power in california

sickle_s.gif (30476 bytes) People’s Democracy

(Weekly Organ of the Communist Party of India (Marxist)

Vol. XXV

No. 07

February 18, 2001

Power Play in California

Prabir Purkayastha

The sunny state of California, home to
the digital revolution and the Silicon Valley, is in the throes of an unprecedented
electricity crisis. California is faced with rolling blackouts, bankrupt utilities and
rising electricity bills. The electricity rates for the consumers with the San Diego Gas
and Electric utility jumped by as much as 240 per cent in just one month this summer
before regulatory action forced a price cap. The other areas escaped as they are operating
with a fixed rate till 2001. The US Energy Secretary, Bill Richardson, said recently
“…. California’s electricity market has become dysfunctional.” Five
years into the new uncharted territory of unbundling, competition, free market in
electricity and deregulation, California’s electricity sector looks to be going



California’s attempts at
de-regulating the electricity sector was hailed as a model for others to follow –
both in the United States and in other parts of the World including India. The Electricity
Bill 2000 clearly has the California model in mind. Recently, Gajendra Haldea, the
architect of the Bill, expressed his earnest hope that after the current reforms, with the
introduction of competition and a “free market” in electricity, power would be
traded as easily as soap. Instead, he should listen to the words of the California
Governor, Gray Davis, who, in his January 8 State Address, said “My friends,
electricity is not an exotic commodity like pork bellies, to be traded in the chaotic
equivalent of a futures market; electricity is a basic necessity of life

What is the nature of the crisis that
engulfed California last summer and now this winter? Simply put, the power generators in
California held up supply during peak demand periods, leading to shortages of power. In
order to meet the demand, the utilities and the Independent System Operator (responsible
for maintaining the power system in California) then had to buy power on occasions at
prices 20 times that of last summer. Not only did the electricity prices rise
astronomically during peak demand periods, they “refused” to come down during
periods of low demand; even on Sundays, the prices last summer were seven times that of
1999. Obviously, those generating power made a killing as California’s purchasers
paid out an estimated $ 10.9 billion more last summer for their electricity than the
summer before
. The division of this amount between the utilities and consumers is the
current divide. The 9 per cent increase in the existing fixed rate regime of two utilities
– Pacific Gas and Electric and Southern California Edison, both threatened with
bankruptcy – and other measures voted by the California legislature have been opposed
by consumer groups.



Why did this situation come about this
year and not earlier? The genesis of this lies in the “restructuring” that
California instituted under the earlier Republican Governor Pat Wilson in 1996.
California’s Public Utilities Commission and Legislature put in a system designed to
separate electricity generation from transmission and distribution. This meant hiving off
the power plants from the three major utilities in California, leaving them with
transmission and distribution only. The arguments advanced were that once the generation
became independent of the utilities, the generators would compete amongst themselves and
bring down electricity prices. For enabling such competition, a Power Exchange — on the
pattern of a Stock Exchange – was created.

The Power Exchange was the spot market
for next day’s wholesale electricity supply. However, this leaves open the
possibility that there could be a shortage of supply vis-à-vis demand. In such a
scenario, the entity looking after the grid – the Independent System Operator (ISO)
— would enter the picture. ISO is responsible for ensuring that there is a balance
between supply and demand at each instant of time. It buys power in what is termed as the
“real time” power market to meet immediate demands and if need be, instructs
load shedding. It was originally envisaged that there would be adequate supplies available
and ISO would enter the power market only rarely. Instead, ISO, faced with large shortages
and imminent collapse of California’s grid, has been forced to buy very expensive
power repeatedly in the “real time” power market.



What the lawmakers failed to understand
is that if the spot market is starved of supplies creating an artificial scarcity,
“free market” could then drive the prices through the roof in the real time
power market, a phenomenon now called “gaming” the market. This is precisely
what happened last summer and is happening during winter as well. The private generators
have reaped windfall profits of 800 per cent to 900 per cent last summer. In one week
alone ending June 14, 2000, the purchasers of power in California spent $1.2 billion or
1/8th of their total cost of power for all of 1999. Governor Davis has called the power
generators “..pirates, marauders, gougers and greedy profiteers.”
California Public Utilities Commission and the Electricity Oversight Board have charged
the generators with stonewalling investigations and deliberately withholding information.
Six investigations are underway on charges of market rigging. There are now powerful calls
for reversing de-regulation and the formation of a California Power Authority to take over
the entire power sector in California, a threat recently held out by Governor Davis as

Denying charges of gaming, the power
generating companies have advanced two reasons for the rise in prices. According to them,
a burgeoning Californian economy led to a sharp rise in demand this summer. This created
temporary shortages driving up prices. They also argued that the rise in gas prices — the
fuel for most of the power plants in the state — further compounded the problem. A
committee set up by Governor Davis consisting of Michael Kahn, Chairman, of the
Electricity Oversight Board and Loretta Lynch, President of the California Public
Utilities Commission has exploded this myth. In their report, they showed ” .. the
highest loads for 2000 were consistently well below 1999 peak loads”. With respect to
gas price increase, the Kahn-Lynch report argues that even a doubling of gas prices cannot
explain why ” .. the wholesale prices for power in June 2000 have increased as much
as tenfold over the last year”.



Why did the markets fail in California?
While the ideologues of the free market will undoubtedly come up with some fancy footwork
to explain this failure, the real reasons go much deeper. Electricity, unlike any other
commodity, cannot be stored. The amount of electricity pumped into the system must be
consumed instantly – in factories, offices and homes. In such a scenario, creating an
artificial shortage is child’s play. Electricity has another attribute. If your
factory is running (or your computers) on electricity, it is difficult to stop consuming
it. Electricity demand is relatively inelastic; it does not fall if prices rise. All this
creates a situation ideal for rigging the market. Once a scarcity is created, competition
fails. Competition only works if there is a surplus of supply over demand.

Interestingly, there is a set of
utilities and consumers in California who have escaped the current crisis. These are about
30 publicly owned utilities — the municipal authorities of Sacramento, Los Angeles, etc.,
with 23 per cent of California’s total generating capacity — that chose not to go
under the de-regulatory hammer and maintained their integrated operations. Not only did
their subscribers escape any rate increase, these public utilities have even increased
their profits last year.

What lessons can we in India learn from
California’s example? The first and the most important one is that there can be no
free market in electricity when there are shortages. This talk of unbundling and
creating a free market for electricity is journey into a never-never land. Instead, we
need to strength the grid, integrate the power systems better and make the best use of our
installed capacities. Any other road, including the one charted by the Electricity Bill
2000, will only lead down a slippery path to disaster.

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