FORUM (Spotlight Weekly)

Lessons From The California Blackout

By S.B Pun

In the last decade globalization, liberalization and privatization have very much been the clarion calls in all developed and developing countries. The liberalization of the power sector has been one of the major sectors that this call has focussed on. We, in Nepal, are no exception to this global effect and power sector restructuring is very much on our agenda also. But how do we go about it? What are our neighbours doing? Which model do we follow? Do we blindly follow the model that others prescribe? Ukaraine, wanting to look very different from Russia, followed the British model blindly only to regret it three years later. Many of the European countries' power sector, still in the clutches of the government in one form or the other, are restructuring in "a cautious and careful" manner. Our policy makers and chief executives need to do a thorough homework before applying the surgical knife. There is no question that our power sector is on the "frying pan". But in the haste to get us out of this frying pan, we do not want our chief executives to throw us "into the fire" instead. It is in this context that they must learn lessons from elsewhere particularly from the American experience of the recent Californian black outs.

It is sad that our media in Nepal refused to take notice of this Californian black out particularly at a time when our power sector restructuring is on the anvil. California, home to the Silicon Valley and one of the richest states in America, has always been dubbed as the global doyen of the reform process. It was one of the first American States to espouse the principle of free market in its power sector in 1996. The icons of deregulation made grand promises of lower electricity tariff, more secure supply and bigger businesses for all in the power sector. Just five years down the deregulated road that is from the 17th of January 2001 a one- hour rolling blackout has hit the consumers of Northern California. The only time the Californians ever had power blackouts were in the 1940s during the time of the Second World War. The two major utilities Southern California Edison (SCE) and Pacific Gas & Electric (PGE) that supply two thirds of California are literally bankrupt with debts exceeding US$ 10 billion. The ultimate sufferers are, like in Nepal, the consumers who do not know where they are being hit, whether legally above the belt or illegally below the belt. Power sector analysts in California merely shake their heads and say, " Do not make the mistakes we made." The Californian Governor, Mr. Gray Davis, in typical politician style rants that deregulation is a "colossal" failure, the Independent Power Producers are all "state criminals" and the out-of-state profiteers can not hold Californians "hostage". These are very strong words indeed, emanating from the Chief Executive of the State. They are, however, no different from the outbursts of our legislators regarding our Khimti and Bhote Koshi power purchases. Even the Chairman of the Federal Energy Regulatory Commission, Mr. James Hoecker, somberly admits that the muddled power sector will require fixing " on several fronts over a period of time --- in California's case three to five years."

From the little information that we can get in this part of the world, an attempt has been made to analyze this blackout. The Californian regulator put a "cap" on the retail prices that the utilities charge to the consumers but gave a free hand to the wholesale price so that the utilities had to purchase on the spot market at the rate that the IPPs bid daily. This is exactly what we are doing here in Nepal with the retail and wholesale prices though our contracts with the IPPs are on long term basis. The Silicon Valley boom in California meant an insatiable appetite for power that resulted in a whopping load growth of 8% per annum (2% is the thumb rule in developed countries) in a system of 55,000 Mw. This was quite contrary to the pundits' forecast that there would be a fall in the consumption of electricity. With gloomy forecasts like that and the fact that the government brought in tough environmental laws plus the classic "not in my backyard" syndrome, the utilities were in no mood to install new power plants. So when the supply could not meet the demand, the market forces pushed the wholesale price for peak power on the spot market from 5 US Cents per unit to 15 Cents and in recent times to an incredible 30 to 40 US Cents per unit. With the rise in the wholesale price for peak power from three to six/eight times, the utilities naturally asked for a raise of 30% in their retail tariff. The legislators, as in any part of the world mindful of their voters, approved only 10%, only for three months and that even subject to reversal! I hope our policy makers in Nepal read and reread this previous sentence carefully, bearing in mind that such tariff increase reluctance is a normal affair even in one of the richest States of the one and only superpower, America. So the utilities started to bleed red and were forced to borrow heavily from the financial institutions to solve their liquidity crunch. When the credit rating agencies lowered the credit worthiness of the utilities, none of the financial institutions came forward with the loans. The IPPs, when payment is not made for the power already sold, naturally halted their generation to put the "squeeze" on the utilities. This is the cause of the IPPs being branded as "criminals" by the Californian Governor. Temporary power relief from California's eastern neighbouring States was restricted by the transmission line's incapability to wheel more power. The irony was, after deregulation, no IPPs or the utilities wanted to risk investment in transmission lines for this kind of probable eventuality.

Politicians whether in America or Nepal are a weird lot. The Governor wanted to circumvent the utilities' creditworthiness issue. So legislation was passed in the State that permitted California's creditworthy Water Resources Department to directly buy additional power under long -term contracts and sell it to the utilities at a fraction of the current spot market rates. This very much brought deregulation back to square one, that is the State re-regulating again. Power trading by the Water Resources Department may be a short- term remedy. This could give a breathing space to the Californian government to rethink on its deregulation and carry out the necessary fixing. On the billions of dollars of loans, the utilities are expected to be given more time to pay off their debts. But the ultimate sufferers of this bungled deregulation are certainly the hapless Californian consumers and the utilities' shareholders, the former to be burdened with higher tariffs and the latter with the liquidation sword hanging precariously over their heads. In fact the Pacific Gas & Electric utility has already filed for bankruptcy. To keep the two Californian utilities (Pacific Gas and Southern California Edison) going through the hot coming summer, a tariff increase of about 46% is being contemplated. But the mood of the consumers is reflected by Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, " We are being held hostage by a handful of energy companies that, under deregulation, got control of our electricity supply." Hence the promise of lower tariff, more secure supply and bigger business through deregulation is apparently going to the operation theatre for necessary "fixing" even in the richest State of America, a State considered the mother of all deregulation.

It is in the above context that the chief executives of our government need to learn lessons and accordingly proceed with our power sector restructuring. We should be particularly careful with our government's present fundamentalist belief that the bulbs in the Nepalese homes and factories will continue to glow even brighter once the power sector reforms as prescribed by the multilateral agencies are religiously implemented as the Fatwa/edict. The government's white paper as outlined by the National Planning Commission calls for the restructuring of the power sector, with some pundits wanting this to be done and be finished with it in an incredible time frame of two to three years. The Californian debacle is a grim reminder to us that deregulation is having its hiccups even in the richest State despite what we believe an "all enabling environment". Finally, besides the lower tariff and a quantum increase in the accessibility of electricity to more Nepalese, the overriding concern of deregulation in Nepal must be that the bulbs in our homes and factories continue to glow in the coming decades! So let us learn lessons from the California black-out and take a more cautious and careful approach to power sector deregulation.

Pun writes on water resources issues.