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June 4, 2018

Deregulation Shouldn’t Be Blamed for California’s Grid Problems

June 4, 2018
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In early May, the California Public Utilities Commission (CPUC) released a report warning that the emergence of community choice aggregators (CCAs) could potentially destabilize California’s energy grid. This blog post explains the concerns the CPUC has about the increase in community choice aggregation in California. It also traces the origin of CCAs back through California’s regulatory history to show they are the result of repeated government intervention, not deregulation as the CPUC’s report suggests.

What Are CCAs?

Community choice aggregation is an alternative to an investor owned utility energy supply system in which local entities combine the buying power of individual consumers in a given jurisdiction in order to secure alternative energy supply contracts. In other words, CCAs are not-for-profit public agencies that decide the source of electricity generation for residents in a certain area. In a CCA’s service territory, the traditional utility continues to own the transmission and distribution infrastructure.

Although CCAs are marketed as a way to expand consumer choice and decentralize regulatory authority, the reality is that CCAs simply shift decision-making power from state-level regulators and utilities to elected local officials. CCAs should be thought of as de facto public utilities that are further removed from a competitive market where decisions about electricity generation are frequently made on a political basis.

CPUC’s Concerns

The CPUC’s primary concern is that CCAs have fractured regulatory decision-making around reliability, affordability, and safety—decisions that have traditionally been handled by the CPUC. In California, CCAs frequently opt for renewable energy generation—usually solar—to provide electricity for those living in their jurisdiction. As others at IER have explained, too much solar energy can be problematic for the reliability of the grid because of intermittency. These problems are exacerbated by the fact that with the emergence of CCAs, decisions about back-up generation and affordability are being made at different levels. The CPUC’s report states:

The community choice aggregation movement, proliferation of rooftop solar along with other customer installed resources, and the continued digitization of the electric grid have transformed a once vertically-integrated industry into one with increasing fragmented responsibility for resource procurement and resource adequacy. And this new disaggregated system must, of course, continue providing Californians with reliable service at affordable rates while achieving deep decarbonization goals.

The CPUC is correct to worry about the impact CCAs could have on stability and affordability, but the agency errs in its assessment that these newer components of California’s energy market are the consequence of deregulation. The report states:

In the last deregulation, we had a plan, however flawed. Now, we are deregulating electric markets through dozens of different decisions and legislative actions, but we do not have a plan. If we are not careful, we can drift into another crisis.

The use of the word “deregulation” is misleading here. The emergence of CCAs in California is not the result of deregulation; they are the result of government’s long history of intervention in California’s energy market.

A Brief History of Energy Regulation in California

We don’t have to look too far into the past to see that heavy-handed government policies—not deregulation—have caused major problems to California’s electric grid. In 2000 and 2001, California experienced an energy crisis where a shortage of supply in electricity created large-scale blackouts across the state. To this day, people wrongly blame the 2000 Electricity Crisis on deregulation and profit-seeking companies. However, a sober assessment of history reveals that the period leading up to the crisis was not a period of deregulation, and the actual cause of the crisis was a series of government interventions in California’s energy market.

In 1994, the CPUC proposed restructuring California’s energy regulations in order to provide “direct access” to consumers. This initial proposal was correctly viewed as an attempt to deregulate California’s energy grid by moving away from the traditional cost-of-service regulatory model governing vertically integrated utilities. This effort was quickly seized upon by special interests and the attempt to deregulate California’s energy industry became a complex rearrangement of energy regulations: utilities sought full recovery of stranded costs, and environmental groups pushed for rate recovery and surcharges for various supply- and demand-side programs.

Deregulation never happened. Instead, power plants were forced to sell their supply into state-managed markets where price controls prevented companies from charging more than 6.5 cents per kilowatt-hour for electricity. The combination of these additional interventions along with an overreliance on natural gas during periods of peak demand and a restriction on long-term contracts between generators and investor-owned utilities is what caused the California Energy Crisis, not deregulation.

In the period following the Energy Crisis when few people were questioning the role for government in operating the state’s energy grid, California made an aggressive push to make electric generation and consumption greener through a system of government programs. The misperception that state regulatory agencies deregulated California’s energy market leading up to the crisis in 2000 led to the creation of CCAs because people wanted accountability shifted to the local level. During this time, special interest groups partnered with local municipalities to introduce legislation that would open the door for CCAs to begin operating in California.

In September of 2002, a bill was passed (AB117) that allowed CCAs to form in California; it also mandated that customers be automatically enrolled in their local CCA, with the option to opt out. In 2010, the first CCA was formed in Marin County. Shortly after, Sonoma County, San Francisco, San Mateo County, Lancaster, Richmond, and parts of Contra Costa County also created CCAs, and by the end of 2017, CCAs were on pace to serve almost 1 million customers.

Why This Matters Today

The fact that deregulation was blamed for the Energy Crisis instead of government failure is important because this misunderstanding is what opened the door for the problems the CPUC is concerned about today. Blaming the crisis on nonexistent deregulation prevented the public from having a serious conversation about the ability of government to manage complex systems like California’s energy grid.

In this new report, the CPUC is once again attempting to blame these problems on deregulation that never happened. Regulators should recognize that there are unintended consequences to meddling with the natural order of the market. The unforeseen outcomes of intervention place regulators on a path where they must continue to intervene to try to correct past mistakes. When regulators travel far enough down this path, the market loses its ability to coordinate information and a crisis ensues.

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