Government

BLACKOUTS
Flawed legislation at heart of California's power problems, scholar says

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

2/1/2001

Photo by Bill Wiegand George Gross, a professor of electrical and computer engineering, studies energy policy at the UI Institute of Government and Public Affairs.

CHAMPAIGN, Ill. -- It's a principle of physics as well as economics: If rapid pressure builds in a confined space and has nowhere to go, there’s going to be an explosion.

The blowup of California’s electricity system demonstrates how soaring demand combined with artificially low prices can disrupt a commodity that everyone relies on -- and takes for granted.

"It took two years to happen, but it did -- ironically in winter and not during the summer when demand is highest," said George Gross, a University of Illinois professor of electrical and computer engineering.

The root cause of the crisis was flawed legislation that traded economic realities for short-term fixes to satisfy consumers and utilities, according to Gross, who studies energy policy at the UI Institute of Government and Public Affairs.

In return for more freedom from state regulation, the leading distributors, Pacific Gas & Electric and Southern California Edison, agreed to freeze residential rates.

"California was then riding on a wave of abundant energy and wholesale prices were low," Gross said. But capacity tightened rapidly as the booming economy sucked up power and in-state supplies stopped growing because of the heavy hand of state politics and bureaucratic indecision.

"Many people point the finger at public opposition to new power stations, but a major cause of the tight supplies was investor uncertainty as to the regulatory regime of the government."

Starting last May, the imbalance between supply and demand was apparent. The situation worsened dramatically last fall as natural gas prices skyrocketed and unusually dry weather reduced hydroelectric power throughout the West.

The result: PG&E and Edison paid an average of $320 a megawatt hour for power in December they could not sell for more than $54. This led to massive losses, default on some debt payments, and power shortages as suppliers worried about unpaid bills, leading to state intervention.

While the California debacle is far from over, several lessons can be drawn as electricity deregulation proceeds in other parts of the country, according to Gross.

First: Regulators must let utilities pass on reasonable costs.

"It is going to be impossible to solve this problem until consumer electric rates are raised. They need higher prices to get investors to invest in California utilities again."

Second: Officials must exercise leadership in securing adequate sources of power as well as allow utility distributors to purchase electricity on stable, long-term contracts.

Third: Better metering technology, which raises or lowers individual consumer rates according to the hours of usage, could be an effective way to stretch supplies without adding costly new capacity.

Fourth: While utility deregulation is going smoothly in Illinois, Pennsylvania and several other states, "expect more shocks as the industry adjusts to market realities and consumers face the real cost of fueling a high-tech economy."