California’s Chief Utility Regulator Is Calling For Retail Choice — Here’s Why That Matters
In an exclusive interview with GTM, Michael Picker, the head of the California Public Utility Commission, called for liberalizing the state’s retail electricity market.
The mere suggestion that market competition may be a worthy alternative to traditional regulation would have been deemed heresy by many industry leaders in California not so long ago. And not without reason. Retail choice was widely rejected due to its role in utility deregulation, which was blamed for causing the California electricity crisis in 2001.
In the 1990s, California and Texas were the first states to pass laws introducing competition into the electric utility industry. The California bill had very broad bipartisan support. It was signed by Republican Governor Pete Wilson not long after it was passed in 1996.
Deregulation came crashing to a halt in the wake of the energy crisis. In particular, California suspended the right of customers to purchase electricity from non-utility providers until the bonds used to finance the long-term power purchase contracts entered into by the state to resolve the crisis had been paid off. When California’s government intervened to fix the crisis, the bonds issued and sold to Wall Street investors to pay for the solution included covenants that prohibited the state from reintroducing retail choice until the bonds had been repaid.
Paul Joskow, an economist and leading expert on utility regulation, explained in a paper for the National Bureau of Economic Research how California tried to solve the crisis.
Between January and May 2001, at the direction of Governor Gray Davis, California spent roughly $8 billion on purchased power to cover the utilities’ “net short” position, mostly in the spot market. The state also initiated a program to sign longer-term contracts with unregulated power suppliers, stretching out for as long as 20 years, in the hope that this would constrain spot market prices and encourage investment in new generating capacity, incurring state obligations of approximately $50 billion. The enormous cost of these contracts will be paid through higher future electricity prices, state tax revenues, or a combination.