Fact Sheet 13
Blackouts and Electricity Deregulation
Frequently Asked Questions
What Caused Electricity Blackouts in California?
Blackouts occur when demand for electricity outstrips supply.
California´s grid managers have to implement rolling blackouts when
power producers cut power levels below aggregate demand. It is widely
believed that the new and unsettled electricity marketplace has created
market-manipulation opportunities for power producers and natural gas
suppliers. By taking vital plants off-line for `maintenance´ during
periods of peak demand, and in some cases by dumping energy supplies in
other states or abroad to create false scarcities, power producers were
able to exploit the genuine scarcities of Pacific Northwest
hydroelectric power imports. This allowed them to name their own prices
and generate unprecedented profits.
While many of the former utilities are owned by sprawling power
conglomerates, they are essentially `price-takers,´ delivering whatever
power they receive at the prices bid that day. In some cases, the old
utilities, now transmission and delivery (T&D) firms, are unable to
charge enough to cover their costs. Two of California´s largest T&D
companies are virtually bankrupt, but the profits made by their parent
companies have more than made up for the inconvenience. In fact, having
emptied ratepayers´ pockets, the power producers seem to be anticipating
a public bailout of their T&D systems, adding insult to injury.
California and surrounding states enjoyed a surplus of energy and low
energy prices in the late 1980´s and 1990´s. Thanks to aggressive
energy efficiency and conservation programs, California´s energy use has
increased by less than 2% per year while neighboring states´ demand grew
at roughly twice that rate. During this period, nearly 1400 Megawatts
(MW) in planned new generating capacity (enough to power 1,400,000
homes) was canceled or put on hold. Environmentalists supported many of
the projects, especially those that used renewable energy sources, but
are nevertheless being blamed by the Bush Administration for siting and
permitting delays.
Deregulation itself may be to blame for the lack of new power capacity,
because as California began electric industry deregulation in 1996
investors pulled back, waiting to see how the new system would work. No
new plants were built, but regional demand for electricity continued to
grow.
Will New York State Face Blackouts This Summer?
Apparently not. New York officials believe that the state can meet its
energy needs in the near future. New York City´s power supply during
summer is the cause of most concern. On hot days, heat rises from dark
roofs, streets, and parking lots, creating a `heat-island´ microclimate
that greatly increases power demand for air-conditioning. The NY Power
Authority (NYPA) has recently installed ten new 79.9 MW natural gas
turbines to generate electricity during peak hours. These were
installed without environmental review (which is triggered at 80 MW) and
are primarily located in poorer communities of color. Long Island and
New York City commercial consumers may be paid to run their backup
diesel generators during the day to further reduce demand, but at a cost
of skyrocketing pollutant emissions. Watt for watt, diesel generators
produce more than 50 times the pollution of a new, natural gas plant.
New York State´s public service law was intended to `fast-track´ new
power plants coming on-line to meet increasing demand, but it has
satisfied neither power producers nor environmentalists. There was
evidence of California-style market manipulation in New York last
summer, and this sort of exploitation is widely expected to continue
until it is reined in. Air quality is guaranteed to suffer as more and
more short-cuts are taken.
What is Electric Deregulation?
Under deregulation, formerly regulated utility monopolies compete in a
marketplace managed by the Independent System Operator (ISO) to sell
electricity. The regulated companies that once generated, transmitted,
and sold electricity are broken up, having to sell their generating
capacity or set up power-producing subsidiaries. Barriers to entry by
new energy companies are greatly reduced, and new investment incentives
are attracting much-needed capital. This theoretically allows many
companies to compete to buy and sell electricity, forcing prices down.
Deregulation is occurring in many states, in various forms, and at
varying rates. New York State has been moving toward deregulation since
1998, at the urging of Governor Pataki.
Why Was Deregulation Implemented?
In the 1990´s, large industrial and commercial electric customers called
for deregulation, ironically, because they believed that their electric
bills were too high. Tired of buying power from the regional utilities,
these customers wanted market-based competition which they believed
would drive down electric prices for them. The selling point was that
deregulation would provide competition first at the wholesale level and
later, at the retail level, so customers could buy power from any
company willing to sell to them. Some environmental organizations
supported deregulation because of the promise of energy choice. Many
believed that consumer demand for `green´ power in a market context
could move renewable energy sources forward faster than under
regulation.
What Makes This Different From the Former System?
Under the former system, private companies and public agencies held
regional monopolies to provide electricity. These regulated utilities
took care of electric generation, transmission, distribution, and
service. They were responsible for long term planning to meet
electricity needs and were required to maintain a reserve margin of
power for unusually high peaks of demand or unexpected power plant
repairs. Regulators could determine need and send electricity from one
area to another area. Prices were equitable, determined by calculating
costs and adding a fixed rate of return for investors.
Is Deregulation Working?
So far, there is very little evidence of public benefits to come under
deregulation. Deregulation eliminated utilities´ incentives for
demand-side management programs (reducing demand). Rates have gone up,
at times exponentially. Reliability is under siege. Power producers
are manipulating the system by choking supply to increase prices.
Older, dirtier coal plants are not going to be displaced by cleaner,
more efficient plants, as some forecasted, and may out-compete many of
the new plants. Without government intervention, these older plants will
continue to violate current environmental standards, using Clean Air Act
loopholes. Customer choice remains more theoretical than real.
Demand-side management, even with regulatory intervention, is far below
previous levels, and in New York State is far below levels in adjoining
states.
It seems as if the benefits touted by deregulation proponents have
devolved into a mix of blackouts, poor air quality and attendant health
problems, rapidly rising power costs, and pitched battles between
communities and power plant developers. Deregulation can only succeed if
there is a glut of power production capacity, and even then, there is
absolutely no guarantee of market stability, or that any public benefits
will be seen. Interestingly, two of the remaining California public
utilities, Los Angeles Dept. of Water and Power and Sacramento Municipal
Utility District, have experienced no blackouts and have maintained
stable prices.
Do We Really Need More Power Plants?
Politicians are now using the atmosphere of crisis resulting from the
California blackouts as an argument for building many new power plants,
allowing `dirty´ plants to continue operating, and relaxing
environmental standards. Legitimate alternatives are being overlooked.
Supplies of oil, coal, and natural gas are finite, and demand is growing
exponentially. This is leading toward higher prices, shortages, and
ultimately, exhaustion of supplies. It also has staggering global-scale
environmental and public health costs: increasing global climate change,
acid rain, local smog, and mercury contamination of our waters. Power
plant proposals focus only on supply and look for a short term fix to a
long term problem, ignoring the big-picture reality.
What are the Alternatives to Construction of New Power Plants?
- Demand-side management: Reducing demand can be accomplished two ways:
conservation programs and energy efficiency improvements. Much of the
energy we use is wasted. Scientists from five US national laboratories
recently released findings that government-led efficiency programs
emphasizing research and incentives to use new technologies could reduce
the growth in electricity demand by 20 percent to 47 percent. This
would eliminate the need to build between 265 and 610 medium-sized (300
megawatt) power plants.
- Investment in Renewable Energy: Instead of continuing subsidies for
fossil fuels and nuclear systems, we must reverse the trends of
investment. If our nation had invested in solar, biofuels, and wind
power what it invested in nuclear power, we could be much more
energy-independent today with significant reductions in our contribution
to global climate change and air pollution. In NY State, and
nationally, we must face the shortcomings of our current patterns of
energy use, and explicitly acknowledge that nuclear and fossil fuel
systems are transitional technologies. We must dedicate our resources
towards developing the full potential of renewable energy, which can
become the engine of future economic growth. Tax incentives, research
and development funds, consumer rebates, and renewable portfolio
standards (requires utilities to buy a certain percentage of their
electricity from renewable sources) could spur increases in renewable
energy. Solar, wind, geothermal, clean biofuels, low impact hydropower,
and fuel cells offer energy that can meet our needs without the
environmental and health burdens of fossil fuel pollution or nuclear
wastes. Currently, less than 1% of national energy needs are filled
with non-hydropower renewables.
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