How to regulate a shortage

California, the richest place on Earth, faced third world style blackouts. This unpublished article for Investors' Business Daily compares Californian "deregulation" with Britain's real deal.

How to regulate a shortage

By Quentin Langley

Dateline 07 February 2001

The privatisation of the British electricity industry in 1990 was a model for the World. One jurisdiction to follow significant elements of the new British model was California. So why is California now facing an electricity crisis when the British market is buoyant? Why are California’s utilities facing bankruptcy when Britain’s are buying up foreign capacity? The answer is that California’s “deregulation” ignored the most significant elements of the British model and left the market massively regulated.

The UK had suffered from decades of nationalised monopoly control of its electricity market. The Central Electricity Generating Board was responsible for all generation, transmission and sales. The CEGB was tied into long-term contracts for domestic coal – used for 75% of generation – and the politically powerful National Union of Mineworkers wielded 250,000 votes at the Labour Party’s annual conference and had brought a Conservative government in the 1970s crashing down amid a national strike, nation-wide black outs and a three-day working week. It was the monopoly no-one dared break.

By 1990 a series of measured union reforms and Margaret Thatcher’s facing down of a 14 month miners’ strike – without a single blackout – the situation had changed: the elected government was in charge.

The CEGB was abolished: three main generating companies were established and two of them were privatised; twelve regional distribution companies were also sold and two integrated companies in Scotland were also floated. The remaining nationalised company and the generating industry in Northern Ireland were both privatised a few years later.

Large customers were given the right to choose their supplier and a timetable was established for all other customers to acquire the same rights. The distribution companies immediately began to build generating capacity. American utilities and other businesses dived into the market. While environmental protest means that California has seen no significant new generating capacity since the 1980s there was massive development in Britain throughout the 1990s.

When the CEGB’s sweetheart contract with the British coal industry ran out in 1993 the matter became massively controversial. Pit closures were threatened throughout the country. But the National Union of Mineworkers had no muscle to protest. Their situation was far weaker than during failed strike of the 80s. The generating companies had built a vast array of new power stations: cheap to build, cheap to operate and fired by natural gas.

The hypocrisy of the environmental movement became apparent when they dived for cover, rather than confront their left-wing allies with the simple and obvious fact that gas-fired generation is much cleaner than coal. Coal can produce as much as 28 times the sulphur emissions that have been implicated in acid rain. Gas produces only half the carbon output of coal or oil.

Although environmentalists will protest the building of any new power stations, natural gas is the clear and obvious answer. It is a fuel in world-wide surplus – it is produced as a by-product of drilling for oil. New methods of liquefying it and transporting it by sea are improving and pipelines, once built and buried, are rarely a matter of controversy.

In California natural gas is used principally for space heating, so peak demand is in the winter. The warm climate with which the state is blessed means that peak demand for electricity is when air-conditioning systems are working at full pelt in the summer. So California has a regular surplus of natural gas when its demand for electricity is at its highest. The power stations are cheap to build and can be ready in under a year. New supplies of gas can be brought on stream from Alaska, Texas, Canada and Mexico.

It is time that California decided to do what it pretended to do five years ago, and deregulated its electricity industry. Creating a trading system is not the same as creating a market. The part of California’s industry that was most in need of deregulation was generation. The average age of the State’s generating plant is 30 years. There are simple and obvious solutions to the politically created crisis that have been successfully applied elsewhere. All you need to do is let the market take charge.

Quentin Langley is British writer and PR consultant. He is the author of two research papers on the benefits of electricity generation from natural gas.

Copyright © Quentin Langley 07 February 2001

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