California’s power grid is changing fast, and ‘we don’t have a plan’

The last time California tried to reshape its electricity market, it ended in disaster.

The state’s bungled attempt at deregulation in the late 1990s led to market manipulation, soaring prices, blackouts, the bankruptcy of Pacific Gas and Electric Co. and the recall of Gov. Gray Davis.

Now, nearly two decades later, the state’s system for producing, selling and distributing energy is undergoing profound changes. Cities are buying electricity directly for their citizens, companies like Google are sidestepping the utilities to buy power on their own and cheap solar energy is flooding the grid.

And, according to a new state report, it is all happening without a plan.

The report, issued Thursday by the California Public Utilities Commission, argues that the state has no clear idea of how to manage a market transformation that is well under way.

“In 2000 and 2001, we at least had a plan,” commission President Michael Picker said. “This time, we don’t have a plan.”

Picker said he doesn’t fear a return to rolling blackouts. But he does worry that some of the new players in the state’s electricity market could collapse, forcing their customers to find other suppliers. That includes private companies selling electricity to other businesses, as well as community choice programs — such as Marin Clean Energy or CleanPower SF — in which cities and counties buy electricity on behalf of their residents.

“You’re going to have some failures,” he said. “Electric markets can be brutal. So what happens to the customers, midyear, if the company or the (program) goes away? Where do those customers go?”

The report is the product of a year of discussion among regulators, legislators and industry executives. It does not spell out what the state should do to guide the electricity market’s transformation. Instead, it tries to frame the discussion by posing questions for decision makers to answer.

Who ensures that customers have electricity if an unregulated or lightly regulated power provider — say, a company that runs power plants and sells directly to businesses — goes bankrupt? Should there be a single state agency to set policies for and oversee the entire market? (The Public Utilities Commission oversees the major utilities, but those utilities’ role in supplying power is diminishing.) As more customers buy or generate their own electricity, how should the utilities, which still own and manage the grid, be compensated?

As briefly happened under deregulation, California consumers now face a growing number of choices about where to get their electricity.

Many households and businesses generate their own solar electricity in the afternoon, although they still rely on the grid for much of the day and night. Cities and counties, using a system called community choice aggregation, are buying electricity for their citizens, signing contracts directly with operators of wind farms and solar power plants or buying through a middleman. Silicon Valley corporations have signed large power purchase agreements with renewable power generators as well.

As a result, by the end of this year, roughly 25 percent of the electricity load in the state will be supplied by someone other than a traditional utility, according to the report. And while utilities are regulated by Picker’s commission, other participants in the market are governed by a patchwork of rules.

The state triggered these changes through its policies on climate change and public power. But the transformation has now taken on a life of its own. Rather than let it drift, Picker says California policy makers should start discussing how to ensure that the state’s electricity system remains reliable, affordable and safe, while continuing to cut the system’s greenhouse gas emissions.

They may not need to reach any decisions immediately, he said, but he would like to see some action “before the heat death of the universe.”

“I just know that we better start talking about it now,” he said.

UC Berkeley energy economist Severin Borenstein said the discussion is overdue.

For example, the new community choice programs, he said, don’t have big financial reserves and, should they run into trouble, aren’t automatically backed by their participating cities or counties.

And if a community choice program can’t line up power purchase agreements at a good price, would some of its customers drop out, switching back to their old utility? How would the utility, which wasn’t planning to buy electricity for those customers, handle their return?

“There is vulnerability here, and that is something we need to dig into,” Borenstein said. “We’re not going to have blackouts, but we could have the same kind of financial issues, (and be) asking who’s financially responsible here?”