From: hal@finney.org
Date: Fri Dec 29 2000 - 11:27:53 MST
JR writes:
> AFAIK, stockholders own the utilities in CA. Isn't this the case in most
> States?
Some utilities in CA are publicly owned, some are government owned.
Deregulation only applied to the public ones, which are Southern
California Edison, Pacific Gas and Electric, and San Diego Gas and
Electric. Municipal utilities like the Los Angeles Department of
Water and Power were not affected and were allowed to retain their
plant ownership. I think the public utilities provide about 70-80%
of the state's electricity.
pcm@rahul.net (Peter C. McCluskey) writes:
> All the power is being priced by the spot market? That seems strange
> and probably foolish. Businesses that are dependent on commodities like
> oil typically insulate themselves from some of the volatility by buying
> a lot of their needs under multi-year fixed price contracts.
The California utilities have been prevented from using futures contracts
(even next-day futures) for more than about 20% of their purchases.
Most power must be purchased within hours of it being used. This is
one of the regulations which is being relaxed to try to get prices down.
Many of the rules were put into place with expectations that have worked
out to be the opposite of current conditions. It was expected that
deregulation would lower prices, hence rules were established for that
condition.
For example, there is a rate freeze in place, which the utilities are
trying to get lifted. The reason for this freeze wasn't to protect
consumers from price increases - it was to protect utilities from
cutthroat competition hurting their profit margins. The rate freeze was
intended to keep consumer prices artificially high. Utilities were forced
to divest themselves of oil and gas fired plants, and they argued that
there should be a rate freeze until they had generated excess profits
sufficient to pay off their capital investments in those plants.
Now, as it has happened, the rate freeze is having the opposite effect
and is generating enormous losses for the utilities, so they want to
get it lifted. However the law is clear that the freeze stays in place
until a certain amount of profits have been generated. Utilities are
now arguing that their existing nuclear and hydroelectric plants
(which they were allowed to retain) have increased in value so much
due to the electricity crisis, that their balance sheet shows enough
profits to satisfy the legal requirements and allow the freeze to go.
Everything is topsy turvy.
In the case of the spot vs futures markets, the thought was that futures
markets would lock in higher prices for producers and so would hurt the
utilities, hence they were required to rely more on the spot market where
they could take greater advantage of competitive prices. This seems
to be poor reasoning even if the prices had worked out that way since
the utilities have plenty of incentive to adopt profit maximization
strategies on their own. It's possible there were other reasons for
the restriction which I don't understand.
> The high peak prices don't seem surprising. I would expect market pricing
> to offset this by driving down prices during periods of low demand. I can't
> tell whether this is actually happening.
Shortly after deregulation it did work, demand was enough lower than
supply that prices fell. However demand is growing about 10% a year
and after the big heat wave this past summer supply has never caught up.
> How many independently owned producers are there? I'm aware of 2 large
> publicly traded companies (Calpine and AES). I've heard a rumor that some
> of the production is done by companies with the same parent that handles
> the transmission.
> I'm sure my information is incomplete, but it sounds like a fairly
> concentrated industry, but not concentrated enough that end users would
> have major problems getting reasonably competitive prices if they were
> choosing spot market prices.
I don't know the exact figures, but power can be purchased from a wide
geographical region of North America and I believe there are significant
numbers of independent plant operators. I agree that we would expect
to see competition at this level. When the state's out there paying
$1000/MWh (ten times the normal rate) you'd think suppliers would speak
up and offer it for $500 if they had it.
> I think even without the environmental regulations, it's easy to imagine
> that companies that until recently have been monopolies would have
> inadequately predicted the effects of the unusually long economic expansion.
Right, plus the general uncertainty due to the changing legal climate
made people hold back. No one wants to build a plant and then have it
divested, trusting to the good will of the political process to allow
recouping the lost investment.
Hal
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