California

Lack of Competition Is Leading to a Costly Electricity Glut in California

Government monopolies drive prices up.

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A top California utility official once quipped that he was one of the few executives in the country who earned a profit merely by remodeling his office. He was referring to the way the state's regulated utility system is designed. Companies are granted an electricity monopoly for a particular region, then are guaranteed a hefty rate of return for the infrastructure investments they make.

This price system, critics say, results in unforeseen consequences. A recent investigative report found that California's utility companies have been involved in a power-plant building spree, even though Californians have significantly cut their electricity usage over the same time period. In three years, the state is projected to be producing 21 percent more electricity than it needs, without counting the growth in rooftop-solar applications, reported the Los Angeles Times.

Last year, the California Independent System Operator had 24 percent in actual reserves—far above the targeted 15 percent goal. Even that 15 percent goal is 50 percent higher than what's necessary to protect the system from disaster and blackouts, according to some experts.

As the Times' report put it, "California has a big—and growing—glut of power." It's a matter of incentives. Because utilities are guaranteed a 10.5 percent rate of return on each new plant they build, regardless of whether customers actually need it, they can make more money building new plants than they could buying power from existing competing plants.

In an open marketplace, gluts of products or services lead firms to slash their prices dramatically. If, say, car manufacturers produce too many vehicles, they will provide rebates or be stuck with lots full of unsold inventory. With California's regulated utility system, by contrast, gluts in electricity actually raise prices for consumers because of the way utilities are paid for their investments. They need only get the approval from the Public Utilities Commission to build new plants and pass on costs to ratepayers.

The regulated utility model, which dates back to the 19th century, puts government regulators in charge of looking after consumers' best interests. But a fairly recent California utility scandal has illustrated the dangers of what Nobel Prize laureate George Stigler refers to as "regulatory capture," when the oversight agencies are dominated by the industries they regulate.

As the Mercury News reported in 2015 regarding the investigation of a deadly 2010 explosion of a PG&E natural-gas pipeline in San Bruno:

Additional evidence of the close relationship between PG&E officials and leaders of the agency that regulates the utility emerged late Friday in a new batch of emails long sought by the city of San Bruno…

Some say the current system also crushes the emergence of a functioning electricity market. The Times article tells the story of an energy company that built a $300 million privately funded facility in Sutter County:

Independents like Calpine don't have a captive audience of residential customers like regulated utilities do. Instead, they sell their electricity under contract or into the electricity market, and make money only if they can find customers for their power.

But soon after the construction of that plant, the California Public Utilities Commission approved PG&E's application to build its own power plant. PG&E gets paid no matter the consumer demand, so it was hard for a true private enterprise to compete with that subsidized model. Calpine shuttered its facility halfway into its useful life.

"A monopoly franchise removes the incentive to innovate to increase market share," explains my R Street Institute colleague Devin Hartman, in an August study of the nation's electricity markets. "Guaranteed cost recovery for 'prudently incurred' expenses diminishes the incentive to control costs. The regulated model also insulates utilities from market risks and most policy risks, such as changes in fuel prices or government subsidies." This provides a safe place for investors, he added, but gives them little incentive to manage risks or control costs.

These analyses also highlight a point that might seem counterintuitive to many environmentalists: competitive markets often lead to better air-quality outcomes. Here, we see utilities overbuilding natural-gas-fired power plants even as consumer demand suggests the plants aren't necessary. Because of the utilities' rate-of-return-based payment, they can stick with older technologies and avoid looking at alternative-energy models that might trim their costs.

The current distorted market is, to some degree, a reaction to the botched energy deregulation plan former Gov. Pete Wilson (R) signed into law in 1996, which provoked a statewide crisis in 2000. The state deregulated the price of wholesale energy, but capped its retail price. The population had been growing and regulators had not approved the construction of new power plants for years. After a hot summer and market manipulations by energy companies gaming the new system, the state's wholesale prices soared above those retail caps.

The end result: Rolling electricity blackouts, a statewide crisis that led to the bankruptcy of PG&E, and the recall of Gov. Gray Davis (D). Though Wilson signed the legislation, Davis was blamed for indecision as parts of the state went dark. Since then, state officials have avoided anything smacking of deregulation or market competition and have been cranking up supply even if it's not necessary. Other states, such as Texas, deregulated their electricity markets and have watched electricity prices go down as California's have increased.

The Times only touches on another issue of long-term importance: solar energy and the utility companies' fear of a "death spiral." California law allows for net energy metering. "Customers who install small solar, wind, biogas and fuel cell generation facilities… to serve all or a portion of onsite electricity needs are eligible for the state's net metering program," explains the Public Utilities Commission. "NEM allows a customer-generator to receive a financial credit for power generated by their onsite system and fed back to the utility."

Utilities must buy back the electricity at market rates, but they still have this vast—and growing—infrastructure of power plants and utility lines to finance and maintain. The more the utilities raise their rates to pay for these "stranded costs," the more consumers opt out and install solar panels. That raises the per-capita costs of maintaining that infrastructure, which raises electricity prices—and leads to more people opting out of the system. Advances in battery storage could further diminish the need for power plants that are financed 30 or 40 years into the future.

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47 responses to “Lack of Competition Is Leading to a Costly Electricity Glut in California

  1. And .. building a new plant for zero demand increases profits from the existing base.

    It works best in colder climates, but Time-Of–Day Pricing works well in the midwest. You pay a lower price per KWH on evenings and weekends. Put a cheap timer on the hot water tank, heating and a/c, and do laundry and showers in off-peak times. My all-electric house saw massive savings, with no real inconvenience . Each month’s bill highlights the savings from the lower off-peak rates.

    Everybody wins. Electric utilities sell more KWHs per plant and consumers save on their power bills.

    1. Making some forms of electric power – the intermittent stuff – take or pay has wrecked the profitability of base load plants – the most efficient kind.

    2. I can actually understand the Californias actions that have led to the glut of energy and out of control pay rates. This is the end result of Californias reaction to the Enron disaster that led to the state having a couple years of outrageous summer power outages and also the average consumer having outrageous power bills.

      You all here will say regulation and lack of competition is bad and yet it was the wild west Enron energy days where the was competition and lack of regulation that caused what you see now.

    1. Why would they be in the National Guard?

      Or did you mean Not Green?

      1. natural gas, I’d assume

  2. If california has such a glut of production, why did it import nearly a third of its electricity from out of state in 2015? Does the media even know what fucking day of the week it is?!

    And molten salt heat storage?!!!! Ivanpah would like a word with you about reality…

    1. What’s wrong with molten salt storage? /curious

      1. What I see as a problem there is that the plant costs $13.3K per home just for the plant (993M/75K).

        That’s a pretty steep fixed cost.

        1. Y-e-a-h, that doesn’t seem tenable. Well, I suppose it depends on the projected lifespan. $13.3k/30 seems reasonable, but of course maintenance and upgrades are going to tack on a ton.

          1. The cost of natural gas to keep the salt hot is also going to add to the cost.

    2. The smug assholes who live in LA have no idea where their power comes from. DWP gets a lot of power from coal in NV and AZ. A LOT.

      All of those Teslas on the westside run on coal.

      1. All of those Teslas on the westside run on coal.

        And this is where “one-size-fits-all, global-warming-is-the-only-problem” environmentalists get things oh-so-wrong.

        Part is the simple hypocrisy of the virtue-signaling with your plug-in electric car that runs on power that almost certainly came from a fossil-fuel plant (as distinct from a hybrid, which is simply more fuel efficient).

        Just for purely local reasons, though, it makes sense to export emissions from the LA basin to AZ or NV as long as the residents of AZ and NV are okay with it, since they have a tendency to build up in the LA basin and cause health problems, while they’ll never be noticed in AZ or NV (if located properly).

        There is a localized environmental problem in the LA basin that an electric car actually does help address, but as a solution to CAGW (the only problem the watermelons believe in anymore), it’s counter-productive. The people driving Teslas think they’re addressing CAGW, as do the bio-fuels people, but both are idiots, and whatever they may be doing to actually help the environment is accidental.

        1. From what I’ve heard, LADWP is divesting itself of coal in the next few years with no real plan for a replacement. So there’s another “local” problem.

          Not my problem though; I’m So Cal Edison.

        2. But isn’t a centralized coal plant better than a hundred million gas engines?

          1. Depends on if you want to get where you are going.

          2. But isn’t a centralized coal plant better than a hundred million gas engines?

            Probably depends on specific local circumstances. That’s my main beef against the “Green” movement.

          3. Depends on the engines. A BEV is not cleaner than a modern hybrid car like the Prius or Niro or Ioniq if the source of electric power is coal.

            https://www.scientificamer ican.com/article/electric-ca rs-are-not-necessarily-clean/

            why won’t this site let me post links? You’ll have to remove the spaces to read the article.

  3. The British have a crazy subsidy program for Diesel Generators. Somebody had the idea that there were lots of emergency diesels in Britain which were not used very much since they were for emergencies such as supplying power to hospitals, factories, data centers when they lost normal power.

    So the Government have started a program to pay these diesel operators to supply the power grid if needed while paying them a much higher rate. So the obvious happens, companies are formed to set up more of these generators to grab the subsides

    http://www.telegraph.co.uk/bus…..subsidies/

    1. Not just the British.

      http://energy.gov/eere/femp/en…..s-new-york and scroll down to the load shed incentive programs, including building new on site generators. NY isn’t alone either.

      1. Seems like plans for bad subsidy programs can travel around the world faster then facts about how bad they are.

    2. Like the british who paid 1.6 pounds per pound spent on wood pellet heating resulting in people roasting empty buildings for the added ncome streams (buildings that were previously left at ambient)

    3. So the obvious happens

      You’d think at some point someone might begin to grasp that these “programs to hand out taxpayer money” to anyone hip enough to know how to game the system are actually DESIGNED with that purpose in mind.

      1. Who do you think writes the bills that create those programs? Lawyers for the companies that are going to game the system. Certainly not lawmakers.

    4. They also have a tax on TVs. Luckily if you’re blind you only have to pay half.

      1. Propaganda is expensive.

    5. meanwhile,UK is investing even more in their wind farms,despite the fact they only output 1/3 of their rated power on average,and STILL need base load generators to compensate for when there’s little or no wind.

  4. This price system, critics say, results in unforeseen consequences.

    followed by

    utilities are guaranteed a 10.5 percent rate of return on each new plant they build

    …unforeseen?

    1. Yeah, somebody misspelled “predictable”.

  5. Tim Blair “Australia has a small population, masses of coal and heaps of uranium. So we should never have any energy problems, right?”

    Energy surge could lead to temporary electricity shutdowns

    1. Was just listening to a news story about this. They’ve already had problems in the state of South Australia. By pure coincidence, the problems began when the state government moved to using “renewables” for power needs.

      1. “pure conincidence”!

        I mean, what Are the odds? Such a mystery.

  6. We have electric competition in PA, and the rate I pay for the electricity itself hasn’t changed much at all in 10 years, while the regulated transmission fee element of the rate has gone up, of course. And it’s gonna help that some electric plants are using natural gas now, which is cheap because we have an abundance of shale gas in the state.

  7. Rolling electricity blackouts, a statewide crisis that led to the bankruptcy of PG&E, and the recall of Gov. Gray Davis (D). . . . Since then, state officials have avoided anything smacking of deregulation or market competition and have been cranking up supply even if it’s not necessary

    That’s probably the most annoying thing about the whole situation – CA Progressives who are now convinced that “we tried a free market in energy, and look what a disaster it was!”

  8. As an electrical engineer, though not in the power side of things, I was privileged to get a substation tour back in the day. The engineer told me they were building no new transmission lines: “If we build it, everyone else gets to use it [at regulated rates]. There’s no ROI.” So the overall network was becoming increasingly fragile, potentially unable to meet geographic shifts between supply and demand.

    This was before the state’s policy reversed to subsidize unneeded generating capacity. It would be interesting to know whether the taxpayer subsidy also pertains to transmission lines. FWIW, I have seen the reconductoring of existing transmission lines, but never seen a new transmission line under construction.

    1. The requirement for treating transmission as a common carrier service comes from FERC, not California. Though it sounds like the real complaint was the rates chargeable for transmission were not high enough to justify the cost of building the lines.

  9. So, which is it? Are idiotic rate case policies encouraging a glut of energy, or are environmentalist nutjobs strangling energy production?

    1. A bit of both. Environmentalist nutjobs have encouraged unnecessary production.

      Welcome to UASS – United American Socialist States

    2. This is the outcome of the Enron days of the early 00’s.

  10. RE: Lack of Competition Is Leading to a Costly Electricity Glut in California
    Government monopolies drive prices up.

    Well of course government monopolies drive prices up.
    How else are ruling elitist filth ruling (or ruining) Kalifornia make all that money?

  11. Private and public monopolies lead to higher prices. Say what you want but without at least a few companies providing energy service prices will always go up and politicians will be paid off.

  12. something something California
    something something stupid
    so secede already!

  13. This article is, well. . . not so good. I’m not saying that the deregulated markets are worse, or better, than the regulated markets, but this article makes popular (misguided) talking points rather than addressing the actual economic issues affecting the electricity industry. A lot of facts dead wrong, and a lot are mislead. Here are a few issues I have with the article:

    1) It repeatedly compares California to Texas, but that comparison is cherry-picked. The Southeast doesn’t have deregulated markets, but its electricity prices are almost as low as Texas. Texas has incredibly cheap gas and benefits from production based federal subsidies for its excellent wind resources. Plus, the state government doesn’t push extreme environmental policies. That’s why power is cheap there. In California, the government has pushed energy efficiency, renewables, net metering, forbidden fracking, and put a tax on carbon emissions. All of that has led to really high electricity prices. Something similar has happened in New York, which has a deregulated electricity market. Again, my point is not that regulation is good (I think there are strong argument in favor of wholesale electric competition), but the article misleads rather than address the issues facing the industry.

    (continued). . .

  14. 2) California “is projected to be producing 21 percent more electricity than it needs” That’s simply not true and the cited article doesn’t make that claim. California is a net electricity importer and is expected to be for the foreseeable future. Moreover, producing more energy than you need (i.e. exporting) isn’t a bad thing for consumers or utilities because free trade lowers costs (you’d think Reason would know that). The cited LA Times article refers to power plant capacity, not electrical energy. It’s an important distinction because overbuilds of capacity are a lot less wasteful/expensive than generating electricity and dumping it would be.

    (cont)

  15. 3) “Last year, the California Independent System Operator had 24 percent in actual reserves?far above the targeted 15 percent goal. Even that 15 percent goal is 50 percent higher than what’s necessary to protect the system from disaster and blackouts, according to some experts.” Well, if we believe the LA Times citation that claims the state will have a 21% capacity reserve margin in 2020, then it sounds like the reserve margins are tightening and not growing like the article implies. I also notice there’s no citation for the claim that a 7.5% reserve margin would be sufficient to maintain reliability. That’s because no credible source claims it is. Moreover, while the 21% capacity reserve margin seems high, it may be driven by local transmission congestion issues. I don’t pretend to know, but the article doesn’t explain how the overbuild happened in the first place. That’s an important part of the story here.

  16. 4) “These analyses also highlight a point that might seem counterintuitive to many environmentalists: competitive markets often lead to better air-quality outcomes. Here, we see utilities overbuilding natural-gas-fired power plants even as consumer demand suggests the plants aren’t necessary. Because of the utilities’ rate-of-return-based payment, they can stick with older technologies and avoid looking at alternative-energy models that might trim their costs.” That’s just not true in this case. Renewable development in California is driven by government mandate and subsidies and the state caps carbon emissions (and accounts for the carbon content of imports). To the extent utilities are building unnecessary new plants they will increase consumer costs, but they’ll actually improve air quality. That’s because new plans are cleaner than old plants and cheaper to run. For that reason, they’ll displace older, less efficient (i.e. dirtier) older fossil fuel plants.

    5) “The more the utilities raise their rates to pay for these “stranded costs,” the more consumers opt out and install solar panels.” If you have a connection to the grid, installing solar panels doesn’t let you “opt out”. You’re still relying on the grid for energy during many hours of the day. However, NEM forces other customers to subsidize you, so you’re not paying for the grid that you need every bit as much as they do.

    I wrote too much, but now I’m done. 🙂

  17. This article talks about the rolling blackouts in CA in the early 2000s but curiously omits Enron’s role in all of this. A disservice to the reader.

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