Customer Choice Key to CA Energy Crisis

New York shows how retail choice can work

The past week has seen a few interesting developments related to electricity deregulation, and I found the juxtaposition of them interesting. They further reinforce the reasons for customer choice and retail deregulation in electricity.

First, the denouement of the California electricity crisis continues on, with the California legislature facing two opposing pieces of legislation concerning electricity regulation. Senate bill SB888, sponsored by Senator Joseph Dunn, proposes to return electricity regulation in California to its pre-1996 level of involvement and control over the industry, and would also implement a stringent renewable portfolio standard (the text of the bill is available here). According to an Associated Press story from last week, Dunn trotted out the usual canard that electricity’s lack of storability make it a non-commercial commodity:

“But Dunn said that after two years of investigating the energy crisis, he believes that there isn’t any way to deregulate electricity because, unlike other commodities, it cannot be stored; instead it must be consumed when it is produced.”

By that logic, Dunn would probably propose regulating hotel room rates and airfares! I don’t want to make that suggestion to him, but rather I want to illustrate the absurdity of his position.

An editorial in Thursday’s San Jose Mercury News correctly characterized Dunn as reaching for a security blanket, an excessive response to problems from the past. The editorial is much more forward-looking, recognizing that a dynamic, thriving economy and electricity industry requires a more nimble and flexible approach:

“Returning to the old regulatory model is not needed either to re-establish stable prices or to restore the financial health of the utilities.

Going forward, there are two central questions: Who is going to generate and sell electricity? Will consumers have a choice about where to buy power?”

The editorial then goes on to highlight and recommend a second bill, AB428, which would reinstate retail direct access for large commercial and industrial consumers. This approach would inject a much-needed dose of consumer demand response into the California market, leading to optimized investment decisions on both the demand side and the generation side, and resulting in a more efficient and flexible generation of and use of power.

An example from the other side of the country illustrates these points beautifully. An article in Wednesday’s New York Times titled “Cooling the Empire State Building on the Cheap” describes how managers of large buildings have been able to reduce their heating and cooling costs, and their energy usage, through better usage monitoring over the day. The technology for such monitoring has existed for several years, but it took deregulation and market-based retail pricing to give building managers an opportunity to save money by reducing their energy use, as well as shifting it over time across the day.

“Several years ago, ConEdison Solutions had convinced Helmsley-Spear, the Empire State Building’s managers, that it could analyze its energy needs, supply energy, improve efficiency and lower costs by monitoring energy market fluctuations. “We equate our role to that of a financial adviser,” said Jorge Lopez, vice president for retail commodity services at ConEdison Solutions. “We acquire information, analyze it and develop a set of solutions.”

One recommendation was that the Empire State Building alternate using steam and electricity so that depending on temperature, time of day and the price difference between the two sources of energy, the building’s operators could switch from one to the other.

“Before energy was deregulated, users basically had to pay a flat rate,” said William K. Stoddard, vice president for projects and engineering buildings at the Rockefeller Group, which operates four buildings in Manhattan, including the Time & Life Building.”

This example is a powerful illustration of how retail choice can create benefits for customers, reduce overall energy use, and encourage the development of innovative energy management solutions. Direct access in California would unleash some of the same dynamics that New York’s commercial building managers and energy solution providers are benefiting from. This is a much healthier policy choice than re-regulating to fight yesterday’s demons.

Lynne Kiesling is director of economic policy at Reason Foundation and senior lecturer in economics at Northwestern University.