Electric Deregulation, California Style
March 10, 1998 – published in St. Paul Pioneer Press
The $210 billion national power market is undergoing radical changes, in no small part due to the efforts of California. Two years ago California decided to allow customers to choose their electricity supplier. The decision spawned a national movement. Within a year almost a dozen states had adopted a similar strategy. Two dozen others have considered doing so. Impatient members of Congress want to speed up the process. They’ve introduced a bill to bypass state legislatures and forcefeed electric deregulation to all Americans.
It is remarkable how quickly the nation’s policymakers have embraced the California experiment. Equally remarkable is how little those policymakers seem to know about that experiment. So as a public service, let me shed a little light on that subject.
In the early 1990s, the nation was emerging from a long recession. A surplus of electricity existed. The power market was a buyer’s paradise. California’s big businesses wanted to take advantage of this historic opportunity. They wanted the ability to shop for the best price rather than having to buy high priced electricity from their local utilities. The California Manufacturers Association(CMA) led the charge.
According to Gregg Goldin of the LA Weekly, Republican Governor, Pete Wilson,was amenable to industry’s demands. The utilities were not. If business were free to shop for low cost electricity, the utilities argued, they would buy from out-of-state suppliers. The ensuing reduction in utility revenues would drive stock prices lower. The net worth of shareholders would suffer.
The giant utilities and the giant corporations developed a mutually beneficial solution. Industry would gain permission to buy from anyone. Utilities would gain permission to write down the cost of their high-priced nuclear power plants to the point where they were competitive with new natural gas fired power plants. Those losses would be covered entirely by ratepayers. The net worth of shareholders would not suffer.
For environmentalists, who had been arguing for decades that nuclear power was unsafe and uneconomical, it was a bittersweet victory. For while utilities finally have conceded that their nuclear plants cannot survive in a freer market, they refuse to shut them down. Instead, they have simply marked them down to the point where they are competitive with other power plants. As California consumer advocate Harvey Rosenfield put it, “We are paying to make nuclear power viable for the electric industry.”
For the general public, the plan guarantees a l0 percent rate reduction for four years. For the plan’s advocates, that is its most visible and leading selling point. Unmentioned by them is the fact that without deregulation, prices would have dropped even faster, by15 percent.
The $26 billion bailout has created a cash windfall for utilities, who are using it to buy up other electricity companies or power plants Last August, for example, PG&E bought l8 power plants from New England Electric Systems for $1.59 billion.
California’s old electric system doesn’t die until April 1st, yet already we can anticipate the immediate consequences. The overwhelming majority of the 35 million Californians will stay with their current utility suppliers, in large part out of inertia, to some degree because after taking the considerable time to evaluate the offers of dozens of brokers they are discovering trivial if any savings. As of late December, of Southern California Edison’s 4.5 million customers, 7500 had decided to seek another supplier.
Large consumers will band together to get a lower price from producers. They already have: CMA, MacDonalds, the University of Californing. Smaller consumers like neighborhood businesses and residences will be amassed into buying clubs by a variety of agencies, including municipal governments and credit unions. This is starting to occur as well.
The most interesting feature of the California system is that it has legally separated the generation and transmission of electricity. No longer will one company own the wires and the power plants. The electricity network is being transformed into a gigantic electricity exchange, with hundreds of thousands of buyers and sellers setting prices in an almost continuous fashion.
The level of complexity ivolved in this is daunting. Indeed, California had to delay by three months the birth date of its new electricity system because its computers were not up to the challenge.
The California experiment has already generated a backlash. A grassroots effort has begun to alter some of the experiment’s key elements through a ballot initiative. But even if this is successful, it is likely that the experiment itself will proceed.
Conclusion: We have a great deal to learn, both good and bad, from the California experiment. We would do well to do our learning before our leaping.