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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: kodiak_bull who wrote (8947)	10/2/2001 3:00:02 PM
From: kodiak_bull	Respond to of 23153

I think we already knew this: CBO: Calif Pwr Crisis a Failure Of Market Design, Not Dereg WASHINGTON -(Dow Jones)- California's electricity crisis was a failure of market design, not of deregulation, the U.S. Congressional Budget Office concluded in a new report to Congress, "Causes and Lessons of the California Electricity Crisis." And the state's response to the problem turned market "stresses" into a full-blown crisis that may condemn California consumers to paying "high electricity prices for many years to come," the CBO report said. "Much of the blame for California's electricity crisis attaches to the state's restructuring plan - but not to its objective, electricity deregulation," the CBO said. When high demand for electricity and limited production capacity created "market stresses" beginning in the summer of 2000, the state plan mushroomed into "a full-blown crisis" in which utilities couldn't purchase enough electricity to supply their customers, the report summarizes. "But deregulation itself did not fail; rather, it was never achieved." The 33-page report outlines the now well-known causes of the state's electricity market problems. The utilities were restricted to purchasing supplies from state-created spot markets. And when supply shortages sent prices spiking, the utilities were unable to recoup their costs because of a state-mandated retail rate freeze. Further, the rate freeze failed to produce price signals that would have lowered demand. The result was "a financial shambles," the CBO said. Pacific Gas & Electric Co. (PCG) has entered into bankruptcy court protection, and Southern California Edison Co. (EIX) has managed to escape a similar fate because creditors expect the state to approve a financial rescue package. Nevertheless, the CBO report did find some fault in the role deregulated power providers played in the crisis. "Independent power generators were able to push up wholesale prices further and even withdrew supplies when it looked as though the utilities might not be able to pay for their purchases," the report noted. "That happened in part because elements of the plan's auction system for the spot market appear to have created strong incentives for suppliers to bid strategically in a way that raised wholesale prices. Some generators may also have withheld supplies at certain times to boost prices even more," the CBO reported. Even without the restructuring plan, California utilities would have had a hard time meeting demand and holding down prices, the report found. But because the plan limited supply and demand responses, "wholesale electricity prices were higher than they probably would have been in either a traditionally regulated market or a more fully deregulated market." In the wake of the financial meltdown, the California Department of Water Resources has stepped in as a creditworthy purchaser of electricity supplies on behalf of the insolvent utilities, spending $9.5 billion during the first seven months of this year while recouping only $1.5 billion, the report noted. Those power purchases were made through a combination of spot-market purchases and long-term supply contracts valued at more than $45 billion. "California responded to its immediate concerns about the availability of electricity and the volatility of prices by directly intervening in the market - a response that could prove costly to electricity consumers and taxpayers," the CBO said. "The potential cost of that intervention became apparent in the summer of 2001, when electricity prices in the spot market dropped in response to mild weather and lower demand, falling below the price the state was paying under its long-term contracts," the CBO said. "If that situation persists, Californians could be committed to paying high electricity prices for many years to come - the prospect that led to restructuring in the first place." The state's long-term contracts, for terms of up to 20 years, have an average cost of $133 per megawatt-hour, compared to July's average spot market cost of $82/MWh. "Because the state is actively concerned about security of supply, it may be putting too much emphasis on costly long-term contracts - much as the private utilities relied too heavily on risky spot-market purchases," the CBO warned. With the Department of Water Resources now buying 90% of the utilities' electricity requirements, it has emerged as one of the largest power market participants in the country, the CBO said. This is diminishing the traditional role of the utilities, diminishing competition and raising questions about the future position of the state's independent power producers, the report said. In reporting on lessons learned, the CBO landed firmly on the side of unfettered competitive markets. Utilities should have the freedom to procure supplies in a manner that limits price risk, and consumers should see price signals that result in demand responses, the report concluded.