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Fact Sheet 13
Blackouts and Electricity Deregulation

Frequently Asked Questions

What Caused Electricity Blackouts in California?

Blackouts occur when demand for electricity outstrips supply. California´s grid managers have to implement rolling blackouts when power producers cut power levels below aggregate demand. It is widely believed that the new and unsettled electricity marketplace has created market-manipulation opportunities for power producers and natural gas suppliers. By taking vital plants off-line for `maintenance´ during periods of peak demand, and in some cases by dumping energy supplies in other states or abroad to create false scarcities, power producers were able to exploit the genuine scarcities of Pacific Northwest hydroelectric power imports. This allowed them to name their own prices and generate unprecedented profits.

While many of the former utilities are owned by sprawling power conglomerates, they are essentially `price-takers,´ delivering whatever power they receive at the prices bid that day. In some cases, the old utilities, now transmission and delivery (T&D) firms, are unable to charge enough to cover their costs. Two of California´s largest T&D companies are virtually bankrupt, but the profits made by their parent companies have more than made up for the inconvenience. In fact, having emptied ratepayers´ pockets, the power producers seem to be anticipating a public bailout of their T&D systems, adding insult to injury.

California and surrounding states enjoyed a surplus of energy and low energy prices in the late 1980´s and 1990´s. Thanks to aggressive energy efficiency and conservation programs, California´s energy use has increased by less than 2% per year while neighboring states´ demand grew at roughly twice that rate. During this period, nearly 1400 Megawatts (MW) in planned new generating capacity (enough to power 1,400,000 homes) was canceled or put on hold. Environmentalists supported many of the projects, especially those that used renewable energy sources, but are nevertheless being blamed by the Bush Administration for siting and permitting delays.

Deregulation itself may be to blame for the lack of new power capacity, because as California began electric industry deregulation in 1996 investors pulled back, waiting to see how the new system would work. No new plants were built, but regional demand for electricity continued to grow.

Will New York State Face Blackouts This Summer?

Apparently not. New York officials believe that the state can meet its energy needs in the near future. New York City´s power supply during summer is the cause of most concern. On hot days, heat rises from dark roofs, streets, and parking lots, creating a `heat-island´ microclimate that greatly increases power demand for air-conditioning. The NY Power Authority (NYPA) has recently installed ten new 79.9 MW natural gas turbines to generate electricity during peak hours. These were installed without environmental review (which is triggered at 80 MW) and are primarily located in poorer communities of color. Long Island and New York City commercial consumers may be paid to run their backup diesel generators during the day to further reduce demand, but at a cost of skyrocketing pollutant emissions. Watt for watt, diesel generators produce more than 50 times the pollution of a new, natural gas plant.

New York State´s public service law was intended to `fast-track´ new power plants coming on-line to meet increasing demand, but it has satisfied neither power producers nor environmentalists. There was evidence of California-style market manipulation in New York last summer, and this sort of exploitation is widely expected to continue until it is reined in. Air quality is guaranteed to suffer as more and more short-cuts are taken.

What is Electric Deregulation?

Under deregulation, formerly regulated utility monopolies compete in a marketplace managed by the Independent System Operator (ISO) to sell electricity. The regulated companies that once generated, transmitted, and sold electricity are broken up, having to sell their generating capacity or set up power-producing subsidiaries. Barriers to entry by new energy companies are greatly reduced, and new investment incentives are attracting much-needed capital. This theoretically allows many companies to compete to buy and sell electricity, forcing prices down. Deregulation is occurring in many states, in various forms, and at varying rates. New York State has been moving toward deregulation since 1998, at the urging of Governor Pataki.

Why Was Deregulation Implemented?

In the 1990´s, large industrial and commercial electric customers called for deregulation, ironically, because they believed that their electric bills were too high. Tired of buying power from the regional utilities, these customers wanted market-based competition which they believed would drive down electric prices for them. The selling point was that deregulation would provide competition first at the wholesale level and later, at the retail level, so customers could buy power from any company willing to sell to them. Some environmental organizations supported deregulation because of the promise of energy choice. Many believed that consumer demand for `green´ power in a market context could move renewable energy sources forward faster than under regulation.

What Makes This Different From the Former System?

Under the former system, private companies and public agencies held regional monopolies to provide electricity. These regulated utilities took care of electric generation, transmission, distribution, and service. They were responsible for long term planning to meet electricity needs and were required to maintain a reserve margin of power for unusually high peaks of demand or unexpected power plant repairs. Regulators could determine need and send electricity from one area to another area. Prices were equitable, determined by calculating costs and adding a fixed rate of return for investors.

Is Deregulation Working?

So far, there is very little evidence of public benefits to come under deregulation. Deregulation eliminated utilities´ incentives for demand-side management programs (reducing demand). Rates have gone up, at times exponentially. Reliability is under siege. Power producers are manipulating the system by choking supply to increase prices. Older, dirtier coal plants are not going to be displaced by cleaner, more efficient plants, as some forecasted, and may out-compete many of the new plants. Without government intervention, these older plants will continue to violate current environmental standards, using Clean Air Act loopholes. Customer choice remains more theoretical than real. Demand-side management, even with regulatory intervention, is far below previous levels, and in New York State is far below levels in adjoining states.

It seems as if the benefits touted by deregulation proponents have devolved into a mix of blackouts, poor air quality and attendant health problems, rapidly rising power costs, and pitched battles between communities and power plant developers. Deregulation can only succeed if there is a glut of power production capacity, and even then, there is absolutely no guarantee of market stability, or that any public benefits will be seen. Interestingly, two of the remaining California public utilities, Los Angeles Dept. of Water and Power and Sacramento Municipal Utility District, have experienced no blackouts and have maintained stable prices.

Do We Really Need More Power Plants?

Politicians are now using the atmosphere of crisis resulting from the California blackouts as an argument for building many new power plants, allowing `dirty´ plants to continue operating, and relaxing environmental standards. Legitimate alternatives are being overlooked. Supplies of oil, coal, and natural gas are finite, and demand is growing exponentially. This is leading toward higher prices, shortages, and ultimately, exhaustion of supplies. It also has staggering global-scale environmental and public health costs: increasing global climate change, acid rain, local smog, and mercury contamination of our waters. Power plant proposals focus only on supply and look for a short term fix to a long term problem, ignoring the big-picture reality.

What are the Alternatives to Construction of New Power Plants?

  • Demand-side management: Reducing demand can be accomplished two ways: conservation programs and energy efficiency improvements. Much of the energy we use is wasted. Scientists from five US national laboratories recently released findings that government-led efficiency programs emphasizing research and incentives to use new technologies could reduce the growth in electricity demand by 20 percent to 47 percent. This would eliminate the need to build between 265 and 610 medium-sized (300 megawatt) power plants.

  • Investment in Renewable Energy: Instead of continuing subsidies for fossil fuels and nuclear systems, we must reverse the trends of investment. If our nation had invested in solar, biofuels, and wind power what it invested in nuclear power, we could be much more energy-independent today with significant reductions in our contribution to global climate change and air pollution. In NY State, and nationally, we must face the shortcomings of our current patterns of energy use, and explicitly acknowledge that nuclear and fossil fuel systems are transitional technologies. We must dedicate our resources towards developing the full potential of renewable energy, which can become the engine of future economic growth. Tax incentives, research and development funds, consumer rebates, and renewable portfolio standards (requires utilities to buy a certain percentage of their electricity from renewable sources) could spur increases in renewable energy. Solar, wind, geothermal, clean biofuels, low impact hydropower, and fuel cells offer energy that can meet our needs without the environmental and health burdens of fossil fuel pollution or nuclear wastes. Currently, less than 1% of national energy needs are filled with non-hydropower renewables.


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