Transcript The California energy crisis

The California energy crisis
• Introduction (Wolak March ‘01)
– Wholesale: averaged $33 MWH in 1999, $116
MWH in 2000, $310MWH Jan 2001.
– Natural gas $3-$4 mm btu in late 1990s
– $10 nationally & $56.54 S Cal Dec 2000
– April 6,2001 PG&E, bankrupt with debts of $9
billion.
– Deregulated market
Investigate cause
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Describe old regulated structure
Initial regulated structure
Evolution of the crisis and underlying causes
Mitigation plans
Lessons
Old system
• Deregulation began in 1995.
• Before this, C-O-S regulation of vertically
integrated utilities
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Generation, transmission, distribution, retail.
Equivalent of public ownership
Based on idea of natural monopoly
Regulation to set “just and reasonable” rates
Public Utility Commission, Federal Energy
Regulatory Commission (FERC)
Problems with Old
• Technical, economic, with treatment of
depreciation
• Very costly
• No incentive to reduce costs, innovate,
increase efficiency, guaranteed return,
promotes cost-padding, unwise investment
– Green energy, cost overruns in nuclear
Goals of deregulation
• Competition in generation
– No natural monopoly here
– Increases efficiency, lowers prices, makes better
use of existing facilities, gives better signals to
generators re new investment
• Competition in retail
– Consumer choice, innovative packaging of
energy products, lower prices, less waste.
Deregulation program
• Generation separated, power plants
auctioned
• Utilities allowed to recover $28 bill re.
nuclear and green
• Retail tariffs reduced by 10% and frozen till
31.3.02 or until debt paid
• PG&E and SCE never paid off. San Diego
G&E did.
Institutions
• Cal PX receives price and quantity offers
from generators and bids from buyers
• No long-term arrangements allowed. All
day-of or day-ahead.
• Cal-Independent System Operator: nonprofit, role to avoid blackouts, make sure
the system works, buy at any price
Experience
• 1998 & 1999 excess capacity, wholesale prices
declined, retail fixed, profit of utilities increased,
some debt paid off. SDG&E paid off all debt,
retail no longer fixed
• 2000 demand increased (20%?)
• Result as discussed. Wholesale price increased,
retail fixed
– PG&E bankrupt, SDG&E customers faced bills
up to 20 times higher 2.7 cents to 52 cents kWh
What happened?
• Supply and demand or market power?
• Supply restricted by the deregulation
program
– No new power plants, new entrants lumbered
with past costs of incumbents, for fairness
– Still uncertainty re future regulations/prices
restricts new entrants
Market power
• Also evidence of market power
– Unverifiable forced outages
– Generators purchasing gas at high prices
through affiliates
• Under mediation whether wholesale prices
were “just and reasonable”
Proposals
• Price caps, soft and hard
• Voluntary/compulsory forward contracts
• Re-regulation of prices
Subsequently
• Natural gas prices in July ‘01 $3/mmbtu
NYME, about $4/mmbtu Cal.
– Temperate weather, increased conservation,
increased gas production, slowing economy.
• FERC June 19, power emergency in
California sets price caps in all western
states. Cost of production in marginal plant,
was $90MWH.
2001
• Some suppliers would not sell, increasing
emergency
• FERC and generators in mediation. FERC
claimed $9 bill. Generators offered $1 bill.
My view
• Bad legislation
• Markets create incentives
– True scarcity, high prices give signals to
consumers to reduce consumption and
producers to increase production (long run)
– Here consumers were insulated and producers
would not invest for uncertainty.
– Result, more scarcity.
My view
• Here the incentives the system created were
to increase profit by using the faults in the
system, like income tax in many countries.
• Example: price cap avoidance by selling
into other markets, reducing supply to
increase price.
Lessons
• Markets often work better than planned
economies because the players innovate in
ways that cannot be anticipated by the
planners.
• Deregulation should be designed to capture
the benefits of this innovation rather than to
give an incentive to avoid the rules.