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Power: Get It While It Lasts

by Alex Berenson
New York Times - August 6, 2000

(Associated Press) The Pacific Stock Exchange in San Francisco, during a 1998 power blackout. For as long as anyone can remember, reliable, cheap electricity has been taken for granted in the United States.

Not anymore, at least not in California.

Four years ago, the nation's most populous state -- and the world's seventh-largest economy -- decided to deregulate its electric industry. New power generators would compete for retail customers with established utilities, and businesses and consumers could choose their power suppliers. The competition would lower everyone's prices.

At least that was the theory. Things have not worked out so well in practice. This summer, power bills have doubled in San Diego, rolling blackouts have hit San Francisco, and the state has repeatedly cut off some big customers to protect the rest of its power grid. The power supply is near collapse.

"What we have in San Diego is an unnatural disaster, a man-made storm unleashed by the state and federal governments," said Michael Shames, executive director of the Utility Consumers Action Network, a 42,000-member group in San Diego. "We're hearing panicked calls from customers saying, 'I can pay my electric bill, or I can pay my rent in full.' "

Nearly everyone agrees that deregulation shoulders a significant amount of blame for the crisis. The reason is that with deregulation looming in the mid-1990's, the state's utility companies were afraid to build new plants, while independent power producers only began planning plant construction two years ago, when the state's voters confirmed their support for deregulation.

Now, with demand rising unexpectedly fast, the state is critically short of power. And for at least the next two years, the soonest any significant capacity can be added, there is no easy solution.

"The squeaking gets tighter in 2001," said Daniel Nix, deputy director for energy information at the California Energy Commission, a state agency that licenses new power plants and estimates energy demand. If next summer is even slightly hotter than normal, "there is a good chance we would have inadequate resources," he said.

Blaming deregulation for the current crisis, however, leaves the more important long-term questions unanswered. Can deregulation solve the problems it has created, or should it be repealed? And does California's experience presage other crises as deregulation moves forward nationwide?

Independent power producers and electricity traders, whose future depends on deregulation, argue that California is an anomaly. They say the state faces an exceptionally tight power supply situation as a result of fast economic growth throughout the West and the state's traditional reluctance to build new plants. Moreover, they say, power companies are moving quickly to build plants throughout California and in neighboring states, and the crisis will subside within a couple of years.

"A deregulated world is the right market for electricity," said Ron Walter, senior vice president at Calpine, an independent power producer in San Jose that is building three plants.

All told, the state's energy commission has been asked to approve construction of 14 power plants. Combined with four already under construction, that would add more than 11,000 megawatts of power, 20 percent of the state's total peak demand. This would significantly improve the current situation.

Nationally, the response has been similar, said Jeffrey K. Skilling, president of Enron, the Houston company that is the world's leading trader of electricity and natural gas. Enron reports that power companies have announced plans to add nearly 240,000 megawatts in new North American generating capacity, increasing supply by more than one-quarter.

"Within two or three years, the problem will be fixed," Mr. Skilling said, provided that the market is allowed to operate freely.

But regulators and some other utilities are less sanguine. Electricity is a unique commodity, they say. First, power consumption varies widely, with summer peak demand 20 percent or more higher than average. So meeting peak loads requires the heavy expense of building many "peakers," plants that run only a few hours each year, when demand is highest.

Second, there is no substitute for electricity. It undergirds modern life, and while demand can be marginally reduced by briefly closing factories, turning off air conditioning and elevators in office buildings, even those slight reductions cause significant disruption.

"When oranges go up, when they double or triple or quadruple, I eat apples, when electricity goes up, I can't avoid using it," said Loretta Lynch, president of the California Public Utilities Commission.

Finally, electricity is also "supply inelastic." When all the plants in a region are running at full steam, there is simply no way to get more power.

Those factors mean that as power demand approaches peak supply in a deregulated market, generators can charge 10 or 100 times the normal price for electricity and know that they will find takers. With the possibility of windfall profits every time there is a hot summer, the power producers have little incentive to build enough plants to have a large reserve.

In the long run, said Eric Hirst, an industry consultant who supports deregulation, smaller reserves would result in lower prices, because unnecessary plants would not be built. Meanwhile, overall reliability for most customers will not be affected, because companies like Enron will seek out customers willing to cut demand for the few hours a year when supply is inadequate.

In the past, "big brother spread the cost of extra capacity among all customers," Dr. Hirst said. "We paid for that."

That explanation does not carry much water in California these days, said State Senator Steve Peace of San Diego, who helped write the state's deregulation legislation, but is now calling for some controls on prices. It ignores the huge price spikes that come if demand runs too close to supply, the power to set prices held by a small number of generators, and the importance of a reliable supply of electricity for everyday life.

And Mr. Peace notes that, while power companies and economists talk of competition leading to lower bills, consumers want the stable prices and reliability they have had for 50 years under regulation.

"This whole market on a national level suffers from an excess of philosophical engagement and a deficiency of practical management," he said. "The market can either prove that it's disciplined enough and stable enough to address its problem. Or inevitably, whether it's the right thing to do or the wrong thing to do, the political system will cut them off at the pass."'

Alex Berenson
Power: Get It While It Lasts
New York Times August 6, 2000

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