Panel: Politics, Poor Infrastructure Sank California

Political forces and physical problems are at the root of the constrained California energy market, and because of it, other states have slowed their pace toward deregulation and may even decide to forego it for a while, according to an energy expert who has helped guide companies through regulatory hearings.

Charles Cicchetti, co-founder of the Pacific Economics Group and author of several books and papers on the energy marketplace, shared a panel this week with other experts at the Arthur Anderson Energy Symposium in Houston. Cicchetti noted that California's dilemma is seen by other states as a sure sign to slow down. And it's also discouraged others from even considering coming into the state.

The state's "home-town rules," which favor resident utilities, discouraged outside independent power producers from coming in and improving the gas and electricity market. An economist himself, Cicchetti noted that the state's power market actually was designed by economists who thought the law of supply and demand would encourage more involvement when prices spiked.

However, a plethora of unpredictable problems hit the Golden State all at once: high temperatures and soaring natural gas prices. In Southern California, low hydroelectric generation also slammed residents there, which sent power prices through the roof.

"The price," said Cicchetti, "exceeded the normal summer surge.

Bruce Williamson, CEO of Duke Energy International also shared the panel. He said the high California prices were the result of fewer interstate pipelines.

"The Gulf of Mexico supply reaches Chicago, Canada reaches Chicago.all of the Mid-continent supply reaches Chicago easily," he said. "There are clearly more pathways into and out of Chicago and more developed infrastructure than there is on the West Coast."

Williamson also blamed the electricity price hikes and shortages squarely on the shoulders of the state's officials, and a failure by industry to build adequate capacity. Now, with the problems detailed in press reports on an almost daily basis, potential investors are turning away from building in the state. "Now you're deregulating into a capacity-constrained market."

UtiliCorp United CEO Richard Green said he thought the price spikes resulted from deregulation slowing down in the rest of the country. "What we have is one foot in a regulated market and one foot in an unregulated market and that's not the right way to be," said Green. He said the country needs to be fully deregulated to better define markets. With a full deregulation, he predicted prices would act "rationally."

Green said that the high prices now are a signal to invest in supply and infrastructure. UtiliCorp subsidiary Aquila Energy is the third largest gas wholesaler in the United States.

"We have a worse time with power," said Green. He noted that wholesale power prices skyrocketed to as high as $8,000 MWh in the past three years in some parts of the country. And even though his company tried to "prepare" consumers for the higher gas prices, he admitted that "no matter what you do there will be concern over gas prices."

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