Fabio,
The situation in CA is, as I understand it, as follows.
Wholesale electricity was sort of deregulated (more on the sort of
later) but price caps remain at the retail level. Currently, wholesale
electricity prices have soared and the two largest utilities PGE and
So.Cal Edison are within days of bankruptcy having lost billions of
dollars in the past couple of months. Fearing that they won't get paid
generators don't want to sell to the two utilities which of course
excerbates the problem. Short term problem number one, therefore, is
what to do about the bankrupt utilities.
Now why have wholesale prices soared? A couple of reasons, CA has
built no major new generating facilities in something like a decade but
demand has increased dramatically becuase of immigration and computer
technology (producer and consumer side). The regulations and NIMBY
problems in CA are huge. It takes about a year to get a power plant up
and running in TX and about four years and counting to get the same
plant up and running in CA. Second, the neanderthal governor Gray Davis
has talked about taking over the generators "statizing them?" and/or
regulating them to death so now there is a huge regulatory risk and even
fewer people are willing to build generators in CA. Electricity can be
transported, of course, but the transmission lines are currently at
capacity so that doesn't help.
Add to this an increase in natural gas prices (which is used to
generate electricity) and we have a crisis. (Note that some people say
that the generators are gaming the system. I doubt that this is a
serious aspect of the problem but even if it were it's more a
consequence of the lack of generating capacity than a cause.)
A couple of other things. Recall that retail prices are capped so
we have the absurd situation of a shortage but little economizing at the
consumer level!
Also, and very importantly, the wholesale market "deregulation" came
with a host of conditions. Most important of which seems to be that for
"transparency" type reasons the regulators wanted to get all the buyers
and sellers together in the "power exchange" which is a one-day-ahead
spot market. The regulators, in other words, strongly discouraged long
term contracts and they encouraged the utilities to divest themselves of
generation capacity (the utilities went along with this willing,
however, as I understand it and they still have considerable generation
capacity left). The main discouragement was that utilities were allowed
to buy futures but if the future price turned out to be higher than the
spot price then the regulators could retroactively charge the utilities
with being "imprudent" and fine them! With these incentives the
utilities shied away from buying long, even though they could have
bought 8 months ago at prices ten times lower than the marginal price
today. The result has been that the average price of a kilowatt has
risen to the marginal price, i.e. since most electricity is bought in
the spot market and the spot market price has been pushed up due to the
failure of supply to meet demand at the margin all units of electricity
have been pushed up in price.
Alex
--
Dr. Alexander Tabarrok
Vice President and Director of Research
The Independent Institute
100 Swan Way
Oakland, CA, 94621-1428
Tel. 510-632-1366, FAX: 510-568-6040
Email: [EMAIL PROTECTED]
