California's Electric Market: Are Customers Necessary?
This chart highlights the declining interest in the California market. Moreover, it does not reflect the difference between bids (early data) and actual performance, which might provide additional evidence of failing interest, as some customers report that few if any of the bids actually evolve into serious offers. One large California public agency reported that eighteen out of twenty bidders left the process before completion leaving it with only two credible suppliers with which to commence negotiations.
The final data point reflects the press coverage of the Defense Energy Support Center's recent award on its request for proposals. Press coverage indicated that DESC had produced savings of $1.73 million over a $300 million contract. This figure would appear to represent savings of less than .6 percent off the existing tariff almost a factor of ten lower than announced savings to other customers earlier in the year.
In my company's most our most recent negotiations, three of the suppliers offered our client the opportunity to purchase more power than needed and to resell the surplus to back to the supplier. None of the parties who made this offer seriously pursued serving our customer's load.
Meanwhile, our negotiations have now moved to a third cycle of suppliers. Each cycle has been characterized by entry, substantial market activity, retreat and then exit. Logically, this process will continue until all of the major suppliers have realized that retail activity will not provide average market returns. When this happens we can expect an end to "supplier flight" (as California customers have come to call the phenomena of successful bidders disappearing from the negotiation) and the final round of RFPs will attract no bids at all.
California's experience is unique. The problems are clearly not endemic to competition. Recently, in one eastern state, opponents of competition seized uponm Enron's departure from the California residential market to argue that competition had failed. Their conclusion was wrong: Competition hadn't failed, it simply wasn't been given its chanceyet. In California, the framers of deregulation have managed to postpone the fateful day when customers have a true choice. That day must wait until the of the CTC recovery period.
Is there a ready analogy? Consider this question often asked in the church schools of our youth: "Can God make a stone too heavy for him to lift?" The answer is "yes," of course, but God is too wise to make that choice. Can California legislators and regulators create a market too ponderous to benefit consumers? That answer again is "yes," but legislators and regulators have only human wisdom and apparently did make that choice. To err is human, to forgive is divine.
Robert McCullough is the managing partner of McCullough Research, an energy consulting firmbased in Portland, Ore. Previously, McCullough worked at Portland General Electric Corp.,where he helped start the nation's first electric brokerage.
1 The period of collection will extend beyond 2002 for some specially designated costs.
2 Time-of-use, Real Time On-peak Demand Charge General Service - Large, Sheet 13
3 There is some argument whether AB 1890 and the PUC