California Syndrome Contained

By SmallBusinessComputing Staff | Posted March 28, 2001
by Robert J. Wagman

Grab a candle and generator, it's going to be a bumpy ride. Or maybe not. Most experts believe that the power deregulation crisis that hit California this past winter will not likely be repeated in any of the twenty-odd states where electricity deregulation has begun or is planned.

In 1998, California became the first state to deregulate its retail electricity market. The result has been a shortage of power, sky high prices for customers, and soaring losses that have threatened to throw the state's two biggest private electric utilities into bankruptcy.

But most experts are confident that California's experience is unique and that one decision in particular led to the crisis. When the California private power companies sold their generating plants at auction for more than $3 billion, they were prohibited from entering into long-term contracts with power producers. Distributors were required to make day-to-day spot market purchases from the California Power Exchange. This decision has proven catastrophic.

"No one has copied the California model," says Bill Brier, vice president of communications for the Edison Electric Institute. "These other states won't get in this bind. Things are much more fragile in California because it just didn't have the reserves."

The state most often cited as the model for successful electrical power deregulation is Pennsylvania, where it is estimated that consumers have saved more than $2.8 billion since deregulation took effect five years ago. But Pennsylvania did some things very differently from California. Utilities were allowed to keep their generating plants and, as a result, today buy only about 15 percent of daily power requirements from the spot market. Rates were capped at 1996 levels, and caps were put on what utilities are required to pay for power.

Other regions that are deregulating are moving quickly to avoid California's problems. For example, when the Washington D.C. area's Potomac Electric Power Company sold its plants last year under the region's deregulation plan, it immediately entered into long-term agreements with the buyers to purchase enough power to make sure the company would not rely on the spot market.

"We would never rely on the spot market," says Pepco spokesman Robert Dobkin. "It's simply too volatile."

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