California Short-Circuits Itself What happened to deregulated electricity?

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California Short-Circuits ItselfWhat happened
to deregulated electricity?

• Robert J. Michaels
• Professor of Economics
• California State University, Fullerton
• 
  CCEE
• 
  Orange Coast College
• 
  Nov. 3, 2000

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Why care in general ?

• 300 billion total U.S. retail sales in year
• The last great monopoly moves to market
• Critical to infrastructure
• Major environmental impacts
• System is everywhere strained
• Richardson -- the U.S. has a third-world
  transmission system

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Why change?

• Reform in gas, telecom, rails, airlines
  successfully cuts prices, improves service
• California electricity prices high
• 1998 Calif average 9 cents/KWh
• Indiana 5.5 cents
• Arizona 7.4
• Nevada 5.8
• New York 10.7

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Experiments and Outcomes

• California reforms --
• High prices, scarce power
• Few customers leave utilities, political upheaval
• Pennsylvania --
• Falling prices, new plants being built
• 500,000 households leave utilities in 1 year
• High-cost states taking lead

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State Restructuring Activity, May 2000
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California Customer Switches

• 1.7 of residential users
• Mostly to subsidized green power
• 2.4 of small commercial
• 5.4 of large commercial
• 13.2 of industrial, but 32 of load

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The Elements of Delivered Power

• Generation
• Reliability services / grid operation
• High-voltage transmission
• Low-voltage distribution
• Customer services

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Electricitys Economically Relevant Attributes I

• Travels at speed of light
• Cannot be stored -- supply and demand must match
  every second
• Matching them requires network operation
• Mismatch anywhere will endanger entire grid
• Controller must have instant access to reserves
• Electricity cannot be routed -- it flows like
  water, not like messages or gas

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Electricitys Economically Relevant Attributes II

• Large, singly-managed grid necessary, with
  control of numerous powerplants
• Non-storeability -- generation sufficient to meet
  peak must be available
• But it might be in another region
• Cost causation -- users with high peaks impose
  greater costs on system
• Cost is capital plus operating (fuel, etc.)
• Residential - industrial rate differences

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The good old days pre-1970s

• Single utility with territorial monopoly owns all
  plants and controls all operations
• Largely self-sufficient
• Can be corporate or collective municipal, co-op
• State utility commissions set rates to recover
  costs of serving different customer types
• Final users or retail customers
• Production costs falling through seventies
• Inefficiencies not visible when prices fall