1. Extra electricity slides

2. Electricity Markets – Basic Conditions
Demand – energy vs. power
Reliability
Area under curve is
energy
Power
24 hours
time
Probability
Density
Loss of load probability
Power system demand (kw)

3. Basic Questions What demand level should system be designed for?
Electricity = power + energy + reliability
Supply – 3 activities:
Generation
Transmission
Distribution

4. Operation of Power System
Load Duration Curve:
Area under LDC is energy
Peak Load
Power at
Least this
high
Intermediate Load
Baseload
100% Fraction of Year

5. Regulation of Electricity Markets
Historically natural monopoly
Rate of Return Regulation
Utilities allowed to price to achieve “fair rate of return”
Problems:
Inefficient
Average Cost Pricing
More recently (worldwide): deregulation

6. The California energy crisis
Pre-1999
3 regulated monopolies that owned and operated generation, transmission, distribution (PG&E, SCE, SDG&E)
Federal Energy Regulatory Commission regulates wholesale power transactions (one utility to another)
California Public Utilities Commission regulates retail prices (to consumers)

7. Restructuring electricity
Designed competitive wholesale market
Suppliers bid to supply electricity on daily basis
“Grid” accepts lowest bids; price at margin
Goal: more competitive California
Argued it would decrease prices
Could pass savings on to consumers by giving them a choice of supplier
But consumer side still regulated.
Didn’t work
Prices skyrocketed over 500% between
Utilities paying far more than consumers paid.
State had to bail out industry, cost $60 billion.

8. From Joskow: “The wholesale prices prevailing between June and
September 2000 were much higher than the fixed
retail price that the utilities were permitted to charge”

9. Why did wholesale prices rise?
Rising natural gas prices (natural gas is an input to electricity production)
Large increase in demand in CA (growth)
Reduced imports from other states (heat waves)
Rising prices for NOx emissions credits (costs of producing electricity)
Market power (in wholesale spot mkt)

10. Why didn’t it work & lessons
Technically challenging to create competitive wholesale market
Consumers were insulated from wholesale market prices (because retail market still regulated).
Deregulated wholesale, failed to deregulate retail prices or to allow forward contracts.
Required utilities to buy at unregulated price and sell at regulated retail price.

11. What next?
State committed to long-term contracts at unreasonably high prices – cost $60 billion.
Prices likely to remain high to pay off.
Prices dropped in 2001 due to increased supply, decreased demand.
SCE and PG&E effectively bankrupt.
Replaced deregulated wholesale with state procurement and regulated prices