Tim Wood
american notes
AMail & Guardian letter-page critic believes that electricity deregulation caused California’s energy crisis and is an example of why it should be avoided when it comes to Eskom. It’s a poor deduction that relies on less than half the facts.
California is in a mess because of the confluence of dozens of events and decisions. They catalysed each other to produce the blackouts. But state politicians bear overwhelming responsibility.
A decade ago California’s then Republican governor Pete Wilson and a Democrat legislature agreed to deregulate the state power market. The deregulation deal eventually struck was a study in market interference that could only produce a disaster. State politicians, fearful of powerful consumer activists, agreed that customers would not participate in deregulation. Instead, they were gifted 10% lower prices that were frozen until 2002. No wonder consumption has risen 15%, while supply has fallen 5%.
Power distributors were expected to pay market-related prices to generators and were left to manage any difference in prices. It was a bank-guaranteed invitation to arbitrageurs, who moved in quickly to milk the distributors. Even when the distributors were forced into bankruptcy the generators were safe because they knew the state would keep the lights on or face a revolt on the streets.
Further evidence of political bungling is in regulations controlling how power could be bought and sold. As with any market, futures act as an important counterbalance to the spot market. But California prohibited its utilities from buying electricity futures or even entering long-term supply contracts, forcing them to buy energy on the spot market.
It worked well at first because supplies were abundant, but more importantly there was also a price floor. When coupled with the retail price ceiling, distributors interpreted the deal as a perpetual profit machine.
Consumers were given no incentive to conserve energy. They could be as wasteful as they liked because the price would never change. So Californians became power gluttons and the onset of the technology boom with its power hungry server farms exacerbated the problem.
The number of consumers also skyrocketed. The state’s population doubled in a decade, but no new major power plants came on stream and the distribution system wasn’t upgraded. That was because environmentalists gained too much sway among politicians and helped block the building of power stations, transmission lines and pipelines by swamping developers with a tide of lawsuits and petty zoning objections. Permitting and planning for power plants in California takes 10 years twice as long as any other state. The added costs delay a return on the initial investment, removing incentives to enter the market.
Environmentalists also persuaded the state government to impose onerous clean-air standards on power plants, restricting their nitrogen oxide emissions to annual quotas. If quotas are exceeded, the generators are fined heavily. As a result, older power plants that become progressively less efficient have to stop operating for a period to stay within their quotas. The remaining power plants are forced to crank up capacity, leading to equipment failures, and reach their clean-air quotas much sooner.
On top of it all, the Pacific Northwest has suffered a severe drought for the past few years leaving hydroelectric dams below capacity. Hydro plant generation has already been hurt by water diversion schemes; ridiculous efforts to allow salmon better procreation opportunities. Despite the worst conditions in some time, this year’s salmon season is reported to be one of the best ever.
Despite this evidence that nature is a greater factor than man in the love lives of salmon, it is not unlikely that some of the biggest hydro dams on the Columbia and Snake rivers might be breached. There is no effective or cheap way to replace that clean, renewable energy. Bad fish science is not worth the risk to civilisation, but apparently that is acceptable to California.
The deregulation also ignored oil cartel Opec. Oil prices deflated steadily through the 1990s, bottoming out below $10 a barrel in 1998. Since then prices have tripled, adding yet more to California’s woes.
California is proof that low prices can no more be regulated than wished for. Eskom’s eventual privatisation would be better off for learning what happens when the free market is pursued half-heartedly.
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