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Enron Mail |
I think a key point is that the California legislature and CPUC implicitly
put themselves in the position as "procurement managers" for California consumers. They did this in two ways: Forced utilities to go short by selling a minimum of 50% of their thermal generation (the utilities chose to sell more and the CPUC approved it). Steve Peace and many California politicians claimed that they sold these assets at ridiculously high prices. Required utilities to buy all of their needs (at least at first, then most of their needs when the Block Forward Market opened) from the spot market. They explicitly chose to take a huge short position into the spot market every day. These two basic facts led to a variety of unintended consequences: Utilities had no incentive, in fact would have to be irrational risk seekers, to purchase forward. All activitiy measured against peak index (same problem plagues their gas market). After the summer of 1999 when utilities made modest Block Forward purchases at prices higher than the spot market liquidated the CPUC played Monday morning quarterback and threatened prudency review. Huge spot market purchasing requirement causes utilities to take large short positions into real time, creating reliability problems. Lack of forward buying signals dampened the asset developement efforts. Developers looked at low spot prices in 1998 and 1999 and invested capital elsewhere in the country (e.g., Enron's peaking plants). Meanwhile tremendous demand existed, but was masked by years of strong hydro and a summer of mild weather. In 2000 when the demand showed up, it was too late. Had utilities tried to hedge forward, the forward price would have move up modestly, causing increased investment in generation. With reasonable siting rules and forward purchasing by the utilities we could have built significant generation to meet the 2001 summer season. Fundamental shortage combined with huge spot market demand caused prices in California, and the rest of the west, to increase. California didn't deregulate, they made a strategic bet to go short! Once they made this strategic bet, they "fired" the traditional portfolio manager -- the utilities -- and hired the CalPX spot market to meet all of their needs. They then let the ship sail with nobody at the helm. Deregulation didn't fail; the State of California has simply proven to be a horribly irresponsible portfolio manager. Other versions of a true deregulated market can work. Protection for small consumers can be achieved by establishing a default provider or specifying a portfolio approach. Asset divestitures can work with a contract from the buyer guaranteeing supply for a few years (this is what happened in MT which is why industrial customers are hurting there and small customers have been protected by a 3 year purchase contract).
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