Just as important as getting these things done, is avoiding those measures that will
make matters worse. In addition to the ill advised state takeover of the industry
discussed above, price caps will compound problems in the West. "Soft" or cost-
based caps have not worked in California--they left many sellers unwilling to sell,
they reduced competition from marketers whose cost structure simply does not
conform to traditional cost of service ratemaking, and they left California power
purchasers scrambling at the last minute to buy power to avoid further blackouts.
They only add to the uncertainty sellers face in deciding whether or not to invest or
make sales. Cost of service ratemaking is at best a poor substitute for market pricing
(which is why it is avoided for all services except monopoly services such as
transmission and distribution). Rate proceedings are contentious, often political and
extremely lengthy proceedings. They are particularly ill suited to situations like those
we find in the West today (i.e. extremely volatile cost components such as fuel and
emissions costs). At a time when investors need assurances that the power business
will not be "reregulated", price caps will only exacerbate the already short power
supply situation. There is a way to get prices down: increase supply or reduce
demand. The solutions outlined above do exactly that. State takeovers and regulated
rates do not. Instead, they leave policymakers with the worst possible task: deciding
whose power to turn off. West-wide price caps will make this even worse: how will
western states decide, for example, whether Idaho agriculture or California's high
tech industry is more deserving of power during any given hour?
The effort to carve off California's portion of the interstate grid from the rest of
the West must be stopped.
Instead, federal policy makers should focus on fully opening the power grid
across the country to ensure the movement of power from where it is to where it is
needed. California is not the first, and will not be the last, to attempt to interfere
with interstate commerce in the power sector. Our nation's grid is more reliable
and more efficient if it is open. As supplies tighten around the country, the
problems we are seeing in California will be repeated.
California must reform its environmental permitting process. The irony is that the
current system actually reduces air quality by keeping new, more efficient plants
off the grid while decades-old facilities that emit NOx at levels 40 times higher,
continue to run.
California must institute a program of demand "buy downs." There is not enough
time to build new generation for this summer. But, the state could take bids for
voluntary demand reductions. This will reduce prices more effectively than price
caps and will reduce or avoid involuntary blackouts. California is tapping into an
enormous amount of money from the General Fund to finance DWR's power
purchases. California could likely reduce demand more economically by running
an auction to determine the payments businesses would be willing to receive to
reduce their demand for a sustained period (e.g., through the summer months).
DWR could easily run an on-line auction to determine the price it could pay for
these demand reductions. To participate, businesses would be required to have
the metering equipment necessary to monitor and verify that they are actually
achieving the reductions. To be successful, customers need access to the
following key elements:
An Internet-based, hour-ahead price posting system to track the market price
for hour-ahead power in real time.
Real-time metering systems for baseline demand and voluntarily curtailment
A Settlement process that allows for market clearing prices of energy to be
paid for load reduction ("Negawatts").
The potential benefits of an effective demand response program would
"creation" of additional summer peaking capacity in California,
particularly in the short term, without requiring construction of additional
reduction of peak or super-peak load on the over-stressed California
electric system, thus potentially reducing the overall cost of electricity in
expansion of demand elasticity without subjecting customers to the full
risk of hourly market price volatility by passing market price signals to
customers and allowing them to voluntarily shed load and be compensated