Domestic electricity customers in the southern California city of San Diego may well be questioning the merits of competition. As temperatures soared during the summer so did their electricity prices, at one point increasing by almost 300 per cent. Their salvation has been the emergency legislation signed by Governor Gray Davis on 6 September to cap electricity prices at 6.5¢ per kilowatt-hour, reducing the price by more than a third from the then price of 21.4¢. In order to help pacify the customers the rate cap is both retroactive to 1 June and will extend at least until 31 December 2002 and possibly until the end of 2003.
Although the situation is somewhat unique in California – increasingly hot summer temperatures, leading to greater air conditioning requirement, and the increased electricity demand of Silicon Valley, with the rapidly growing digital economy (electronic commerce) forecast to account for up to a third of electricity demand – it should send a shock wave across the other US states that are either already competitive or in the process of deregulating their market. The gravity of the situation in San Diego forced the Federal Energy Regulatory Commission (FERC) to hold a public meeting, following the rate cap legislation, the results of which should make interesting reading.
The problem with California, and other US states that have implemented competition, is not the theory of market competition but its implementation. Competition in electricity markets does work when it is properly implemented and regulated. To witness this you have to look no further than Scandinavia, which is the first, and most successful, of all the competitive electricity markets in the world. Even in the UK, which has had its fair share of criticism, it can be argued that competition is working. In other words, competition in these markets is leading to lower prices in real terms for domestic customers.
So what is wrong with California and the US in general? A market that Enron president Jeffrey Skilling recently said was the “most screwed up” of the 14 markets which Enron has helped develop around the world. The problem with the US electricity market is that the transmission system is not open to competition and there is no inter-state competition. Therefore, in the case of California, when demand nears available capacity it cannot wheel in power from outside the state. The result is that prices escalate as more expensive generation plant is called on to meet increased demand and the likelihood of brown outs increases.
The warning signs that the US transmission system is “flawed” have been evident for years. For the past three years California has experienced escalating prices in the summer as temperatures soared. But legislation to restructure the market has stalled in Congress for the past year, and with the election in November the earliest date for any legislation to be implemented will be after the new president is sworn in in January. With Democrats and Republicans sponsoring bills to legislate restructuring the US power market is fast becoming a political issue.
Indeed the politics of the US power market are largely controlled at the state level, characterising the market as a regulatory quagmire. For all the investment made by US utilities in competitive European markets, such as the UK, to learn about market competition in action the deregulation legislation implemented by the respective Public Utility Commissions of states that have introduced competition has done little to prevent market abuse or break the monopoly power of utilities. Clearly until this situation is resolved the true value and benefits of competition cannot be realised.
As in the more successful competitive electricity markets their needs to be some centralised control of regulatory initiatives. The obvious solution is for FERC to take control and ensure that deregulation legislation is consistent throughout the nation with improved transmission and investment in more interconnectors. The creation of Regional Transmission Organisations would certainly assist in a market that has witnessed a 300 per cent increase in electricity system failures since 1998.
While it is easy to pass off the California situation as a one-off there are likely to be many other “California’s” in development. To prevent further occurrences the US has to start with restructuring its wholesale market. If the US wants a competitive market at the retail level it first has to implement a competitive transmission system at the wholesale level. It is surely a sad indictment of a country that has been at the cutting edge of market commoditisation and free market trading that it has been unable to effectively introduce competition in the world’s largest commodity.
