Cheap Electricity II

About a year-and-a-half ago, I wrote about the appearance of Cheap Electricity caused by plummeting natural gas prices and the onset of independent power producers generating power with gas turbines (see HEJuly/Aug `93, p.2). Some independents are producing electricity for less than 3.5¢/kWh. I speculated about the impact that lower electricity prices will have on conservation efforts by individuals and utilities.

Now the implications of cheap electricity are filtering through the utility industry. California appears to be leading the way. A recently proposed order by the California Public Utilities Commission (CPUC) would allow virtually any consumer to select his or her power provider. The deregulation would begin with large, industrial customers, and would gradually expand to include commercial customers, and then residential customers in 2002. Meanwhile, regulations would be modified to set each utility's profits on its performance, so that it would be rewarded for efficient operations rather than recovery of expenses.

There is justification for the CPUC's action: the regulatory body wants everybody to enjoy access to low-cost electricity while encouraging utilities to operate as efficiently as possible. (There are some less-charitable explanations for the action, ranging from the CPUC's need to justify its political exstence to bungling and poor analysis.) In any event, the proposal must be taken seriously.

The most curious aspect of the current deregulation frenzy is that it is driven almost entirely by the low price of natural gas (and the resulting cheap electricity). The costs of almost every other aspect of electricity production and distribution have not appreciably changed, yet the whole system is being torn down to accommodate low gas prices. In other words, the tail is wagging the dog. A highly unstable situation is being created, that can be toppled by an unexpected upturn in gas prices. One can imagine a rapid regulatory backtracking if gas prices suddenly rise and consumers suddenly do not receive cheap electricity.

Meanwhile, California's utilities are downsizing so they can compete with the independent power producers (see DSM in the Doghouse? p.7). As budgets shrink, virtually the first departments to disappear are those dealing with energy efficiency. There may not be any means for a utility to profit from energy efficiency in the new utility order nor is the CPUC likely to retain any leverage to encourage utilities to operate efficiency programs. As a result, many efficiency programs and rebates have been suspended, and the dismantling of energy-efficiency expertise is already underway.

The impact extends far beyond California. Utilities in other states have already proposed cutbacks in their efficiency programs while local regulators decide whether to follow the California example.