Please Blame the Deregulation and Regulation Fiascos Parte 15

Dick Maclay has added the following comment to the EnergyPulse article Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices in response to my last post.

Jose Antonio, I followed your links, and it appears the U.S. is behind Latin America in some important ways. Brazil is differentiating wires prices by time of use and self generation, particularly for peaking, is coming into use. The former is reducing the amount of misinformation in regulated pricing. Studies I have done through the years suggest the latter reshapes the industry into a lower cost configuration.

In the U.S., where the air conditioning peak is a big cost driver, self generation and other tactics to evade high on-peak prices make sense. They will be used when supply costs are fully revealed through electric pricing. Available measures include gas air conditioning and cool storage. The latter is just making ice at night and melting it during the day, instead of running air conditioners on peak.

Rafael Herzberg does a good job of describing how to contract under deregulation, but he misses the cumulative affect of optimizing individual decisions with good price information. When individual customers find lower cost ways to provide energy services during peak hours, and some discover they can move activities to off-peak periods, total costs decline. Fewer generators, transmission lines, and distribution facilities need to be amortized as the industry is reshaped by consumer choice.

Jose Antonio, your emphasis on price information is very important in mitigating risk. The California PUC had an experimental real-time residential rate at one time. It was expected that participants would turn up the temperatures in their homes when prices rose. Instead, many of them shut down their air conditioners completely. In the language of an economist, price elasticity was much higher than expected. Of course, there tends to be a bias in who chooses to participate in such experiments. But that only strengthens your point that regulatory customer classes are not homogeneous. Given the opportunity, some will reduce usage in the face of high prices. So price elasticity is an important risk mitigation measure during shortage periods, including droughts. And price elasticity reduces the amount of spare capacity that sits unused, needing to be amortized, between droughts.

You wondered about the culpability of those who preceded Governor Davis in California. The mislabeled restructuring that increased regulation in California was passed unanimously by the California legislature and signed by Governor Wilson years before Davis become Governor. It was passed unanimously because it was a Christmas tree with something for everyone. At least it promised something for everyone. Too bad we couldn’t fire all of those politicians retroactively.

In fairness, the politicians were duped by the California Energy Commission that promised surplus generation through the fixed price period that was to end in 2002. So perhaps in fairness we should have fired the regulators too. Then again, it was the job of the politicians to oversee the regulators, and they failed to ask any hard questions.

The failures of the badly designed re-regulation become obvious on Davis’ watch. Instead of dealing with the issues he inherited, he announced there was no shortage of power, and reiterated that as the aluminum industry in the northwest was shut down. The shut down was in accordance with the plan for a major drought published by the Northwest Power Planning Council prior to California’s passage of the restructuring legislation. Every time Davis refused to acknowledge the problem prices went up. People in a position to know tell me Davis ignored the advice of knowledgeable advisors. I have a political cartoon in which Davis brags that Schwarzenegger only destroyed Los Angeles in the movies, while he, Davis, destroyed the entire state of California in real life. Cartoons exaggerate a little bit. Still, Davis deserved worse than he got from the voters.