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Electricity Crisis in California and the Global Environmental Problems -- Yukio Kubo

Electricity Crisis in California and the Global Environmental Problems

The electric power crisis in California managed to escape from a critical situation by intervention of the state government for the time being. However, the electric power is still in short supply, and the scheduled power cut (rolling blackouts) continues in March in the southern part such as Los Angeles and San Diego. Not only the industry, but also the civic life has been affected: the traffic lights are turned off, or the people get locked inside the elevator because of blackouts.

Electricity retail prices have been raised, and the people in California no longer benefit from the low-priced electricity.

There are some short-term problems, too. In order to prevent power disruptions in California, the Columbia River hydroelectric power station generated electricity by reducing the water storage. However, because of the La Nina (anti-El Nino) phenomenon, this year's snowfall has been below average both in Cascade and Rockies mountains, therefore the anticipated increase of water storage by meltwater now seems rather unlikely. Some warn that a crisis may hit again at the peak of the power consumption during the summer.

Restructuring Electric Power

The immediate cause of the electricity crisis in California is reported to be a flowed "deregulation." However, some point out that it was not deregulation in the first place.

James Spiers, the energy consultant of META Group, explains, "it would be better called restructuring of the industry rather than deregulation. Deregulation is to abolish any regulations by the government concerning the production, transportation, and distribution of electric power or gas. Restructuring, on the other hand, is to remove part of those regulations."

Mr. George Passantino of Reason Foundation says it was new regulations rather than deregulation that California carried out this time, considering some aspects of the market mechanism such as price formation, charge liberalization, and new market entry.

Before the restructuring of electricity in 1996, power generation, transmission, and distribution in California have been altogether managed by the electric power companies. The retail prices of electric power have been controlled by the state government.

At the restructuring of 1996, the former private power companies were disbanded, and the power plants were sold off to generators, and the power transmission system to ISO (Independent System Operator), a transmission organization. An electricity marketplace, the "California Power Exchange (PX)," was founded for the retailers to buy electricity through bidding. The former power companies became the suppliers, and their profits would be produced not through electricity retail, but from distribution commissions. The same rule, however, was not applied to public power agencies. They were allowed to own power plants and to sell surplus or buy shortage electricity in the marketplace.

After this restructuring, the consumers who had contracted with private power companies were allowed to buy electricity from other power retail companies as well as from power suppliers. In this case, the consumers pay electricity charges to the power retailer, and the distribution commissions to the supplier.

Although retail prices of electricity were capped, wholesale prices were not. In addition, in some large cities such as Los Angeles or San Diego where public power agencies dominate the market, consumers cannot buy electricity from other retailers. In this sense restructuring was insufficient.

Wholesale electricity on the exchange market is purchased based on a long-term contract or on the real-time market like stocks. For the Pacific Gas and Electric Company (PG&E) and the Southern California EDISON (SCE), who brought on this electric power crisis, the share of long-term contracts was as low as 3 ~ 4%.

Introduction of this market mechanism in 1996 must have reduced the wholesale price of electric power.

Electricity demand of California

Electricity retail prices in the U.S. are less than half of those in Japan. Such low prices are made possible owing partly to the material costs. In the West Coast, low-cost electricity from hydroelectric power is generated and sold by the government using the resources from the Columbia and the Colorado River. This provides 1/4 of the electricity consumption in California. Furthermore, new coalfields were developed by strip mining in Utah, Wyoming, and New Mexico during the 1960s, which enabled low-cost power production along with the highly efficient freight system called unit trains.

Coal-fired power has been criticized for causing pollution, and thermal power came to rely largely on natural gas after the 80s. Now most thermal power plants in California uses natural gas for energy sources, however, coal-fired electricity is also purchased from the power plants located outside of the state.

It has become difficult to build a new plant in the state under the strict environmental regulations in California and the influence of the residents' campaigns. In fact, no new plant was built in the last 10 years, consequently the supply capacity increased only by 2 % between 1996 and 1999. On the other hand, electricity consumption soared with the emergence of the high-tech industry, showing a 14 % increase between 1996 and 1999. According to an estimation, the electricity consumption by the Internet reaches 8% of the whole demand. Meanwhile, capped retail prices didn't help to raise the consumers' awareness for power-saving.

Obliged to sell the plants in the coming years, the suppliers tended to neglect the maintenance of their plants, resulting in lowing the operating rate. Soaring demand and stagnant production has forced California to buy 25% of power consumption from outside of the state. Today four plants are under construction and one is in the planning stage, but these new plants will not be enough to solve the imbalance between supply and demand.

To make the situation worse, the rain in the West Coast has decreased because of La Nina. Precipitation dropped considerably for three months from November to January in Serra Nevada and Cascade Mountains. Subsequently the generating capacity of the plants in the government irrigation districts around the Columbia and the Colorado River decreased to 80% of the usual year.

Soaring Wholesale Electricity Prices

As the electric industry was restructured and new generators' entry was permitted, electricity costs were to fall. However in reality, wholesale electricity prices soared. There are some causes for this.

The first reason is the rise of production costs. OPEC's production cut caused a sudden rise in oil price since last year, which consequently pushed up the whole energy costs.

Natural gas is used not only for power generation but also for cars because of its clean exhaust. Because of its little carbon dioxide generation, natural gas has recently been replacing other energy sources based on the measures against global warming. Therefore, the market price for natural gas, too, has risen significantly.

Another reason is the real-time pricing. Introduction of the market principle has let wholesale electricity prices rise in relation to the rise of electricity costs, and to the tension between supply and demand.

At noon when electricity demand is at its peak, the wholesale electricity price would go up to 27 cents/kWh, exceeding the capped retail rate. In the figure shown here, the base rate is 6.5 cents and the over-baseline rate is 13 cents, however the rates range depending on the retail companies. The charges consumers actually pay are higher, as power distribution costs are added to them. The SCE's charges for my residence were, for example, $120.09 for the baseline up to 302 kWh, $141.57 for the over-baseline.

It has also been pointed out that some companies profited from the raised prices through this process. Some public utilities purchased cheap electricity from the national plants, then sold it on the marketplace for several times higher price. Likewise, the municipal and national plants gained a large profit by selling electricity on the market. These profits are estimated to be 20 million dollars only for the Los Angeles Department of Power and Water.

Arrival of the Crisis and Urgent Countermeasures

Electricity suppliers had a big loss due to such unbalance between supply and demand, and to the wholesale prices exceeding the retail prices. Electricity suppliers hoped 25 ~ 30% of price increase, but the state only accepted a 7~15% of increase for 90 days. Consequently, when it became certain that the electricity suppliers would default on the debt to the generators, purchasing electricity became hardly possible, and supply failed.

On January 19, power transmission was cut off in certain areas, and blackouts occurred. Since then, rolling blackouts continue till now. Immediately after the first blackouts, California offered financial rescues to the electricity suppliers, and urged the generators to sell electricity to them.

Furthermore, the state admitted that the restructuring plan was a failure, and decided the intervention into the electric business and marketplace. On March 27, the state government further permitted 40% of price increase for two private companies. This was aimed at the prevention of bankruptcy and also to raise the consumers' tax-saving consciousness. However, SCE filed for bankruptcy protection in April, and practically went into bankruptcy.

Whereabouts of the Crisis

In order to save the crisis at present, the plants under government's jurisdiction transmit electricity to California. As mentioned above, there has been little snowfall in the Sierra Nevada, Cascade, and Rockies Mountains, therefore, this operation may fail to generate electricity to meet the high demand during the summer. Moreover, releasing water in winter, the essential rainy season, may cause a water shortage in summer and may lead to insufficiency of irrigation water in the agricultural zone in the central California. As a consequence, the production of lettuce, orange, and wine may be affected.

By the way, what will be the long-term effects of the crisis? One certain thing is that the restructuring plan will be modified. Electricity suppliers will be allowed to have plants. Moreover, the transmission organization and the marketplace will be reassessed. Prices will be reexamined, too. There are other long-term scenarios. One of the views is that the residents' resistance to the plant construction and enlargement will be eased as their awareness will change. This will allow the emergence of agencies specialized in generation, eventually improving demand-and-supply balance.

Another is that the imbalance will be reduced by a decrease in demand, which will occur with economic recession. Compared to Washington where electricity prices are low as a result of the rise in the power rates, or to Pennsylvania where the successful deregulation has brought a considerable price cut, California's consumers pay 1.5 to 2-fold prices. As a consequence, consumers may abandon the companies. Furthermore, some presuppose that as prices will not fall in the future, alternative energy sources will be more competitive, increasing the supply subsequently. In fact, windmill power generation shows rapid growth as clean energy. Backed up by support policies (obligation for the electricity companies to buy electricity) for non-fossil fuel power generation, some areas in the east foot of the Rockies make a greater profit from electricity generation in the wind farm than agricultural production. Even some farmland has been partly converted into the wind farm. Dry-land farming has relied on the fossil groundwater from Olalaga aquifer. However, cultivation is becoming more difficult as the groundwater decreases. Therefore, such conversion may be promoted.

Power saving and Demand Side Management (DSM)

Low consciousness of power-saving resulted from cheap electric costs is in the background of the electric power crisis in California. To economize and equalize electricity use are the pressing matters for a stable supply. It is crucial to cut down the consumption in peak hours, for it would not only save the investment in new facilities, but also enable an effective use of the existing facilities. Electric industries have already set a strategy for reducing power consumption and for issuing a guidance to economize residential electricity. More specifically, this guidance suggests; monitoring the real-time use indicated by the rate, increasing insulation of buildings, eliminating standby-power, cutting back unnecessary lighting and changing thermostat setting. For further reduction of the peak use, suggested are the introduction of the Demand Side Management (DSM) (for the peak-hour rate, night-hour rate, etc.) and relief of the heat island phenomenon.

What Will Happen after the Electricity Crisis?

Most people consider the flawed policies to be the cause for California's electricity crisis. Whereas it is also pointed out that the root of the crisis was in the state's economy and business that rely much on mass consumption of energy and water resources.

Many analysts and dam administrators are concerned what will happen in this summer. What would occur if extensive blackouts and water shortage hit this summer? Of course, this problem is not totally irrelevant to Japan. Electricity supply could barely meet the peak demand during the summer of the last several years in Japan. Water resources, too, are calling for attention under global warming. The situation is becoming increasingly difficult for us.

*U.S. President George W. Bush declared his decision to withdraw from the Kyoto Treaty on CO2 emission reduction mentioning the energy crisis as one reason.

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