Here’s some background on the problems in the California electricity market over the last 10 years and why I believe that Californians should vote no on Proposition 80.
Proposition 80 is based on the premise that the public at large should write into the California Constitution many pages of highly specific details about how electricity production and sale should be regulated. If you’re someone who likes to spend weeks researching how to cast your vote on each question, this proposition is your dream. I recommend that you start your reading about California’s electricity market with excellent treatments by Stanford Economics Professor Frank Wolak and the Congressional Budget Office. No time for that? Then maybe you’ll settle for this quick summary.
In 1996, California residents were paying 35% more for electricity than the U.S. average. In the hopes of changing that, California law AB 1890 forced the major California utilities to divest their fossil-fuel generating capacity, created the California Power Exchange to run wholesale auctions of electricity, and mandated a reduction in retail electricity prices.
By 2000, California had reached a situation in which electrical generating capacity was close to demand on peak usage days. Because of the way in which wholesale prices were determined by the bids from power producers, in periods when there was the least spare capacity, it turned out to be in the financial interests of producers to have as much of their production off-line as possible in order to be able to sell at a nearly unlimited price. One of the key things that made this market manipulation possible was the fact that retail demand was by construction completely unresponsive to daily market conditions.
Proposition 80 would repeal sections of AB 1890, and replace them with an outright ban on users making new arrangements to purchase electricity directly from producers. The proposition would further prohibit time-differentiated rate schedules for small users, unless the users give affirmative written consent.
That second item is particularly troubling to me. The core policy objective is to make sure that there is sufficient capacity for the most extreme conditions without burdening users with unnecessary costs. The obvious way to do that is to try to discourage use for those particular times when the system is most heavily taxed. Thus Proposition 80 would prohibit, as an article of the California Constitution, the one tool that is most promising for dealing with the fundamental problem.
The thinking of proponents of both Proposition 80 and the earlier AB 1890 is evidently that consumers wouldn’t respond to price incentives. However, technological advances may shortly make it very easy for consumers to make these adjustments automatically, and it strikes me as quite bizarre that California regulators believe that consumers will respond in significant numbers to public requests for conservation from the California Energy Commission while completely ignoring any signals in the form of the price they actually pay.
Even if I thought that a ban on peak-load pricing was appropriate, I’d still be opposed to the strategy of implementing that ban in the form of an amendment to the California Constitution, which is what Proposition 80 would entail. The Constitution should be reserved for establishing broad principles of the highest law of the state, not for details of the latest fashionable thought among the tinkerers. The reason is that, in a few years when it becomes clear that the tinkerers have missed with Proposition 80 as badly as they missed with AB 1890, it will be that much harder for anybody to change it the next time.
I recommend voting “no” on Proposition 80.