A Return to Regulation? California Problems Spark National Trend ,
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"RCI IssueAlert" <IssueAlert@consultrci.com> on 08/16/2000 05:50:45 AM
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Subject: A Return to Regulation? California Problems Spark National Trend


Feedback regarding RCI's IssueAlert should be sent to wmcnamara@consultrci.=
com

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ConsultRCI.com IssueAlert, August 16, 2000
A Return to Regulation? California Problems Spark National Trend
By: Will McNamara
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With state power reserves falling below 7 percent for the second straight
day, and the demand for electricity continuing to increase, the California
Independent System Operator (CA-ISO), issued a Stage Two electrical emergen=
cy
on Tuesday. A Stage Two Emergency is a serious occurrence as it signals
that electric operating reserves in the state have fallen below 5 percent.
The Cal-ISO has issued over 10 Stage Two emergencies this summer, leaving
little doubt that the power supply problem in California has reached=20
disastrous
proportions. Other states (and foreign countries such as Japan) that have
deregulated their energy markets=01*or are about to do so=01*have kept a cl=
ose
eye on the problems in California. These problems have sparked a national
debate over whether returning to or maintaining a regulated energy market
is a better option.

ANALYSIS: I've been tracking the chronic problems facing California in
RCI's IssueAlerts for several months, so for further background please
visit our archives at the link offered below. Yet, generally speaking,
it's fairly obvious that the promises of deregulation in California have
not materialized. Limited transmission lines, the fact that no new power
plants have been built in almost two decades, and a 3-percent increase
in demand have driven costs up in California instead of down. On Tuesday,
approximately 43,218 MW of power was consumed, topping Monday's peak of
43,087 MW. Exacerbating the already tight supplies is the fact that some
2,220 MW of generation, mostly in Southern California, are unavailable
due to power plant mechanical failures.

However, perhaps even more pertinent is a movement that I am seeing develop
both within California and other states that arguably is a direct result
of the problems we've seen on the West Coast. This movement is founded
on a platform that suggests deregulated energy markets should become regula=
ted
once again, and those states that haven't adopted a restructuring plan
should take a "timeout" and reconsider if competition truly offers more
benefits than headaches.

Not surprisingly, California lawmakers and consumer advocates=01*blaming=20
deregulation
for the high rates that customers of San Diego Gas & Electric are now payin=
g=01*
suggested
that the California market should become "re-regulated." Proposals included
imposing more governmental control over energy prices (which led to the
recent lowering of the price cap in the state to $250/MW) to having utility
companies buy back all the power plants they were forced to sell only two
years ago.

But the discussion of re-regulation has not been limited to California.
The New York City Council, for instance, has posted a bill that would give
the City authority to regulate the output of lead into the atmosphere.
As lead is a small part of the pollution generated by power plants, if
this bill passes the City would have a handle on power generation that
it does not now have.

Even more striking is the coalition of 23 low-cost energy states that have
petitioned Congress to exempt them from participating in deregulation.
The Low-Cost Electricity States Initiative (LCESI) actually has been in
existence for over a year, but is gaining momentum again now that it can
use California as an example of all that is wrong with deregulation. Some
of these states only want to open their wholesale markets to competition,
but not their retail markets. Others want to avoid deregulation altogether.
As a lobbying group, the LCESI has tried to convince Congress that any
federal restructuring law should be secondary to state plans, and that
any mandate regarding state participation in deregulation will be appealed.


Other low-cost states have started to drag their heels regarding deregulati=
on,
even if they have not officially joined LCESI. Iowa, for instance, recently
decided that it won't even pursue the issue of deregulation during the
2001 session of its legislature, upon the urging of the state's largest
utility, MidAmerican Energy. New Mexico, which had previously approved
a start date of Jan 1., 2001, for electric competition, now has delayed
that start date until Jan. 1., 2002, to further investigate the impact
that competition will have on the state.

On the other hand, two states that are moving forward with their Jan. 1
start dates=01*Illinois and Ohio=01*continue to watch California closely bu=
t
think such problems will be averted in their own states. Ohio points to
the fact that its rate freeze won't be lifted for five years, which will
protect residents from the kind of price spikes now hurting customers in
San Diego. Illinois customers also will benefit from a longer rate freeze
and the fact that regulators in the state=01*having watched problems regard=
ing
supply materialize in California=01*allowed for incumbent utilities to dive=
st
of their power plants, but did not mandate it. Thus, importing power from
the wholesale market won't be as necessary in Illinois as it is in Californ=
ia.

However, between the 23 members of LCESI and the approximately 24 states
that have adopted some form of a restructuring plan, the United States
is almost evenly divided with regard to states that would or would not
be participating in deregulation. But, realistically, would states even
be allowed to "opt-out" from electric competition? Perhaps this might work
on the wholesale market, but ultimately I cannot see half of the U.S. state=
s
retreating from retail competition if the other half is participating.
When educated properly about the true benefits of competition, electric
customers=01*especially industrial and commercial customers=01*will push fo=
r
competition within their states or go to states where they can choose their
energy provider. In addition, because of the way the nation's transmission
grid is structured, it would be near impossible to transport power any
great distance if states along the way refuse to grant access to their
transmission lines.

Moreover, perhaps it is not entirely wise to use California as a test examp=
le
for how deregulation will work nationally, as the LCESI is now attempting
to do. First, California clearly made some mistakes in its own restructurin=
g
plan, not the least of which was the combination of mandating divestiture
and not allowing new plants to be built, ultimately leaving the state with
power supply problems. But other states are learning from these mistakes
and developing better restructuring plans. Second, states such as Pennsylva=
nia
have adopted longer periods for rate freezes and stranded cost recovery,
thus protecting customers from price spikes for a longer period. Third,
deregulation in California has only been in effect for two and half years.
To write it off as a "failure" without allowing this huge system to work
out its own kinks is a mistake.

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Sincerely,
Will McNamara
Director, Electric Industry Analysis
wmcnamara@consultrci.com

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RCI's IssueAlerts are compiled based on independent analysis by RCI=20
consultants.
 The opinions expressed in RCI's IssueAlerts are not intended to predict
financial performance of companies discussed or to be the basis for investm=
ent
decisions of any kind.  RCI's sole purpose in publishing its IssueAlerts
is to offer an independent perspective regarding the key events occurring
in the energy industry, based on its 60-year existence and long-standing
reputation as an expert on energy issues.

Copyright 2000.  The Reddy Corporation International





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