Deinonychus antirrhopus

Energy Competition in California...Again

Gov. Schwarzenegger has come out in favor of competition for large scale electricity users (a.k.a. large power customers) in California. But there is a catch,

Schwarzenegger stepped squarely into the contentious debate about whether large energy consumers, such as manufacturing plants, should have the option to buy power from independent generators to get a better price than through the utility company that serves them. He cautioned that such a plan must not come at the expense of smaller users. The state froze so-called "direct access" during California's energy crisis in 2001.

First of lets get some of the terminology out of the way, direct access is the name use for those customers who can choose their energy supplier. Right now there aren't many of them. For example in the L.A. area there are maybe 35,000 or so, and the bulk of them are domestic customers. However, when you look at the large power customers you find that about half of all large power customers are direct access (there aren't many large power customers).

What is the catch? Getting your energy via the utility means paying alot. The reason is that the state is still paying for those awful contracts that former Gov. "Low Beam" Davis got the state into. So where exactly is the catch? The catch is if you open up direct access for the large power guys many of them will jump ship. they will go direct access and try to avoid paying those charges. If they do that, this will mean higher rates for those customers who don't (trust me on this unless you want me to go through the basics of electricity rate making...I can if you want just let me know).

So what happens is that to keep the rates from rising on the remaining customers you keep charging these large power customers who go direct access the charge for the long term contracts noted above. This takes a lot of the attractiveness out of going direct access (on a similar note this is also why many areas are looking at municipalizing their area). However, there might still be some that can benefit by going direct access.

The thing about large power customers that is different from small power customers is that they watch their bill very, very, very closely. When your annual electric bill is $15,000,000 it pays to have 3 or 4 guys sitting around figuring out if it is worthwhile to move more production to the off peak hours (i.e., say a graveyard shift). Small customers with a $50 to $100 monthly bill don't have the same incentive to sit around monitoring the situation all that closely. Typically most small power customers wont see the effects of temporary price spikes until the next month. It is similar to the old cob-web models that have been used to describe agriculture. Last month the bill was high, so this month people cut back and the bill is low. Since that bill is low, the following month people increase usage and the bill is high. Throw in the summer (global) and winter (local) peaks as well as the rotten load shape¹ most small power customers are going to have and you have a fairly complex price signal. Large power customers are noted for having rather flat load shapes which can give them an edge in negotiating prices/contracts.

For customers to have the same kind of demand responsiveness would require a change in the type of meter they have and probably some sort of new technology that lets the consumer see their load shape as well. Most large power customers will have what are called interval meters. Not only will such meters record kilo-Watt hours (kWh) but also instantaneous usage (kW). A consumer with a $75 bill doesn't have as much incentive to check that meter periodically and then record it, graph it, look up prices and so forth. So some sort of technology is needed to relay that kind of information in a simple form to the customer. With the rise in home computers that time is probably not too far off.

However, there is still a catch. This will entail taking out millions of meters and replacing them with even more expensive meters. Such a cost could go over a billion dollars. That money will go into the utilities rate base and will raise rates. So the issue is will the savings of doing something like that offset the temporary increase in rates?

So the problem with competition for the small power user is due to the information being so diffuse. The cost of gathering all that information and then going through the process to find out if you should set your thermostat at 77 degrees or 79 degrees probably isn't worth it (i.e., just go with 79 degrees). So, the reason this probably wont work for smaller customers is the problem of asymmetrical information and the cost of over-coming those asymmetries.

Link via Truck & Barter.
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¹A customer's load is the amount of electricity they are using at any given instant. This is measured in kW (kilowatts). If you were to graph out all those instants of usage it would describe the "load shape" or "load profile". The usage over time is the area under the load profile and is denoted in terms of kWh (kilo-Watt hours). Typically the instantaneous usage is called demand, and the usage over time is simply called usage.