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KEY FACTS ON CALIFORNIA MARKETS |
In 1994, California became one of the first states to restructure its electricity industry when regulators proposed moving to competitive electricity markets. In 1996, legislators unanimously passed enabling legislation. Certain aspects of the restructuring law, regulations, and subsequent implementation are now affecting the performance of the state's power markets.
Utilities were "strongly encouraged" to sell their generation and required to buy power from the state's power pool.
Local distribution utilities became "default providers," meaning they would have to provide power to those customers who did not elect to buy power from a competitive provider.
The law included a 10-percent rate cut and price freeze combination that discouraged suppliers from entering the market. Because of the rate cut, many customers elected to stay with their default provider.
Regulations (modified since last summer) also prohibited bilateral contracts between power suppliers and utilities, thus preventing utilities from making block forward purchases. (Such purchasing is a way to contract for power to be delivered at a future date at a guaranteed price, and it is one means power purchasers can use to hedge against spot market prices.) The effect was to focus power purchases on the power pool spot market, which is subject to considerable volatility. No other state has such a requirement.
There were significant increases in the price of natural gas used to generate electricity. Gas prices rose from April 2000 through the summer demand period, adding $15 per megawatt-hour (MWH) to the cost of power. These increases were passed along to the utilities that purchased power on behalf of their customers.
California has stringent environmental regulations making it difficult to build new generation. In fact, no significant new generation has been built in a decade. Last summer, in addition to higher-priced natural gas, generators in several areas had to buy nitrogen oxide pollution allowances that went from $3.50/MWH in 1999 to $36/MWH in 2000. The combination of increases was reflected in higher prices for gas-fired power. This is considered to be a short-term problem, which will be addressed by installation of new pollution controls.
The state has limited import capabilities. The main region that has power export capability is to the north, and current transmission capacity is not sufficient to meet the state's growing needs. |
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