California Electricity

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California Electricity

• Opportunity turned into Risk
• Risk turned into Challenge
• Challenge turned into Crisis
• Crisis turned into Blight

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Source California Energy Commission
http//www.energy.ca.gov/html/energysources.html
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California Electricity

• Opportunity turned into Risk
• Risk turned into Challenge
• Challenge turned into Crisis
• Crisis turned into Blight

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Electricity Restructuring

• Assembly Bill 1890, September 1996
• Created wholesale markets
• PX, CA-ISO
• Isolated Consumer from producer of electricity
• Retail price control
• Transition charge to pay for stranded assets
• Increased utility risk bearing
• Encouraged divesture of generating assets
• Discouraged long term wholesale electricity
  contracts

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Operational Capacity Californias Three Utilities
All Coal, Some Nuclear Out of State Source
California Energy Commission
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Operational Capacity Californias Three Investor
Owned Utilities
Some Utility Owned Out of State Source
California Energy Commission
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California Electricity

• Opportunity turned into Risk
• Risk turned into Challenge
• Challenge turned into Crisis
• Crisis turned into Blight

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California Electricity Use (Average MW)
Source California Energy Commission
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Problem Was Not Because Californians Are Energy
Hogs
California Relative to US
Item
California
All US
Monthly Average Residential Consumption of
Electricity (Kwhr)
37 Below National Average
548
866
Retail Price (cents per Kwhr)
10.71
8.16
9th Highest
17 Below National Average
Average Monthly Residential Bill
59
71
Source Energy Information Administration 1999
Data
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Basic Market Forces

• Demand for Electricity Increased a Bit More than
  Expected
• Healthy California Economy
• Growth of Electricity-intensive Products
• Decline in the Retail Price of Electricity
• Supply of Electricity Did Not Increase
• Until Recently No New Generating Plants on Line
• But Many in pipeline
• Slow Regulatory Approval Process
• Supplies from Pacific Northwest and Southwest
  Decreased
• Costs of Electricity Generation Increased
• Prices of Natural Gas increased
• Prices of NOx Prices skyrocketed under RECLAIM
  project

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San Diego Gas Electric
Southern California Edison
Pacific Gas Electric
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California Electricity

• Opportunity turned into Risk
• Risk turned into Challenge
• Challenge turned into Crisis
• Crisis turned into Blight

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Day-ahead Prices in the PX
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Limitations on Market Adjustment Processes

• Normally, when demand increases faster than
  supply, prices rise. Price rises increase supply
  and decrease demand, thereby limiting further
  price increases.
• This process cannot occur here
• Supply cannot adjust upward once generators reach
  capacity. Capacity cannot increase quickly,
  especially with siting regulations.
• Demand does not adjust normally
• Retail price control insulates retail prices from
  wholesale prices
• No time-of-use pricing which differentiates
  between high price times and low price times
• Net result is high wholesale prices and shortages
• Rolling blackouts are direct result of shortages

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Source California Energy Commissionwww.energy.c
a.gov/electricity/wepr/
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Price of Electricity
Demand Functions
Supply Function
Quantity of Electricity
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Price of Electricity
Demand Functions
Supply Function
Quantity of Electricity
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Exercise of Market Power By Generators

• Individual generators have much market power
• They can hold back electricity supplies and cause
  prices to increase disproportionately
• No demand response
• Supply response of rivals very limited when
  rivals are at capacity
• Market power would have decreased if much
  electricity were sold on long term contracts
• But this was precluded by AB 1890

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Price of Electricity
Demand Functions
Supply Function
Quantity of Electricity
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Average Daily Generating Capacity Offline
Source California Energy Commission http//www.e
nergy.ca.gov/electricity/1999-2001_monthly_off_lin
e.html
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Source California Energy Commissionwww.energy.c
a.gov/electricity/wepr/
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Other Crisis Impacts

• Rolling Blackouts
• PGE Bankruptcy
• Edison Electric Near Bankruptcy
• State Budgetary Surplus Eliminated

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Retail vs Wholesale Electricity Prices (Estimates)
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Class Discussion Possibility Did Californias
Retail Price Control Protect Consumers?

• People of California paying entire wholesale cost
• Utilities Virtually Bankrupt They are not paying
  this cost
• State Surplus is Being Spent (For a while, over
  50 Million per day)
• State revenue bond sale would not avoid, but
  would simply delay payments.
• Failure to Raise Rates Simply Hides Costs
• Higher retail prices provides incentives to
  reduce demand
• Higher retail prices can increase supply
• Utilities collect more revenues and pay suppliers
• QFs could be fully paid and all can come back on
  line
• Demand decreases and supply increases beneficial
  to consumers
• Reduce wholesale price
• Avoid rolling blackouts (shortages)

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California Electricity

• Opportunity turned into Risk
• Risk turned into Challenge
• Challenge turned into Crisis
• Crisis turned into Blight

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Bond Payments

• 13 Billion Bonds Proposed
• 15 Year Payments
• 4 to 5 Interest
• Annual Payment for Next 15 years
  1.2 Billion Per Year

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/MWhr
Expected Price Range with 3 - 5 Gas
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Time (months)
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State Actions to Watch

• Buy transmission assets from utilities ?
• State Power Authority ?
• Acquire generating assets by eminent domain ?
• Elimination of Direct Access ?

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Primary Lessons

• Dont interpret as deregulation doesnt work
• Electricity system restructuring that isolates
  the supply side of the market from the demand
  side can lead to disaster
• System structuring that does not allow
  appropriate risk sharing can lead to disaster
• Fundamental restructuring will invariably lead to
  errors
• Legislature and the governor must monitor system
  and be prepared to take timely actions
• Failure to take timely decisive actions can lead
  to disaster

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Some Solutions
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Energy Demand Reduction Measures

• Retail Price Increases
• Time-of-Use Metering
• Legislation to require companies to reduce use
• Incentives to replace inefficient refrigerators
  and other appliances
• Subsidies on compact fluorescent lights
• Public Energy Efficiency Investment
• LEDs in Traffic Lights
• Other Energy efficiency initiatives

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Reductions In Use, 2001 Vs 2000
Source California Energy Commission
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Real Time Pricing

• Current system provides no incentive to move
  electricity loads from peak time to off peak time
• Time of Use Pricing, particularly real time
  pricing will provide that incentive
• California Legislature is providing for time of
  use pricing for large commercial users
• How effective will this be in reducing peak
  demands?
• Experience by other utilities, e.g. Puget Sound
  Public Utility District
• Experience in other countries, e.g. France

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Two Part Real Time Pricing
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FERC Actions

• Bid Price Caps Initially Set During Stage 1, 2,
  or 3 Emergency Based on Index of Natural Gas
  Prices
• Requirements to Bid
• Market Clearing Price (MCP) Set by Highest
  Accepted Bid
• Cost-Based Payments at Higher than MCP
• Last FERC Order
• Keeps Bid Caps during Alerts
• Adds Price Cap for all other times at 85 of MCP
• Extends Controls to entire region, based
  primarily on California conditions
• Settlement Hearings for past wholesale prices
• Fair and Reasonable Standard

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Problem Solving For Californias Electricity
System
DOES IT STILL FUNCTION?
YES
NO
DID YOU SAY IN PUBLIC YOU COULD FIX IT?
DONT CHANGE IT
YES
YOU IDIOT !
NO
DO THE POLLS LOOK BAD?
HAS THE PRESS CAUGHT ON?
YES
YES
YOU POOR BASTARD!
CAN YOU BLAME EVERYONE ELSE?
NO
NO
NO
PRETEND THERE IS NO PROBLEM
HIDE IT
YES
THEN, THERE IS NO PROBLEM.