Effort to tie CA grid to other states is not a deregulation redux

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OPINION – There has been much debate over SB 540, a bill by Democratic senators Josh Becker and Henry Stern that would facilitate California joining with at least four other Western states to create a single “regional” electricity market. The contentious argument is understandable given that this new regional market would require California to yield some degree of authority over electricity transactions in the state.

However, opponents of the bill who claim that it could result in dire consequences similar to what happened during the state’s infamous 2000-01 electricity crisis are off base in numerous ways. One of those critics, referring to the 1996 “deregulation” of the state’s electricity market that led to the crisis, called SB 540 “clearly deregulation 2.0” in which the “market” could once again “minimize supply and maximize price.”

While that description applies to the market during the electricity crisis, the primary causes of that result were due to an exceedingly complex and poor design. For example, the 1996 deregulation did not allow the Investor-Owned Utilities (IOUs) to sign long-term electricity contracts to hedge price volatility risk. Instead, they had to purchase most of their electricity, especially for often costly peak demand power, in a day-or-hour-ahead market in which traders and electricity generators, no longer under the jurisdiction of the California Public Utilities Commission, withheld supply to drive up prices. Those glaring problems are largely in the past, and SB 540 would not provide an opportunity to revive them.

Moreover, the 1996 deregulation essentially required the IOUs to sell their natural-gas electricity plants to private generators to prevent monopolistic behavior by the IOUs, but that perversely gave the private generators “market power” — the ability of one or more firms to raise and maintain prices above the level that would result under true competition. In addition, IOU transmission networks were designed for regional operation and reliability, not for the reliability needs of the statewide grid that deregulation created and that private traders and generators at times manipulated. SB 540 will not recreate these market mistakes and defects either.

Perhaps the biggest argument on the bill is over the need for sufficient “guardrails” on the “Regional Organization” that the bill would create to oversee energy market rules. The California Independent System Operator (CAISO), which manages the statewide grid, would still operate the electricity market and serve as the first-line check on the Regional Organization’s obligation to meet specific requirements.

It’s also worth noting that the CAISO Board of Governors had 26 members, including some arguably-conflicted power industry representatives, when the electricity crisis began. Gov. Gray Davis got rid of that board in early 2001 and replaced it with the five-member panel, appointed by the governor, that exists today.

To the extent that the “ghost of energy deregulation haunts” SB 540, as the headline of an article in The Capitol Weekly recently declared, in certain ways it is, ironically, a friendly ghost. Yes, deregulation was a catastrophic mistake, but the crisis it created launched a green wave, including the establishment of the California Renewable Portfolio Standard in 2002, that almost surely would not have happened then if not for the crisis. That created momentum for the landmark California Global Warming Solutions Act of 2006 and the state’s key role in solar-energy innovation and expansion.

It’s no surprise that many people (myself included) are concerned about the possibility that SB 540 might provide the Federal Energy Regulatory Commission, which botched its duty to timely intervene in the electricity crisis and impose “just and reasonable” rates, an additional opportunity, all these years later, to mess with California – especially given the hostility that President Trump has for the state and renewable energy. That said, it just might be the best way to reduce electricity costs and maintain our clean-energy progress; but it definitely won’t lead to the bad old days of electricity deregulation.

Kurt Schuparra served in the administrations of California governors Gray Davis, Arnold Schwarzenegger, and Jerry Brown, and in the state legislature.