California Short-Circuits Itself What happened to deregulated electricity? Robert J. Michaels Professor of Economics California State University, Fullerton CCEE Orange Coast College Nov. 3, 2000

Why care in general ? u $300 billion total U.S. retail sales in year u The last great monopoly moves to market u Critical to infrastructure u Major environmental impacts u System is everywhere strained u Richardson -- “the U.S. has a third-world transmission system”

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

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

State Restructuring Activity, May 2000

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

The Elements of Delivered Power Generation Reliability services / grid operation High-voltage transmission Low-voltage distribution Customer services

Electricity’s 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

Electricity’s 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

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