Deregulation California Style

USA Today (Society for the Advancement of Education), July, 2001 by Tim D. Kane

Unwilling to trust consumers or the power industry, California officials concluded that competition could not work unless the three stages of power supply were in separate hands. Local utilities would be confined to selling power to residential and business customers, generator operators to producing power, and transmission line operators to maintaining the electron highways. In 1996, Republican Gov. Pete Wilson signed a bill to Restructure Public Utilities in California, and it unanimously passed both houses of the Democratically controlled state legislature. The politicians referred to this legislation--AB 1890--which defined the structure of the power industry and controlled retail electricity prices to prevent consumer exploitation, as "deregulation."

The major provisions were: Utilities must divest themselves of 90% of their fossil fuel-powered generators and transfer control of their transmission facilities to the Independent System Operator (ISO). This new agency would be responsible for distributing the flow of power to all areas of the state and would, in an emergency, have authority to purchase out-of-state power. A second new state agency, the Power Exchange, would operate a spot (for same-day delivery) market for electricity. An industry accustomed to utilizing long-term contracts as a means of insulating its customers against price fluctuations would be forced to secure power one day at a time. Generator operators would inform the Power Exchange of the amount of electricity they wished to sell on that day and their asking price. Public utilities would indicate the volume of electricity they wished to purchase for delivery that same day and their bid price. Each morning, buy and sell offers would be matched on the Power Exchange, thus determining the average wholesale price.

Revealingly, the "deregulation" bill did not eliminate a single regulatory entity or remove retail price controls. Utilities were ordered to cut their retail prices immediately by 10% and could subsequently change prices only after they complied with a highly specific set of requirements. After completing this "market evaluation" process, a utility's retail power prices would be determined by a formula in which production costs--not supply and demand--were the sole criteria.

On the daily Power Exchange, utilities could purchase wholesale power from generator operators for resale to consumers at controlled prices ranging from $54 to $65 per megawatt, depending on the utility's power source. California wholesale prices were averaging $30 per megawatt at the time of deregulation in 1996, and this price prevailed up to May, 2000. Low and steady prices, coupled with the nation's third-lowest per capita electricity consumption, assured California regulators their $65 cap provided plenty of maneuvering room. Should supply offers fall short of demand at the daily auction, the ISO was authorized to purchase power on the open market.

Consumers' electric bills would also contain a separate charge unrelated to electricity. These monies would be allocated by the state for development of alternative energy sources, energy conservation, and new energy technologies.