comrade Richardson of the People's Energy Department? How about this for fair: let the Oregon and Washington power generators sell their megawatts wherever they want and at the best price in the marketplace. To do otherwise would be to compromise the long-run best interests of the electricity market. If Davis, Richardson and Feinstein keep this up, the entire West Coast will wind up like California.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Energy%20News&s1=blk&tp=ad_topright_topfin&refer=topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOjmlnBWvRG9uJ3Qg

-- Cave Man (caves@are.us), December 15, 2000

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BANANA rule:

Build Absolutely Nothing Anywhere Near Anything

-- Cave Man (caves@are.us), December 15, 2000.


D.C. summit called over power woes

ENERGY: Federal and California officials will explore electricity-supply issues.

December 15, 2000

By DENA BUNIS and KATE BERRY The Orange County Register

U.S. Energy Secretary Bill Richardson called Thursday for a summit meeting of state and federal energy officials, utilities and power generators to find long-term solutions to California's flawed electricity market.

Separately, the California Public Utilities Commission said it may consider allowing the state's two largest electric utilities to pass along to consumers part of the more than $7.2 billion in higher wholesale costs this year.

In a letter to the chairman of Federal Energy Regulatory Commission, Richardson said the federal government will help "the parties on the ground in California ... work together to help find a solution.''

The summit, proposed for early next week in Washington, D.C., would address all aspects of the state's energy crisis. One proposal would require utilities to buy 80 percent of their power under long-term contracts, making them less dependent on the last-minute market, where prices have soared.

Today, FERC is expected to order its own changesto overhaul the state's wholesale electricity market. Electricity prices have skyrocketed as high as $1,500 a megawatt hour this winter, compared with $30 a megawatt hour a year ago. Among the causes are higher natural gas prices, power plants closed for repairs and a lack of electricity imports from neighboring states.

Gov. Gray Davis and Sen. Dianne Feinstein want FERC to adopt a regionwide wholesale price cap for Western states to bring stability to the market. That way, neighboring states would be under the same cap. California has had a cap in its market for last-minute power purchases, which caused many suppliers to seek higher prices in search of higher prices.

"We strongly urge a wholesale regional price cap,'' Feinstein, D-Calif., said. "Absent that, there is no way to prevent the incredible volatility from bankrupting California's three major investor-owned utilities and creating havoc for electricity customers up and down the state."

California verged on rolling blackouts Wednesday when a dozen power suppliers refused to sell electricity to Southern California Edison and Pacific Gas & Electric because of fears they wouldn't be paid. With no juice flowing to the state, Richardson used his authority under the Federal Powers Act to order generators back into the market.

"Emergency orders should be issued sparingly,'' Richardson said Thursday. "However I am deeply concerned about the reliability of California's grid. I urge suppliers to act in a responsible manner that will help keep the lights on.''

The CPUC said it will again consider proposals by Edison and PG&E to raise rates on consumers by between 10 percent and 22 percent. Those proposals - rejected by the CPUC just last week - could come before the commission at its Dec. 21 meeting. Rates on consumers are currently capped at 6.5 cents a kilowatt-hour, though the utilities paid an average of 49 cents a kilowatt-hour in the wholesale market Thursday.

The CPUC had suggested the utilities offset their losses with revenue from their own power plants, which have benefited from the higher prices.

Consumer advocates expressed outrage that rate increases are again under consideration. "It would be criminal if the only action Gov. Davis takes in response to this disaster is to raise rates," said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights.

http://www.ocregister.com/politics/energy01215cci.shtml

-- Cave Man (caves@are.us), December 15, 2000.


PG&E was the monopoly here in California, now the monopoly is Feinstein, Richardson and Davis - aka the guberment.

-- bardou (bardou@baloneyyyy.xcom), December 15, 2000.




-- (in@energy.news), December 15, 2000

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