Western Markets: An Investor's Minefield
Electric Competition, One Year Later: Winners and Losers in California
The state foots the bill, while northern neighbors profit from a managed power market.
California's electric restructuring plan, launched on April 1, 1998, marks one of the most ambitious attempts in U.S. history to place the state in a social engineering role. Not only was the scale of the project daunting, with implementation cost estimates running as high as $1.2 billion, but the plan places California government in control of the most minute components of the electric system.
How has the experiment gone? Most participants on the retail side agree that restructuring California-style has had little impact as yet on final consumers. The complex mechanics and high entry fees simply have made large-scale customer participation impossible. Even the largest industrial customers have seen few benefits.fn1
Instead, the most far-reaching impacts have occurred at the wholesale end of the market. This finding is surprising, moreover, because the mechanism described in the program's enabling legislation, Assembly Bill 1890, was not designed to intervene in wholesale markets.
Granted, this analysis is preliminary at best; we can call on only eight months of experience with the new institutions, including only about five or six months of hard information, since data from the U.S. Energy Information Administration is usually lagged three months or more.
Nevertheless, the preliminary indications appear quite clear. California's intervention in wholesale markets, with its complex administered Power Exchange (PX) and Independent System Operator (ISO), has raised both prices and volatility across the West Coast. This experience suggests a series of questions for the state, the region and the nation as a whole:
California. Are total costs in California going up or down since the implementation of AB 1890?
WSCC. In the larger regional sphere, encompassing the Western Systems Coordinating Council, are markets more efficient economically? Have changes brought prices closer to pure economic levels unaffected by market imperfections and monopoly power? Have the economic benefits of better (more efficient) prices been offset by higher market volatility?
Society. Finally, is the nation better off for these innovations?
My sense of the preliminary data is that the West Coast is a better, more economically efficient market since implementation of AB 1890. The cost of increased volatility has not offset the economic advantages of more competitive markets. One major reason that the balance remains positive is that implementation costs have been borne largely by Californians.
California proper, however, is another situation entirely. The state has lost in three ways since AB 1890. Overall terms of trade have moved against California, imposing much higher prices for imports but leaving export prices largely unchanged. Second, the additional volatility is a cost that Californians face without the advantage of lower wholesale prices. Third, as mentioned, California has sole responsibility for implementation costs.
Fundamentals: West Coast Trading
Market players on the West Coast long have recognized a seasonal framework to transactions along the Pacific Ocean. Loads in California and the desert southwest are highest in the summer, reflecting cooling loads. Loads north of California are highest in the winter where electric resistance heating is common. In addition, supply is dominated