Most UCSB students seem to be either unaware or ignorant of the current electricity problems in California. California’s two largest investor-owned utilities, Pacific Gas & Electric Co. and Southern California Edison, have incurred debts totaling over $11 billion since June, and Gov. Gray Davis has spent $400 million out of the state budget to help keep power running. With power prices running high on the wholesale market, it is possible that the state could spend upwards of $2 billion to keep the lights on over the next three months.
One of the major causes of the current problem is the flawed 1996 deregulation law, which required investor-owned utilities to sell off all of their power plants, except nuclear. This moved the vast majority of power production out of the hands of the utilities and into the hands of companies purely interested in making money. Investor-owned utilities had no business interest in spending large amounts of money to build a power plant that they would have to sell for only a fraction of the construction cost. In addition, outside generators were not interested in building power plants until the state became truly deregulated. For these reasons, the amount of power generation available in California has only increased by 6 percent in the last 10 years, while demand for electricity has increased by 30 percent.
State law required utilities – no longer able to produce power for their customers – to buy all of their power from the California Independent System Operator (CAISO). Power generators bid their power into CAISO on an hourly and daily basis. The utilities are then required to buy power on the spot market for the customers. The state deregulation law strictly forbade utility companies from entering into long-term power contracts with power producers.
Last year, the price of natural gas was about $2 per Million British Thermal Units (MBTU), which translated to an electrical generation cost of about $20 per Megawatt-hour (Mw-hr). After the CAISO mark up, the utilities paid about $25-30 per Mw-hr. and were allowed to charge customers a fixed rate of $54 per Mw-hr.
The utilities were allowed to collect this higher rate in order to pay off what is called stranded assets – primarily, the mortgages on Diablo Canyon and San Onofre power plants. The utilities were allowed to collect the fixed rate of $54 per Mw-hr until the summer of 2001 or until they had paid off their stranded assets. Afterwards, they would charge customers rates equal to what they paid for power from CAISO. Thus, customers should see a rate reduction.
By early summer 2000, the price of natural gas shot up to $7 per MBTU, translating to $70 per Mw-hr and sometimes rose as high as $3,000 per Mw-hr. This summer, the California Public Utilities Commission (CPUC) set the CAISO price at $350 per Mw-hr in order to help protect the utilities from price spikes. However, the price caps come off when spinning reserves drop below 5 percent, in order to encourage more production. For this reason, it was more profitable for some generators not to produce electricity until the price caps came off. Also, some generators found it more profitable to sell their natural gas than to burn it making electricity. Remember, the companies that now produce the power for California are interested in making money, not in providing a consistent source of power to customers.
Power prices were expected to fall at the end of summer with decreasing demand. It is now February, and this has yet to occur. The reason for this is that over 10,000 Mw are off line for maintenance. When the utilities owned most of the generation capabilities, they scheduled outages to minimize the amount of generation that was to be taken off line. Now, with a dozen or so companies controlling most of the generation, there is no scheduling for who will take what generation off line and when. They are interested in making money, not in providing a consistent source of power to us.
Deregulation was set up for failure and it did. In the end, you and I will pay for the failure of our politicians. We, the taxpayers, are now paying for the state to spend potentially billions of dollars purchasing power for the nearly bankrupt utilities. And we, the electricity consumers, will be paying back the billions owed by the utilities in the form of state allowed rate increases.
Thomas Rhodes is a senior chemical engineering major.
