Mutiny on the Meter?

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Mutiny on the Meter?

By William Booth Washington Post Staff Writer Sunday , December 3, 2000 ; Page H01

LOS ANGELES –– The power system in California, the first and largest state to deregulate its electricity market, is in meltdown.

Supply and demand are out of whack. Prices have soared, and in the past few weeks the manager of the state's power system has declared four alerts because power reserves have dipped below 5 percent, the result of maintenance-related plant shutdowns and a cold snap. Home, industrial and state consumers--some of whom have seen their electricity bills double or triple--have been warned or ordered to reduce their consumption.

The system is in such disarray that one of the co-authors of the 1996 legislation that deregulated the state's electricity market is now pressing ahead with a plan that would take $2 billion from California's $10 billion forecast surplus next year and devote the money entirely to energy needs. The state itself is considering taking over large sectors of the electricity market, including the building of new generating plants. And a citizens group is readying a ballot initiative for 2002 that would turn over the California electricity market to residents.

The problem is so acute that Gov. Gray Davis (D) canceled a trip to Asia to produce a new energy plan, which he planned to do by this week. The governor is considering calling a special session of the state legislature devoted to the energy crisis.

"We've got a first-class mess on our hands," said Daniel Kirshner, a board member of the California Independent System Operator (ISO), the not-for-profit entity that oversees the power grid.

Kirshner said "revolutionary conditions" have been created by the current crisis, suggesting that just as the Paris mob revolted against the crown for want of bread, California's electorate might also become unruly for want of electrons.

In November, the Federal Energy Regulatory Commission (FERC) declared that the electricity marketplace in California was "dysfunctional" and that wholesale energy prices passed along to consumers were "unjust and unreasonable."

"Never has this commission had to address such a dramatic market meltdown as occurred in California's electricity market this summer," said FERC Chairman James J. Hoecker. "Never have residential customers been exposed to economic risk and financial hardship as they were in San Diego."

In the San Diego area this summer, consumers saw their electric bills double and triple. Prices for a megawatt hour of electricity even now are often four times the price of just one year ago.

While most consumers around the state so far have been shielded from the shock of soaring bills because of temporary, regional rate caps, the bill almost inevitably will come due. Utility companies that have been forbidden to pass along higher rates to many consumers are claiming billions of dollars in uncompensated costs.

At a FERC meeting in November in San Diego, Gov. Davis sought to have the federal regulators approve broad changes in their oversight of the California energy market, and to approve billions of dollars in rebates to consumers he says were gouged by "merchant generators and market marauders." Davis said FERC's proposed solution to the energy crisis "does nothing to lower prices to California consumers."

"Quite to the contrary," Davis said, "it is designed to bring our economy and our consumers to their knees. Understand this: If that is your solution, I predict you will spark a taxpayer revolt."

It was not supposed to be like this.

In the 1990s, California residential and industrial customers routinely were paying above the national average for their electricity. Back then, California had a power system dominated by three large utility companies, which built generating plants and then sold their power to customers in different regions, with rates set by state controllers and the industry. It was, essentially, a regulated monopoly, just as operates in many states.

Under the direction of former California governor Pete Wilson (R) and his appointees, the California Public Utilities Commission recommended the deregulation of the electric power industries, and legislation was passed to do just that in 1996 with eventual support by many Democrats, environmentalists, labor and consumer groups.

The guiding principle was that a deregulated market and the competition it instilled would encourage the construction of cleaner power plants and bring new providers of electricity into the state, which should lower rates.

For a time after deregulation began in 1998, the system more or less worked.

Under the deregulation plan, the utilities were directed to sell off their fossil-fuel power plants, which they did. Most were bought by out-of-state utility companies. The plan also created the ISO and the Power Exchange.

The job of the not-for-profit ISO is to manage the power grid, the transmission system composed of all those high-voltage power lines that move electricity around, into and out of the state--a sort of electricity traffic control center for California's "electron highway."

Each day, the ISO gathers information from the utilities about what the next day's power needs across the state will be (higher in summer, lower in winter), and it directs the Power Exchange to buy the electricity from the power plants.

Generators of electricity--both in the state and outside, from hydroelectric dams in British Columbia or coal plants in Arizona--then make bids to sell their megawatts of power. But in the California system, many of the utilities have been underestimating how much power they need the next day, forcing the Power Exchange to buy electricity hour by hour as it is needed. And prices are set, according to the rules, by the highest bidder.

The problem is that electricity bought at the last minute can be very expensive, and electricity is a unique product. It can't be stored, and it can't be replaced by something else.

And so at present, the free market is producing high prices. How and why this is happening is a subject of great debate (and lawsuits and state and federal investigations). But the answers will shape how the state and the federal regulators attempt to fix the problem.

Some blame a simple and temporary imbalance between supply and demand, which will, the optimists believe, eventually sort itself out and bring electricity prices in California down.

There is some support for this optimism. "Demand in California is simply outstripping supply," said Patrick Dorinson, a spokesman for the ISO. "Demand is just up a lot," he added. The economy is booming, and the state, after losing residents, is now growing by leaps and bounds.

ISO board member Kirshner, an activist with the Environmental Defense Fund in Oakland, considers himself cautiously optimistic for the long haul. He views the current crisis as "an awfully painful bump on the road," something akin to the "shock capitalism" experienced by Eastern Europe coming out of decades of state-run socialism.

"We've got a bunch of power plants being built, but just not quite in time," he said, adding that he thinks there will be an energy surplus and falling prices by summer of 2002. In the meantime, Kirshner sees a role for some temporary price caps and other methods to control wildly fluctuating costs but does not envision "de-deregulation."

Gov. Davis and others, however, charge that the imbalance is not simply market-driven but the work of energy producers and marketers who are playing the system to their advantage.

"There is no question in anyone's mind in California that the market here and the rules it operates by have been manipulated to generate obscene profits," Davis told the federal regulators.

A FERC investigation did find very high prices, but it did not find evidence of market abuse.

The California Public Utilities Commission also is conducting an investigation and has found that prices are staying high even during low usage. Commissioners are split on the reasons. Some say it is because of short supply of electricity. But Commissioner Carl Wood thinks that energy providers may be withholding supply to keep prices high and watching one another like bridge players for signs of when one provider or another might be selling too much or too little power.

"We have been naive about the creativity of the marketers," Wood said. "There are a lot of really smart people playing this game and trying to make money, and they have figured out how to work the system to their advantage."

http://www.washingtonpost.com/ac2/wp-dyn/A11465-2000Dec1?language=printer

-- Martin Thompson (mthom1927@aol.com), December 03, 2000

Answers

Are there any CA readers that would tell
us what your monthly bill is currently as
compared to last year?

-- spider (spider0@usa.net), December 03, 2000.

Hey spider

Doesn't look like you are getting any responses from down south. Here in the Seattle area my bill has gone up $100.00 from last year. Thats gas and electricty combined in the same bill, but it was the gas that caused most of it.

-- Martin Thompson (mthom1927@aol.com), December 03, 2000.


Thanks Martin, after checking the archives
I found a $400 bill in San Diego and a $600
bill in Utah. I'm kinda out of the loop being
off the grid.

-- spider (spider0@usa.net), December 04, 2000.

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