Report 2008-602 Summary - June 2009

High Risk:

The California State Auditor Has Designated Electricity Production and Delivery as a High-Risk Issue

HIGHLIGHTS

Our review of California's production and delivery of electricity revealed that since the energy crisis of 2000 and 2001, new issues and challenges could impact the supply of electricity, its transmission, and consumer rates. Some of these challenges include the following:

  • Numerous aging and environmentally harmful power plants need to be replaced or retrofitted.
  • Key air and water policies could reduce the electricity supply from existing power plants and limit new plants.
  • As the State's remaining power contracts expire, there is uncertainty surrounding the ability of electricity providers to procure sufficient energy supplies.
  • Uncertainties about the introduction of a new wholesale market structure.

RESULTS IN BRIEF

Because California's electricity sector faces multiple challenges and problems related to energy production and consumption, the Bureau of State Audits (bureau) has added the production and delivery of electricity to its list of issues that pose a high risk to the State of California (State) and its citizens. The reliable supply of electricity provides a critical foundation both for California's economy and its citizens' standard of living. The electricity industry is evolving to address problems highlighted by the energy crisis of 2000 and 2001 while simultaneously working to introduce mechanisms to increase competition and to support the State's overall energy targets. Since the energy crisis, the State has continued to deal with the challenges of ensuring that sufficient capacity exists to generate the volume of electricity needed, that California has the infrastructure necessary to transport the electricity to the areas that most need it, and that the appropriate regulatory agencies work collaboratively in their efforts to ensure that an energy crisis does not reoccur.

In 1996, when the State took the lead in the national move toward restructuring the electricity industry to allow for greater competition, proponents assumed that these actions would reduce California's electric rates. Despite this intent, the State experienced rolling blackouts and, in January 2001, the governor proclaimed a state of emergency. Wholesale electricity prices escalated to unprecedented levels. Because of a cap on retail prices, two of the State's three largest electricity providers-Pacific Gas and Electric Company (PG&E) and Southern California Edison-could not recoup their costs from customers and PG&E ultimately filed for bankruptcy.

By many accounts, several interconnected events during the early part of the current decade contributed to the energy crisis. For instance, the State and energy providers did not meet increased demand for electricity with investments in new generation of electricity or in upgrades to the State's system for transmitting electricity. Compounding this imbalance, a flawed market design relied too heavily on short-term markets, leaving participants overexposed to market manipulation that led to high wholesale prices. Because of the uncertainty related to the ability of the large electricity providers to secure enough energy supplies to meet their customers' needs, the State took steps to alleviate the crisis, including procuring long-term power contracts to ensure both a reliable supply of electricity and rate stability.

Since the energy crisis of 2000 and 2001, the electricity sector has continued to evolve. In fact, industry observers suggest that the actions the State has taken have decreased the risk of another energy crisis. However, the State and other market participants continue to work to resolve issues and to further refine the actions taken to alleviate the earlier energy crisis. In addition, significant new issues and challenges in the electricity sector have the potential to influence the supply of electricity, its transmission, and consumer rates. These issues include the following:

  • The State's need to replace or retrofit aging and environmentally harmful power plants.
  • Ongoing decisions surrounding key air and water policies-most notably affecting Orange County and the urban portions of Los Angeles, Riverside, and San Bernardino counties-which may reduce the electricity supply from existing power plants and limit the siting, construction, and operation of new plants.
  • Uncertainty surrounding the financial recovery of California's large electricity providers and their ability to procure sufficient energy supplies to meet consumers' needs as the State's power contracts expire.
  • The State's targets to increase the use of electricity produced from renewable energy sources.
  • Modifications to the market structure, such as the reinstatement of energy markets that failed at the height of the energy crisis; a new wholesale electricity pricing scheme; and the use of a new computer model of the electric grid that will allow, for example, better identification of transmission bottlenecks.
  • A proposal currently before the Legislature to reorganize certain energy-related entities and create a new state Department of Energy.

Consequently, we believe that our list of high-risk issues should include energy concerns-and, more specifically, the areas related to supplying electricity to California's citizens. We will continue to monitor new developments and challenges that affect the industry as well as their effects on the reliability and affordability of electricity. To the extent that resources are available, the bureau may undertake future projects that could include recommendations to improve electricity-related policies and programs and how best to implement those improvements. For example, the bureau may monitor developments in a court ruling regarding a proposed policy that potentially affects electricity supplies in Southern California. The bureau may report on the status of the State's expiring energy contracts and the ability of large electricity providers to procure sufficient energy supplies to meet consumers' needs. Also, should major developments occur, the bureau may consider deeper evaluations of the new market structure, the State's ability to meet its renewable resource targets, and, if one is created, the effectiveness of a new state Department of Energy.


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