Lessons from the California Crisis for the Restructuring of Russias UES

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Lessons from the California Crisis for the
Restructuring of Russias UES

• GET Conference at New Economics School
• Moscow, Russia
• October 3-5, 2002
• Geoffrey Rothwell
• Department of Economics
• Stanford University
• rothwell_at_stanford.edu

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Abstract

• This presentation reviews the Californian energy
  crisis following deregulation of electricity
  generation and the restructuring of the electric
  utility industry. Three causes are discussed (1)
  the lack of markets for long-term supply
  contracts, (2) the lack of demand response, and
  (3) conflicting jurisdictions in policing abuses
  of market power. Three lessons for UES
  restructuring are presented (1) care must be
  taken to design markets that remunerate fixed
  costs, (2) consumers must be given clear market
  signals, and (3) a regulatory structure must be
  established to police market power and regulate
  natural monopoly segments of the industry.

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Lessons from the California Crisis for the
Restructuring of Russias UES

• Based on Chapter 6, The California Power
  Sector, in
• Rothwell and Gomez
• Electricity Economics Regulation and
  Deregulation,
• being published by the IEEE Press through John
  Wiley,
• originally written for the Russian Federal Energy
  Commission,
• through the World Bank with funding from Spain

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Why did California Deregulate?High Prices!
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History of Deregulation in California

• 1992 US Energy Policy Act created Exempt
  Wholesale Generators and non-discriminatory
  transmission access
• 1996 US Federal Energy Regulatory Commission
  (FERC) issues rules on uniform access to
  transmission and stranded cost recovery
• 1996 California legislature passes bill
  mandating competition among Investor Owned
  Utilities (Utilities)
• 1997 California Public Utilities Commission
  (CPUC) issues implementation rules, such as
  universal Retail Choice
• 1998 Californias spot market for electricity
  opens
• 2000 California energy crisis begins with high
  wholesale prices and rolling blackouts
• 2001 Energy crisis ends with California state
  intervention

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Divestiture of Generating Assets

• (1) 18,000 MW of fossil-fuel plants sold by
  Utilities to merchant producers
• (2) Utilities given opportunity to recover
  difference between book value and market value of
  generating assets, (stranded assets) over 4
  years through the Competitive Transition Charge
  (CTC)
• (3) Consumers required to pay CTC for up to 4
  years
• (4) Consumers prices frozen at 90 of 1996 rates
  until CTC is paid
• ? CTC ends in San Diego in Spring 2000 rates
  double

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Transfer of Control of Transmission Assets

• (1) Utilities retained ownership of transmission
  assets and responsibility for building new assets
• (2) Independent System Operator (ISO) assumed
  control of transmission network on day-to-day
  basis
• (3) Transmission charges subject to regulation
  under Performance-Based Ratemaking (PBR)
• ? Transmission assets might be sold under
  bankruptcy

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Distribution and Retail Choice

• (1) Utilities retained ownership of distribution
  assets with charges subject to PBR
• (2) Utilities continued to bill consumers
• (3) Consumers could choose their electricity
  provider under universal Retail Choice
• ? Retail Choice was terminated in October 2001

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Power Exchange (PX) Day-Ahead and Day-Of Markets

• (1) Utilities must buy and sell electricity
  through the PX
• (2) For each hour, suppliers (Utilities and
  Merchants) and demanders (Utilities and Energy
  Service Providers) bid price and quantities
• (3) PX determined Market-Clearing Price for each
  hour
• (4) PX announced Market-Clearing Quantities to
  the ISO
• (5) System works well from March 1998 to March
  2000
• ? PX was terminated January 31, 2001

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The California Market(representation of March
1998-March 2000)
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Natural Gas Prices in California(dollars per
1000 cubic feet, monthly averages)
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(No Transcript)
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Causes of the California Energy Crisis

• (1) Requirement that Utilities purchase
  electricity in the spot market without long-term
  contracts
• (2) Lack of demand response due to rate freeze
  because of payments for stranded assets
• (3) Conflicting jurisdictions in policing abuses
  of market power

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Abuse of Market Power?California Power
Failures Linked to Energy Companies New York
Times September 18, 2002 By John M. BroderLOS
ANGELES, Sept. 17. Widespread power failures
during California's energy crisis of 2000 and
2001 could have been avoided if five independent
energy companies had not withheld electricity
they were capable of producing, a study by state
regulators said today. This contributed to the
"unconscionable, unjust and unreasonable
electricity price spike that California
experienced during the energy crisis," the report
said. The California Public Utilities Commission
did not directly accuse the companies of
deliberately trying to drive prices up. Officials
said investigations were continuing into possible
price manipulation and collusion among the
companies.
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Abuse of Market Power?Judge Concludes Energy
Company Drove Up PricesNew York Times,
September 24, 2002By RICHARD A. OPPEL Jr.. with
LOWELL BERGMANWASHINGTON, Sept. 23. An
administrative law judge concluded today that the
El Paso Corporation illegally helped to drive up
prices for natural gas in California during the
state's power crisis in 2000 and 2001, the first
time any federal regulatory official has
determined there was widespread manipulation of
energy supplies. California officials and one of
the state's major utilities, which argued the
case in hearings at FERC, said they would seek to
recover nearly 4 billion in what they contended
were higher power and gas prices caused by El
Paso's actions. The ruling sent shares in El Paso
down 4.16, or 36 percent, to 7.51.
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Lessons for UES Restructuring

• (1) Care must be taken in designing markets so
  that the fixed costs of providing generating
  capacity are remunerated
• (2) Consumers must be given the opportunity to
  respond to changes in rates given their low
  short-run elasticities of demand
• (3) The regulatory structure must be able to (a)
  contain abuses of market power in generation
  (including abuses of monopoly power in natural
  gas and other input markets) and (b) regulate
  prices for transmission and distribution services