Calif Choice Is Mkt Rates Or Blackouts
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- As the lights went out in California Wednesday and Thursday, an unavoidable truth dawned on more than a few minds: market prices should be passed on to end-users.
"With the growing population and growing technology in the state, if we're not going to build any new power plants, obviously rising demand is going to raise the price. What do you expect?" Ted Schlater, manager of the Blazing Saddles bike rental shop, said in a "man on the street" radio interview Thursday in San Francisco.
Other businesses have been tallying their costs, and most will conclude that paying market prices for power is worthwhile, given the alternative.
California's blackouts proved that the serious imbalance between power supply and demand in the western U.S. requires rationing. The only question now is whether to continue to ration power through blackouts or to ration it through markets. To avoid making a decision now is to choose blackouts and the economic destruction that routine blackouts will bring.
Even David Freeman, chairman of the Los Angeles Dept. of Water & Power and an avowed opponent of utility deregulation, said Thursday in the New York Times: "It's not all that complicated - we just have a shortage. All the conspiracy theories - you don't need to go there."
Bulk power markets show that western generators haven't been idling plants in response to the bad credit of California's utilities. Other western utilities were paying up to $600 a megawatt-hour Wednesday and Thursday, which is about 20 times the historic price, because the capacity to meet demand isn't there. California utility credit problems just put the state's two main utilities last in line to get power, so the western shortfall flowed entirely to California.
But if California were to start charging customers market prices for power, the problem would be solved in a matter of months and the shortage's overall economic impact would be minimized, according to Calpine Corp. (CPN) Vice President Thomas McAndrew, one of the country's two or three most rs.
"The debate must shift from utility solvency to the most efficient and effective way to allocate scarce electricity supplies in the western U.S. The financial health of California utilities will not add one megawatt of supply to the region. Their filing for Chapter 11 will not cause a recession, but routine rolling blackouts will," McAndrew said.
Rolling blackouts are detrimental to the economy because they are indiscriminate relative to value. The loss of the same amount of power at an In their most productive use at times like this.
"Obviously, the greatest economic value for the electricity would be to Intel. The rolling blackout does not afford that option, which is why it is so destructive. As blackouts become more routine, the economic misallocations will intensify and harm to the overall economy will be magnified," according to McAndrew.
On the other hand, what would happen if California's leaders made the bold decision to start charging users market prices for electricity? Demand would fall. Blackouts would be avoided. Prices would decline a bit in the near term as the supply side competes with elastic demand. Investment would flow to increase supply, and within about two years, California would once again have an abundant, reliable and reasonably-priced power supply.
Emergency legislation making its way through Sacramento to shift bulk power buying from the near-bankrupt utilities to the state government accomplishes none of those things.
With the exception of some aluminum smelters in the Northwest that have shut down, very little demand reduction has occurred in the West since the true cost of electricity isn't being passed to the end consumer. Shockwave.com Inc., for example, sent an e-mail to employees on Jan. 11 asking them to turn off their lava lamps "until the state's energy crisis is under control."
"It's like selling $0.60 gasoline in a $2.00 market and asking car owners not to drive so much," McAndrew says.
For the low-income residential consumer, government could subsidize that specific group rather than impose artificial prices on the entire market. There is precedence for this in the Northeast heating oil markets this year.
Choosing market-based rates now would require political courage. Even the greatest proponent of markets would admit this is a horrible time to force consumers into the market. But the choice for California now, unfortunately, isn't between good deregulation and bad deregulation. Bad deregulation happened, and today's choice is between blackouts and market prices. Most of the shortfall, especially in non-summer months, will be made up by eliminating waste. This summer, however, high prices likely will force some marginally profitable businesses to close.
But it can be done. Almost unnoticed, the city of Tacoma, Washington, recently passed a 50% temporary surcharge on electricity. Tacoma is a beacon in the California darkness.
California politicians are deathly afraid of the consumer-advocate groups in the state because it's easy to get a ballot initiative going there. But what these groups will go nuts over is a utility bailout. Market-based rates going forward aren't a utility bailout. This is a pass-through. As soon as market prices drop in response to lower demand, consumers will get the lower prices.
Also, market-based rates won't be the 30 cents a kilowatt-hour price now seen in the spot market, which would cause a quadrupling of rates. Prudent procurement of power should include a blend of the cheap power from the utilities' retained power plants, some moderately priced long-term supply contracts, and some expensive spot-market power.
How bad does this summer look? Blackouts of 3,000 MW to 5,000 MW - which would be three to five times Thursday's blackouts - may be a regular occurence from July through September.
Only a massive snowfall between now and April in the Northwest, which would increase hydroelectric supply, can avoid such a scenario, but early reports aren't good. On Thursday, the National Weather Service forecast that supplies of hydropower this spring and summer will be 68% of normal because hardly any snow has fallen so far in the Cascade Mountains where critical hydroelectric projects are located. Two weeks ago, the forecast was for 75% of normal.
To keep the lights on in California the past six months, northwest dam operators have run reservoirs to dangerously low levels, and they may run out of water to power their turbines as soon as March. Water at the largest reservoir, the Grand Coulee Dam, now stands at 49 feet above the turbine inlets. At this point in the winter, given the forecast for low spring snow melt, it should be at 75 feet.
Natural gas supplies are in a similarly depleted condition. Most of California's electricity is powered by gas and water.
"Nature may bail out the western grid, but that is a dangerous bet to make at this point," McAndrew points out.
The window of opportunity to act is closing. |
