Energy: Shortages, High Rates Beginning to Affect Other States, Say Experts
Not only will the California power crisis get worse, it could spread to other states.
Joe Egan, director for strategic and marketing issues for Boulder, Colo.-based energy analysts E Source, addressed power experts March 14 in a teleconference sponsored by Financial Times Energy, an energy consulting company also based out of Boulder.
In many ways the power crisis has become worse since the height of the uncertainty last summer, he said.
“Now in California, we have huge utilities teetering on the edge of financial insolvency, we have a state apparently determined to buy a significant huge chunk of the transmission system, and we also have the state negotiating and signing multibillion-dollar, long-term power contracts. None of that to me appears to be very good news,” he said.
And things will get worse. He predicted this summer will prove to be more troublesome than last summer.
Although a record amount of generating capacity will be built in the United States this year, only 4,500 megawatts will come online in the West , far short of already existing needs. Even worse, shortages in equipment for power plants and skilled labor to build the plants are delaying construction.
“The rest of the nation will soon be awash in generating capacity, but individual regions may face extreme price volatility in natural gas markets due to gas transportation shortages,” he said.
Two More Years Of Crisis
Economist Peter Navarro, associate professor of economics and public policy at UC Irvine, had a slightly different view. He predicted the current crisis will last at least another two years.
The good news is that after that, as planned power plants and self-generation units come on line , together with a predicted drop in natural gas prices , the West should see abundant electric supplies hovering at an average wholesale price of about 5 cents a kilowatt hour, Navarro said.
The bad news, he said, is that the state of California is now signing long-term contracts with wholesalers to provide electricity at 8 cents a kilowatt hour and higher.
So the state of California is compounding its errors under deregulation by locking in long-term prices that will ultimately saddle the state’s consumers with billions of dollars of above-market prices, Navarro said.
Navarro cited a study by the Utility Consumers’ Action Network which showed that California ratepayers may end up paying $9 billion more for energy over market prices.
‘California Road Kill’
Meanwhile, the effects of the ongoing crisis are spreading across the country. Jerry Pfeffer, energy industries adviser at the Washington, D.C.-based law firm of Skadden, Arps, Slate, Meagher & Flom, referred to this as “the ‘California road kill'” effect.
States that were moving forward with deregulation have either suspended their plans or reopened them for additional consideration, while new proposals have been placed on “indefinite hold,” he said.
But other states are learning from California’s mistakes. Alison Silverstein, spokeswoman for the Texas Public Utility Commission, said the state had fashioned its own restructuring efforts to prevent a Golden State-style catastrophe.
Texas designed its wholesale market in 1995 to rely upon power supply contracts between electricity providers and purchasers, rather than a state-operated, spot market power exchange as California did. The state also streamlined its permitting process, and the results were noteworthy.
“(The) competitive wholesale market has encouraged completion of 9,343 megawatts of new power plant capacity since 1995,” she said. “With another 14,000 megawatts under construction today and a diverse fuel mix independent of unpredictable resources like hydroelectricity, Texas has dependable supply well in excess of its growing demand.”
‘The Wrong Lesson’
The fact that Texas has done well under deregulation shows that it can work if done correctly. California energy crisis will not become the national energy crisis, so long as regulators, lawmakers, utility companies and consumers understand what went here, Egan said.
That means giving market players a broad range of risk management tools, including the ability to negotiate bilateral contracts and to use options, futures, and swaps to hedge their risk profile, he said.
“The wrong lesson to draw is that restructuring is harmful and should be avoided,” Egan said. “The right lesson is that, prior to opening a state’s market, every effort must be made to ensure that market conditions are ripe for the entry of new competitors .
“If the state creates elaborate and expensive systems that make it impossible for competitors to operate profitably, they will leave. You can’t have a competitive market without competitors.”
