Why the Legislature Likely Saw the Regional Grid as Déjà Vu All Over Again

Editor's Note: News broke recently that Jerry Brown's plans for a regional grid would be put on hold until the next legislative session. State Senate leader Kevin de León said :"Our climate leadership in California cannot be undermined... We can't go two, three, four steps backwards to reach a deal for regionalization."  But the idea is far from dead.  Below is energy expert Robert McCullough's view on why the Western grid would return California to the Enron age.
In 2002 I stood up in front of the U.S. Senate Energy Committee and presented reasons why Enron had caused the so called “California Energy Crisis.”  I was alone that day on a panel of senior regulators and energy officials.  My picture in the New York Times the next day captured the puzzled looks of my more important panelists as I failed to support the consensus that nothing was wrong.

Obviously, I won the day at the Senate in that hearing and went on to play a major role in procuring civil refunds and convicting Enron traders of criminal charges.  We all know this could never happen again.  Or more precisely, we actually know nothing of the kind.

Enron targeted California because its opaque and inefficient market was “prone to gaming.”  And, as anyone who practices at FERC knows, this is still true today.  FERC investigations of market manipulation are frequent and generally reflect the same basic mechanics pioneered in Enron’s famous crime school for its traders.

The western energy markets are comprised of two very different structures.  Within most of California there is little in the way of transparency.  Bids and asks are protected by regulators as a slightly wacky attempt to avoid collusion.  (The reality is that collusion can take place without logging on to the ISO web site.)  Outside of the California ISO, the energy markets are vastly more efficient.  Markets outside of California are open outcry markets – like the vast majority of markets in the economy.  Keeping secrets is hard since you need to call out your bids and asks to the market as a whole.

Prices outside of California tend to be 10% less than California wholesale markets.  This doesn’t reflect a temperatures or resource differences since the differential extends years into the future.

Recently, the idea has surfaced in California that extending the benefits of the California ISO to neighboring areas is a good idea.  It has found resonance in Warren Buffett whose purchasing spree for western utilities has drawn FERC’s ire.  (FERC recently removed the market price license from a number of his properties citing his increasing market dominance in western markets.)

Given the surplus in energy markets, reducing transparency and raising transaction costs is very attractive to Warren Buffett.  And, surprisingly, Warren Buffett’s desire to raise energy prices outside of California does not bode well for California since it is a net importer.

We keep hearing that there are benefits, but the demonstration so far has been little more than a round of kumbaya.  The reality is that additional renewables integration need engineering improvements not adding administrative obstacles to efficient markets.  Both wind and solar integrate best across time zones, so additional transmission east to west is likely to prove vastly more efficient than the reduction in transparency in neighboring power markets.

This is a case where the mistake is so evocative and the aspirations so naïve, that the simple evidence is lost in the chorus.  If we really want efficient markets, we should be paring back on the role of bureaucracy and encouraging additional competition.
Plans for the western grid are on hold for now - but are certainly not over yet.
Robert McCullough has been working in the energy industry from 30 years, and manages an energy research firm - McCullough Research. The group was critical in exposing Enron's role in the California electricity crisis.

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