How To Make A Mess

If
you’ve followed the news at all the past several months you’ve
heard at least something about California’s energy woes.

The crisis, brought on by the
state’s 1996 law that restructured the state’s electric utility
industry, fascinates us like a horror movie. But it also offers
lessons for anyone concerned about reliable and affordable
electricity.

Finding those lessons requires
returning to the reasons for the disaster, which is made up of an
unlikely combination of bad policy, bad planning, and bad luck.

Here are the major causes of
California’s electricity supply and price problems.

No major power plants have
been built in California for 10 years. Making fun of California’s
environmentalism is one of America’s favorite sports, and in this
case it seems deserved. The state hoped to establish a thriving
alternative energy industry, but that dream never came true. Local
resistance to building new power plants and transmission lines
further increased California’s dependence on outside sources of
electricity.

Electricity supply did not
keep up with economic growth. California began the 1990s in an
economic slump, but the high-technology boom boosted a kind of
growth that used up the available electricity in the state and
much of the region. While California’s demand for electricity
increased by 3,000 megawatts in the past four years, it built only
500 megawatts of new capacity.

Hydroelectric plants faced low
water supplies. Hydropower helps bless the Pacific Northwest with
some of the lowest electric rates in the nation and provides a
reserve when California’s supplies get short. But hot and dry
weather led to unusually low levels of water to flow over the dams
and turn power turbines. Water runoff in the Northwest in the
first part of last year was at the lowest level in five years.

Utilities sold their power
plants. The restructuring rules encouraged the state’s three major
investor-owned utilities to sell their power plants. That might
not have been so bad except the plan also discouraged long-term
power purchases.

Restructuring discouraged
long-term power contracts. A part of the restructuring plan,
intended to increase competition, instead ended up deterring
utilities from signing long-term contracts for their wholesale
electricity. That meant that each day they had to go to the spot
market, where prices can soar to hundreds of times normal on very
hot or cold days when electricity use is highest.

Wholesale electricity markets
have grown more competitive. The utility industry is more
competitive than it used to be. Since 1992 when the federal
government deregulated the price of electricity that utilities
sell to each other in times of need, those transactions have
changed from polite agreements to highly competitive bidding and
dealing. Hundreds of companies have sprung up in the past few
years, just to buy and sell electricity. When those companies saw
California utilities start to go to the market every day, they
raised prices according to how desperately the state needed
electricity. You can call that immoral profiteering or you can
call it the American free enterprise system-in either case it’s
how the wholesale electricity market works these days.

Price caps were put on
consumer rates. A limit on rate increases for many of California’s
consumers pushed the major investor-owned utilities in the state
toward, or into, bankruptcy as they sold power for much less than
they paid for it. The state has recently moved to increase rates
for consumers-a hugely controversial move. On the one hand,
utilities claim consumers have no incentive to conserve
electricity unless they pay what it costs. On the other side,
consumers say they shouldn’t have to pay for the huge profits
being earned by the electricity brokers. One observation is that
the price caps kept a competitive electricity market from
developing in California because consumers had no incentive to try
to get better rates from other power suppliers.

A little over a year ago
Kentucky’s Special Task Force studying electricity restructuring
recommended watching to see how deregulation works in other states
rather than trying it in the Commonwealth. California’s experience
makes that look like a very good decision.

-Paul Wesslund