V. De-Regulation, Merchant Plants, and the Supply Crisis/Glut (1997- ??)

I am not an economist, and decline any attempt to analyze the many dysfunctional pricing/bidding mechanisms, erroneous decisions, miscalculations, and greedy activities that helped destroy electricity de-regulation. Instead, I will focus on utility divestment because it directly involved powerplants that were essential to California’s electricity supply.

At one basic level, the market failed, in part, because the PUC chose to auction off existing utility powerplants (divestment or divestiture) before any new merchant powerplants had been built to provide a competitive marketplace for electricity. The investor-owned utilities happily pocketed their massive profits (billions of dollars) from these over-priced sales, transferring the funds to unregulated companies. The ratepayers received nothing from the transactions, even though the powerplants had been paid for by ratepayer funds. The corporate buyers had bid so much for the powerplants that these companies had a strong incentive to maximize profits by any means necessary. Thus, if withholding power ultimately helped the bottom line by dramtically raising electricity prices, that approach must have appeared to make good business sense. (Despite the ensuing disaster, the investor-owned utilities supported continued divestment and even wanted to sell-off their hydro plants (dams), only to be blocked by environmentalists, government agencies, ratepayer advocates, and the supply crisis itself.)

Subsequently in 2000-2001, with retail rates still frozen, the PG&E/SCE regulated utility companies could not pay the extraordinary higher wholesale prices being charged under market-driven deregulation by the new private owners of the former utility generating facilities. Thus, divestment, which the PUC initiated on its own, with utility concurrence, is certainly one cause for the complete deregulation system collapse. In contrast, the municipal utilities often had power to spare because they were exempt from the PUC and its divestment program.

The merchant plants that were supposed to bring competition began filing their AFCs in 1997. These turned out to be extremely large facilities (generally 500-1000 MW), which took years to construct. Thus, even with rapid CEC approval, the first merchant plants did not come on-line until 2001. By then, the supply crunch had produced rolling blackouts, escalating prices to the point where the State of California, through the Department of Water Resources (DWR) was buying electricity because the still-regulated utility distribution companies were going broke.

According to DWR, wholesale electricity prices went from a pre-deregulation level of $15-30 per megawatt hour to between $300 and $1,000 per megawatt hour at the height of the crisis. DWR did its best, and prices came down, but the agency bought too much electricity at absurdly high prices, helping create a state financial crisis and DWR electricity surplus. According to then Governor Davis, DWR spent $26.7 billion on electricity in 2001. Financial uncertainty for both the state and merchant plant developers has become a major element in California's electricity market.

Now the ratepayers or taxpayers will probably foot the bill for de-regulation's failure. The Energy Commission at first seemed overwhelmed with new merchant plant AFCs, even though there could be no possible need for all these facilities. Many AFCs will not be built, even if licensed. Other applicants have suspended their AFCs. (As part of de-regulation, the Legislature eliminated the CEC's historic and essential legal authority to determine need for new powerplants.) In 2001, California thus moved from an energy shortage to an energy glut, while still under a state of emergency. By the end of 2003, with several large merchant powerplants licensed, but delayed or on hold due to financial problems, it is unclear to me whether their several thousands megawatts will or should materialize.

Yet the state will still be buying a great deal of merchant plant power, largely under DWR contracts, destroying the original definition of and rationale for merchant plants, that no ratepayer impacts were possible from such facilities. Some of the merchant plants march on, while others are stalled by the inability to obtain financing. All potential ratepayer benefits from deregulation failed to materialize, as electricity rates zoomed upwards to among the nation's highest, and the State of California has joined the utilities with billions of dollars in debt.

What follows are histories for the first eighteen merchant plant AFCs, covering those "conventional" 12-month Applications for Certification approved by the Energy Commission through 2001. There were seventeen licenses granted and one withdrawal (Nueva Azalea), which lost at the ballot box. (The construction/operational status of licesned facilities are updated to December 2003, but remain subject to change, due to California's uncertain electricity climate.) The histories exclude Small Power Plant Exemptions and make no attempt to describe any other filings during this period, such as new, confusing licensing categories created in response to the state of emergency, namely 4-month AFCs and emergency peakers with an EP Docket Number. (The Legislature also added 6-month AFCs, completing the regulatory smorgasbord.)

Most of these original merchant plant AFCs would have been licensed absent the 2000-2001 supply crisis. But the electricity shortages sped up the certification/construction process at the Energy Commission, and clearly helped some facilities that may otherwise have been stalled, especially highly contested Metcalf (land use override), and Sunrise (expansion in compliance.) In the space of just a few years, the Energy Commission licensed twice the capacity from 17 large merchant plants plus other emergency facilities (over 11,000 MW) than it had in the agency's entire previous history dating back to 1975. Many of these projects are now providing needed electricity, some are still under construction, while others may never be built. New powerplant applications continue to be filed, although at a much slower rate than during the crisis period.