# Presentation: 056779

## California’s Electricity Situation Briefing for the staff of the U.S. House of Representatives

- February 9, 2001
- Energy Information Administration
- (Updated May 9, 2001)

## Vertically Integrated Utility

**Notes:**
The electric power industry began around the turn of the century when private electric companies, mostly serving a single municipality, were granted franchises by the municipalities, thus laying the foundation for regulation of a monopoly industry.  In exchange for a designated franchise and a reasonable regulated rate of return, utilities were obliged to serve the public at reasonable and nondiscriminatory rates.  

This regulatory structure, first set in place by the cities, was perpetuated by State and Federal governments during the first decades of the century as utility companies grew and transmission lines made interstate commerce of electricity possible.   Since the 1930’s, electric utilities have been highly regulated by local, State, and Federal governments.

Economies of scale and the monopolistic nature of the wires systems promoted the vertical integration of generation, transmission, and distribution in the electric utility companies.  From the mid-1930’s until the 1970’s, the electric utilities were operated mostly as vertically integrated entities under a high level of regulation from local, State, and Federal governments.

Today, in the majority of States, utilities are “unbundling” the different parts of electric power services:  generation, transmission, and distribution.  Some areas of the electric power industry are entering an era of less regulation and more competitive markets.  Deregulation of other monopoly industries, advancement in generation technologies, legislative and regulatory mandates, and regional price variations across the Nation are some of the reasons driving the restructuring of the electric power industry.

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## Generation

- 53,157 megawatts of total net summer capability
- More than half owned by nonutilities
- One quarter owned by publicly owned utilities
- California is interconnected with the other States of the Western Systems Coordinating Council and relies on about 7-11,000 megawatts of out-of-state capability
- California normally exports electricity in the winter and imports electricity in the summer

## GenerationRequirements of AB 1890

- California restructuring required investor-owned utilities to sell their generating assets – new owners not required to sell within the State
- Utilities were required to sell their output to the California PX and buy their electricity exclusively from the California PX
- No long-term contracts allowed

## Issues affecting generation

- Capability decreased 2 percent from 1990-1999, while retail sales increased by 11 percent
- 10,000 megawatts of total capability out of operation due to forced and/or planned outages
- Unusually low water level, losing about 3,000 megawatts of capacity from the Northwest

## Pacific Region Precipitation and Hydroelectric Generation, 1996 - 2000

## Issues affecting generation

- Excess electric generation in summer caused some to use all available emission allowances for year
- High cost of emissions and emissions constraints
- Cap placed on wholesale electricity prices
- Natural gas price increases and El Paso natural gas pipeline explosion
- Uncertainty for independent electric generators to receive payment

## Transmission

- Federal Energy Regulatory Commission oversees Independent System Operator (CAL-ISO) which administers the grid, accounting for 75 percent of California grid
- The three utilities had to give up the operation of their transmission lines to the ISO, while still owning them in accordance with FERC Order 888
- Transmission constraints limit the amount of electricity that can be moved between Northern and Southern California (see map)

## Slide 9

## Distribution

- Distribution facilities continue to be operated by the three traditional utilities and regulated by California PUC

## Retail Sales

- AB 1890 reduced retail rates by 10 percent and then froze them until March 2002
- 24 California ESP’s accounted for about 10 percent of electricity sales in the State in 1999, but electricity still delivered by utility
- Where rates were capped, the effect of the higher power acquisition prices was not seen by the consumer – instead the provider absorbed the higher costs (i.e., PG&E, SCE)
- Where rates were not capped, the consumer paid the higher costs (i.e., San Diego)

## Conclusions

- Generating capacity tight
- Long–term contracts not allowed
- Wholesale prices capped
- Transmission line constraints
- Natural gas prices much higher than normal
- California utilities’ rates frozen
- California purchased all of their electricity at prices higher than they were allowed to pass on to consumers
- Generators and fuel suppliers were reluctant to sell to bankrupt utilities

## Energy Information Administrationwww.eia.doe.govRobert SchnappDirector, Electric Power Division202-287-1787