EBF 483
Introduction to Electricity Markets

7.1 Why did California Want to Deregulate?

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California is the largest electricity-consuming state in the U.S. (peak demand is ~45 GW). But it has some special challenges:

  1. dependence on imports from other states (mostly hydropower from the Pacific Northwest and Canada) for up to 1/3 of its annual demand,
  2. high-cost in-state generation and strict environmental rules, and
  3. relatively little fuel delivery infrastructure (especially gas pipelines).

California's electric utilities also had some particularly bad experiences trying to build nuclear power plants. Delays and cost over-runs were massive, and the state's ratepayers were forced to bear these costs. Under PURPA (which you may remember from earlier in the lesson) California's utilities were also required to sign long term contracts with independent power producers at very high prices. As a result of all of these factors, California's electricity prices were (and still are) among the highest in the US.

Map of ther US showing high electricity rates in AK, HI, NY, VT, NH, ME, MA, RI, CT, and NJ.
Figure 7.1: Average residential electricity prices in the US.
Source: US Energy Information Administration

Faced with increasing global competition by the 1980s, industrial electricity consumers in California became angry with high electricity prices. Many large users of electricity thought that they could produce power for themselves at a lower cost than buying from the utility, but their ability to do so was severely restricted by regulations in California. Utilities were also concerned about the rising amount of debt on their books from nuclear power and PURPA contracts and were concerned that state regulators would limit the amount of that debt that the utilities could recover through even higher rates.

Thus, a kind of odd coalition was born. Large electricity users wanted to get out from under the utility monopoly, or at least introduce some kind of cost controls to their electric rates. Utilities were looking for a deal that would shift the costs of debt from shareholders to ratepayers. At the same time, the US as a whole had begun a series of highly successful experiments with industry deregulation. Natural gas, airlines, trucking and other industries had all had various forms of regulation and price controls removed, with apparent success in controlling prices. The California PUC in its famous "blue book" suggested that this success could be extended to electric power generation. Power prices in California could be lowered if generators were forced to compete with one another in a statewide market.