How did the current crisis start?
Californians were sick of having some of the highest energy prices in the country. That is, about 10 cents per kilowatt hour, while neighboring Oregonians paid less than 5 cents per kilowatt hour. Although use varies widely, on average a home uses about 860 kilowatt hours of energy a month, which for Californians translates into monthly bills of $80 to $90. They wanted to pay less, and their elected officials wanted to help.
So, what happened?
In 1996 the California Legislature deregulated the state’s electric utilities. Sort of. Prior to deregulation the investor-owned electric companies–in most of the country, electric utilities are owned by investors, as opposed to the public–both generated power through their plants and supplied it to consumers through their wires. What they could charge was decided by the state’s Public Utilities Commission and the Federal Energy Regulatory Commission. Deregulation forced the utilities to sell their plants and get out of the generating business. Now they are simply energy suppliers, buying it wholesale on the new free market and then reselling it to consumers. The idea was that competition would bring in, well, new competitors to sell energy to the suppliers and new suppliers to sell to consumers. All the new competition would bring down prices–eventually. The “sort-of” part of the deregulation is that the utilities agreed to freeze the prices they charged consumers until 2002 or until specific debts were paid off. The companies believed that since wholesale energy prices would drop, they could resell the energy for a profit. And eventually, when the freeze was lifted, consumers would see their bills go down.
What went wrong?
Just about everything. The good news was that California came out of its recession and the new economy took off. This meant demand for power soared, and so did the prices for electricity charged by the no-longer-regulated generating companies. Although California is not a per-capita energy hog, it does produce less power per capita than any other state. Californians like to let other states build ugly, polluting energy plants then pay for the energy to be shipped across wires to them. But a booming economy meant soaring demand elsewhere, so out-of-state supplies were tight. Also, under deregulation, the utilities are essentially required to buy their energy each day from a new entity, the California Power Exchange, an auction house for electricity. This meant the utilities didn’t enter into long-term contracts but were captives of widely fluctuating daily, or spot, markets. And they were forbidden by law to pass their soaring costs on to consumers. According to the Los Angeles Times, at the height of summer demand, spot wholesale electricity prices rose from $50 a megawatt-hour in 1999 to $522 in 2000. As a result, California’s two largest utilities, Pacific Gas & Electric Co. (PG&E) and Southern California Edison, are on the brink of bankruptcy.
How come it took so long for everybody to realize a crisis was approaching?
Because we’d never have any crises unless we ignored the signs that they were coming. Actually, almost as soon as the deregulation was in place, in 1998, utilities started complaining that they were paying more, not less, for electricity. But since a price freeze was in effect, consumers’ bills were not going up, so nobody, especially politicians and the media, was paying any attention. But last year San Diego Gas & Electric, which had paid off its debts, was free to raise prices. They certainly did: by tripling them. That got everyone’s attention, and Gov. Gray Davis signed emergency legislation eliminating the increase. What followed was a long series of futile measures to keep California’s lights on.
By the way, who bought the California power plants?
Big power companies located in other parts of the country. Of course, with money it earned by selling its power plants, PG&E bought some New England power plants.
What are the sources of California’s electricity?
About 10 percent is from hydroelectric plants, and 15 percent each comes from nuclear and coal. The rest comes from natural gas fired plants
But not every California electricity utility is in trouble, right?
Right. Some cities, such as Los Angeles, Burbank, and Pasadena, have publicly owned utilities. They didn’t participate in deregulation and kept their own plants. The Los Angeles Department of Water and Power is actually making money right now selling its surplus power. For more on why this shouldn’t surprise anyone, rent Chinatown.
Explainer thanks James Bushnell of the University of California Energy Institute and the reporters of the Los Angeles Times.
