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Learning from their mistakes

California has offered a tutorial in how not to deregulate the electricity business. Is Florida taking notes?

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By ROBERT TRIGAUX

© St. Petersburg Times, published February 4, 2001


What do Florida and California have in common?

Aside from images of fun in the sun, they are the only two states recently dubbed by the national media with the same insulting nickname: "Banana Republic."

Florida earned the sorry label in the fall when the state was ground zero in the presidential vote-counting debacle.

Now California has seized the dubious title by so bungling a plan to deregulate its electricity market that even Rube Goldberg would be ashamed.

"California was an experiment that blew up," says Larry Makovich, an energy expert at Cambridge Energy Research Associates. "The problem in California is not deregulation itself. The system was only partially, and not properly, deregulated."

Florida had been looking to California to deliver clear directions for building a more competitive market for electricity. Like most states, Florida slowly is recognizing the long-term benefits in loosening laws to allow electric utilities, businesses and, eventually, residents to choose their electricity from competing power providers.

Instead, California's power nightmare gives Florida a laundry list of what not to do.

After the initial promise of lower power rates from deregulation, Californians face an ugly future of soaring electricity rates to cover the unexpected billions spent on high-priced power.

Rather than lead the United States toward more competitively priced electricity, California is on the verge of a state government takeover of its power business and a taxpayer bailout of its two biggest electric utilities. California consumers are protesting in the streets against huge rate hikes ahead, while businesses are cursing last month's rolling blackouts and the likely threat of power interruptions for months to come. Some companies talk of leaving the state.

[AP photo]
Linda Lahn, 17, works on an exam in the dark at River High School in Sacramento, Calif., during a rolling blackout in January.

Throughout the late 1990s, California enjoyed an international image as the homeland of the new economy, with Silicon Valley as its capital. Now on the verge of a threatened U.S. recession, the state battles a reputation as a Third World country constantly at risk of a power failure.

But there are still good lessons for Florida from such adversity.

Florida is one of more than 25 states that are in various stages of deregulating their power markets.

Before recent spikes in prices for natural gas, oil and other fuels used to generate power, electric rates nationwide had been falling steadily. Deregulation deserves more credit than it gets.

Experts say deregulation of a market as complex and as fundamental as electricity will work. But it will take time to iron out the kinks. Trial and error is unavoidable.

In that light, Florida owes California a world of thanks.

Though Florida may not be ready to admit it, the crisis in California could have happened here.

* * *

California had two strikes against it even before it passed legislation in 1996 to open its power market to competition.

The state had not built a new power plant in years. Environmental laws, the toughest in the nation, and vocal NIMBY (Not In My Back Yard) protesters had discouraged power companies from siting plants in California. Worse, the state had grossly underestimated its new economy growth and the accompanying demand for electricity.

The result: California is woefully behind in its supply of power. Today, California-based power plants supply only 65 percent of the state's electricity needs. The remainder must be purchased from wholesale power providers at market prices and from neighboring states.

Lately, those market prices are sky high. And such nearby states such as Oregon and Washington, under federal orders until Wednesday to send some of their own power to California, are feeling pinched to meet their own electric needs.

Republican Sen. Gordon Smith of Oregon complains that his state is being set up as "an energy farm" for California. A recent cartoon in the Oregonian newspaper titled "The View from California" depicts Oregon as one giant electrical socket.

Florida is not nearly as dependent on outside power suppliers to meet its day-to-day electricity needs. For years, St. Petersburg's Florida Power Corp. and other in-state utilities bragged that they had the situation well under control.

But Florida's power demands are pushing the state closer to the edge than most people think. And Florida's utilities have proved they are notoriously poor at anticipating the statewide demand.

In April 1999, the Florida Reliability Coordinating Council, which monitors the state's power supply, declared a supply shortage alert. The alert was caused by unusually warm weather and a large number of power plants down for spring maintenance.

The state's utilities urged customers to reduce power usage, primarily by raising their thermostats 5 to 10 degrees. Tampa Electric Co. even asked customers to keep cooking and bathing to a minimum.

It was the first time in six years the council had issued such a warning.

Florida's power supply is okay for now, but it is "getting near the edge," says Lynn Church, who heads the Electric Power Supply Association.

California illustrates the danger of going over the edge. To meet its power needs, large portions of electricity are purchased at high, short-term "spot market" prices from power plants run by out-of-state power companies. Among the heavy hitters are North Carolina's Duke Energy and Houston-based Reliant Energy and Dynegy Inc.

California Gov. Gray Davis attacked these out-of-state companies as "profiteers" for imposing prices 10 times higher than what typically is charged for electricity. Davis alleged they purposely took their plants offline until power prices were forced higher.

The companies deny overcharging. And on Friday, an audit by federal regulators found no evidence that electricity generators shut down California plants to jack up power prices.

"California has no one to blame but themselves," Reliant spokesman Richard Wheatley says.

Still, a whiff of gross opportunism is obvious.

The financial pain of California has turned a handsome gain for these companies. Duke Energy, which owns four California power plants, more than doubled its revenues in the fourth quarter. At Dynegy, which has 16 percent of its generating capacity in the troubled state, earnings rose 135 percent. Both companies easily beat Wall Street's expectations. Reliant profits rose 65 percent.

Floridians, get to know these names. Duke, Dynegy and Reliant are the same aggressive power companies seeking to build merchant power plants on Florida soil.

Florida-based utilities for years fought the entry of such companies. But a state energy commission last week recommended to Gov. Jeb Bush that building additional power plants in the state would help generating capacity and set the stage for price competition on the wholesale (utility-to-utility) market. Those recommendations will be considered by the state Legislature.

* * *

On Friday, California's governor signed a $10-billion package designed to ease the state's power crunch. The legislation lets the state sell bonds and use the money to sign long-term contracts with energy wholesalers in an attempt to provide reliable and affordable energy sources for as long as a decade.

Ultimately, residents will end up paying for the bulk of that deal, either through higher electric rates or some special tax to pay off the bonds.

Another provision, designed to encourage conservation, would penalize residential customers with higher rates if they consume 30 percent more energy than a baseline specified by regional climate and energy use.

Could such a similar power deal, built on the wallets of Floridians, occur?

You bet.

In fact, Florida consumers already have faced their own version of a state government bailout with striking similarities to California's electricity situation.

It's called the JUA, the Joint Underwriting Association. It was created after Hurricane Andrew struck South Florida in 1992. A state-backed insurance pool, the JUA provides homeowners insurance to residents who cannot find private insurance to protect their homes.

The JUA is not big now. But it used to be one of the state's biggest home insurers.

Like California's power bailout package, the JUA was created to provide a basic service to residents that the private market refused to offer at reasonable prices after Andrew. And like California's package, the JUA relied on state-backed bonds that would help cover claims by JUA-backed homeowner policies in the event another powerful hurricane struck Florida.

The comparison is not far-fetched.

More than half of Americans are concerned that California-like energy problems could hit their communities, according to a poll Thursday by the Associated Press.

Power deregulation is under way in Florida. Eventually, consumers likely will have more choices of power providers and a menu of electricity prices.

Did we learn our lessons? Or will Floridians end up paying the bills?

This time around, let's hope Florida won't get tagged yet again as a "banana republic."

- Contact Robert Trigaux at trigaux@sptimes.com or (727) 893-8405.

Headline: Top 10 lessons from California

Here's what Florida can learn from the Golden State's power deregulation debacle:

1. Never let electricity demand outstrip supply of power generated in-state.

2. Discourage domination of the market by a small number of power producers.

3. Do not depend on buying wholesale power in the price-sensitive spot market. Encourage long-term power contracts.

4. Strengthen state power regulators to monitor this faster, tougher market.

5. Keep the state out of the power business by catching potential crises early.

6. Track power markets so problems in nearby states do not spread.

7. Avoid the need for the emergency building of power plants that undermines environmental concerns.

8. Minimize reliance on one fuel, such as (now high-priced) natural gas to run new power plants.

9. Don't "half-deregulate" by capping retail but not wholesale prices.

10. Improve incentives to encourage conservation, alternative energy.

Recent coverage

Shocks to the system (January 26, 2001)

Bush, commission seek ways to avoid power struggle (January 19, 2001)

Trend could be a shock for power structure (January 12, 2001)

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