Power to the People: California’s era of electricity deregulation begins Jan. 1, bringing consumers many choices, but also more than a little uncertainty

In less than two weeks, most California consumers will wake up to a new era of deregulated electricity and a confusing array of choices and decisions.

On Jan. 1, customers of the state’s three investor-owned utilities--Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric--will be able to buy power from providers other than the local utilities. (Customers of most municipally owned utilities, including the Los Angeles Department of Water & Power, will have to wait a year or two for the option.)

Californians are already wading through a bewildering array of offers coming at them in the mail, in advertisements and over the telephone, just as they did when long-distance phone service was deregulated in the 1980s. But despite the hard sell and a $73-million state-sponsored public education program, most consumers remain confused--or indifferent.

More than a dozen states have moved to deregulate their energy industries, and California is the furthest along. For that reason, and because the state’s power sales total nearly $20 billion annually, the nation’s electricity industry will be watching closely what happens here.

The point of deregulation is choice--70% of the state’s power customers will finally have a say-so about the electricity they use. The scores of power marketers out scouring the state for business are betting that consumers’ demand for better deals, pent-up dissatisfaction with utilities, or desire for “green�--albeit more expensive--energy will cause big numbers to defect to their side.

Here follows everything you ever wanted to know about the brave new era of electricity deregulation.

THE BIG PICTURE

Q. Why does California want to deregulate its electricity market?

A. The Legislature decided to open the market to competition in an attempt to drive down California’s rates, which are 30% to 50% higher than the national average. The state also wanted to give consumers more choice and help attract businesses to California. Other utilities, such as telephone service and cable TV providers, have already undergone similar deregulation.

Q. Is California the only state doing this?

A. No. Fourteen other states also are opening their electricity markets to competition.

Q. Will this change the way I get my power?

A. No. Your current utility will continue to deliver your electricity over the same power lines as before. But utilities are losing their monopoly power over electricity “generation,� that is, the actual production of the kilowatts used by homes and businesses. After Jan. 1, you’ll be able to choose where you buy your energy before it’s shipped.

Q. What is California Assembly Bill 1890?

A. That’s the 1996 legislation that made these changes possible. The law allows customers of investor-owned utilities to purchase their power from another source if they choose to. More than 70% of California consumers are eligible to make the switch. Almost all are customers of three major utilities: Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.

Municipal utilities, such as the Los Angeles Department of Water & Power, are not obligated to open their service areas to competition, although most are expected to do so eventually because of market pressure.

In any case, the original utilities will continue to deliver the electricity to homes and businesses and to provide repairs and service, even if their customers opt to buy power from another company.

The legislation also requires investor-owned utilities and new competitors to cut rates 10% for all residential and small-business customers. That rate reduction will apply to the total bill, not just the electricity consumed.

Q: Will homeowners save much money by switching power sources?

A. Probably not--perhaps only a few dollars a month at most, because residential and small-business customers are already receiving the mandated 10% cut. Homeowners who switch will probably be motivated either by dissatisfaction with their utility or a desire to use so-called clean energy, which may actually cost more.

The reason rates won’t go down much more for small users is that over the next four years, 25% to 35% of their monthly bill will go to pay off the utilities’ “stranded costs.� Those are big-ticket, long-term investments the utilities made in an attempt to keep electricity flowing to customers. Not all of these were wise investments. Small users will be paying for obsolete nuclear plants and renewable-energy contracts that are not economically competitive in the new market.

Q. Does the legislation mandate a rate cut for big businesses as well?

A. No. The rationale is that the big guys can cut their own deals. If they elect to do nothing, their rates are guaranteed not to go up over a four-year transition period. If they decide to switch power suppliers, any discounts they negotiate are likely to apply only to the actual kilowatts of electricity used. This “generation� element represents 20% to 40% of the monthly bill.

Q. What about DWP and other municipal utilities?

A. AB 1890 doesn’t apply to taxpayer-owned utilities, so they’ll retain their power monopolies for now. But competition in surrounding areas will eventually force munis to compete, or risk watching their biggest customers pack up and leave. DWP hasn’t given a definitive date, but it’s unlikely to open its customer base to competition until early next century. But one municipal utility, the Sacramento Municipal Utility District, has already done so.

Q. When does deregulation start?

A. Though customers of investor-owned utilities can switch providers starting Jan. 1, other changes--such as choices on billing and service--will be phased in over the four-year transition period. Electricity rates for consumers and small businesses will be reduced 10% beginning Jan. 1. Rates are also expected to drop again in 2002 after the transition period, although there are no guarantees.

Q. Who will be the big winners under deregulation?

A. Lawmakers and lobbyists are pitching deregulation as a win-win for everyone involved. Whether it will remains to be seen, but the clear early beneficiaries are giant commercial customers that have the clout to obtain the biggest rate reductions.

The big utilities and their stockholders won’t do too badly, either. They get to speed up recovery of costs incurred to build power plants and other facilities, courtesy of consumers who’ll be paying the tab.

MAKING THE SWITCH

Q. I’m satisfied with my current service. Do I have to switch to get the 10% rate cut?

A. No. If you are a residential or small-business customer of an investor-owned utility and are using less than 20 kilowatt-hours at peak demand (typical residential usage is 1 kilowatt-hour at peak), you are entitled to the 10% rate cut. So even if you do nothing, your bill will decrease starting Jan. 1.

Q. If everyone is getting 10% knocked off, why should anyone switch?

A. That 10% is the minimum that rates must be reduced. Large manufacturers and other heavy electricity consumers are being aggressively courted by new competitors offering rate reductions of as much as 25%. Also, price isn’t the only motivation. For example, conservation-minded consumers may choose companies offering solar and wind power.

Q. How small does a small business have to be to qualify for the automatic 10% rate cut?

A. The legislation defines a small business as one whose peak demand is less than 20 kilowatt-hours. In other words, if it takes less than 20 kilowatt-hours to power every light, machine and appliance in your facility, you’re considered a small fry. Still, you don’t have to be a big factory to use more than that during peak periods. Your corner convenience store or fast-food restaurant easily pulls that much juice. So if you run a small business, don’t assume you’re automatically eligible for the 10% rate cut. Check your electricity bill or call your utility to find out for sure.

Q. Is there a way for consumers and small businesses to get the large rate cuts being offered to the big guys?

A. Yes. The industry term is “aggregation.� Just as with insurance pools or auto clubs, electricity users can band together to wield more clout. The process is just getting started in California, but eventually there will be buying blocks organized through small-business trade groups, apartment buildings and subdivisions, to name a few.

Q. How can I go about joining one of these aggregate groups?

A. A few cities, such as Palm Springs, have already announced plans to turn their municipalities into buying pools to get lower rates for residents. Some small businesses are banding together by industry or in geographic clusters such as strip malls. Professional “aggregators� are also out there trying to herd residents and businesses into buying blocs. But be cautious. Your best bet may be to stick with an organization that you know and trust and that has the resources and sophistication to negotiate the best deal. Call your city manager, homeowners association, trade association or other organized group to see if it’s forming a buying pool you can join.

Q. How many new electricity sellers are there to choose from?

A. At present, more than 200 companies have registered with the state Public Utilities Commission to sell electricity in California.

Q. How can I choose the one that’s right for me?

A. First, check to see that it’s registered with the PUC to sell electricity here. You can find that information on the agency’s Web site (https://www.cpuc.ca.gov). If the company isn’t registered, don’t do business with it.

New power providers are required to disclose, in writing, the price of the electricity, expressed in a standard format that allows side-by-side comparison. They also must disclose any additional fees, terms or conditions of service and tell you about your rights to rescind the contract or change providers.

Do your homework and evaluate claims carefully. Unfortunately, opportunists tend to come out of the woodwork whenever any industry is deregulated. (Think 900-number scams and pay phone rip-offs in the telephone industry.) Multilevel-marketing companies are already on the Internet touting the California electricity market as a modern-day gold rush. Be skeptical of pitches that sound too good to be true. As a rule, avoid big upfront fees and long-term contracts.

For some good tips on avoiding rip-offs, check out the Utility Consumers’ Action Network Web site at https://www.ucan.org

Q. Does this mean I’m going to get a bunch of solicitors calling at dinner time?

A. Probably. But you can stop them by putting your name on the state’s “don’t call me� list. Companies that make more than one call to anyone on the list can be penalized. Mail your written request to the California Public Utilities Commission, Consumer Affairs Branch, 505 Van Ness Ave., Room 2003, San Francisco, CA 94102. Include your name, address and telephone number.

Q. What’s to prevent one of these new companies from switching me over to their service without my consent?

A. To prevent such “slamming,� which has proliferated in the long-distance telephone market, California will require all electricity service switches to be approved by consumers in writing, then verified by an independent source.

Q. Does it cost anything to switch?

A. No. There are no fees to change your service provider.

Q. Can I switch back if I don’t like my new provider?

A. Yes. But you may have to pay a penalty or wait a minimum period. Be sure to read the fine print in your contract.

Q. What if my new provider goes out of business?

A. Your utility is required to provide you with electricity until you choose another supplier.

Q. Could all the neighbors on my block end up buying their power from different sources?

A. Yes. It wouldn’t be any different than finding AT&T;, Sprint, MCI and other long-distance providers at homes in the same neighborhood.

Q. But my current utility owns my meter, power lines and all the infrastructure. Do I have to change these things to go with a new company?

A. No. Existing utilities will continue to own their own power lines and other equipment. New competitors will simply pay them a fee.

The one exception is meters. New electricity providers can begin offering metering service to big commercial users in January and to residential and small-business customers after Jan. 1, 1999.

Q. Why would I want a new meter?

A. The latest technology will allow you to track your electricity usage on an hourly basis. Large commercial users in particular would want that kind of information to reduce their usage at peak times, when rates are highest.

Q. Will my bill look different?

A. Yes. Over the next several months, the utilities will be required to give you a lot more information about where your electricity dollar goes. Later in 1998, your bill will be “unbundled� to show what you’re paying for a each of a variety of services.

These will include charges for generation, transmission, delivery, public purpose programs (such as low-income ratepayer assistance) and the competition transmission charge, or CTC. The CTC represents the amount ratepayers must shell out to reimburse utilities for power plants and other facilities that will become obsolete in a competitive environment. These are known as utilities’ stranded costs.

Your bill could come from a different place as well. If you choose a new provider, that company may send you an all-inclusive bill, or it could charge you just for electricity generation and let the utility bill you for all other services. If you stick with your local utility, you’ll continue to receive a single bill for all services.

CHANGING THE SYSTEM

Q. How can the utilities afford to cut rates?

A. Because ratepayers are helping them offset the cost with bonds whose proceeds will allow them to lower rates immediately. The bonds will be paid back over 10 years through a charge on customers’ bills called the fixed transition amount or trust transfer amount.

In addition, the Legislature decided that the utilities should be reimbursed for all the money they sank into power plants and other facilities, some of which will now become obsolete in the new competitive environment. This CTC will appear on bills until 2002.

Q: Don’t these fees defeat the purpose of a rate cut?

A: The PUC estimates that consumers will save $970 million over 10 years through lower bills, even after factoring in the cost to repay the bonds. Consumer watchdogs dispute those figures and argue that the rate cut will be a wash at best if ratepayers have to finance it.

As for the CTC, the commission says it really isn’t a new charge. Ratepayers are already paying for utilities’ long-term power contracts, generating plants and other facilities as part of their monthly bills. The CTC just allows utilities to recoup those costs faster.

Electricity rates should drop after March 31, 2002, when these facilities are paid off and the CTC goes away, but there are no guarantees.

Q. New competitors must rely on established utilities to deliver their power to customers. Won’t these utilities be able to manipulate the system to their advantage?

A. The law allows the utilities to maintain ownership of their transmission facilities. But to ensure a level playing field, they must turn over operation of those facilities to a newly created body called the Independent System Operator.

As its name implies, the ISO will operate independently of the utilities; it will be regulated by the Federal Energy Regulatory Commission. The ISO will manage the state’s transmission grid, a vast network of power towers, lines and transformers owned by the various utilities, to ensure that electricity flows freely and fairly around California.

Q. How will the price of electricity be determined in this new competitive environment?

A. As part of deregulation, another independent body called the Power Exchange, or PX, will create a competitive spot market for electricity. Instead of selling electricity directly to their customers at a set price, investor-owned utilities will be required to sell the power they generate to the PX after Jan. 1. Competing electricity providers can do the same.

Supply and demand will determine the price that producers get for their electricity at the PX, and prices will fluctuate hourly. Observers say a competitive market should help drive prices down. It will also allow consumers to see how the price of power fluctuates, so they can adjust their usage to take advantage of lower prices at off-peak hours.

Q. Many companies entering the California electricity market are from out of state. How is it possible for consumers to buy electricity from companies situated thousands of miles away?

A. The nation’s power grid is partitioned into separate regional systems, and it isn’t really possible to send juice coast to coast. But that doesn’t preclude a New England or mid-Atlantic company from selling power in California. These companies either own or will purchase generating plants in the West, or they’ll enter into contracts to purchase power from Western facilities. Then they’ll resell this power directly to their California customers or to the PX.

Q. State law currently requires utilities to operate programs to encourage energy conservation and to help low-income customers pay their power bills. What will happen to these programs under deregulation?

A. The utilities will gradually hand off these responsibilities to two new independent boards. The California Board for Energy Efficiency should be up and running by Oct. 1. The Low Income Governing Board is to be established by Jan. 1, 1999. Members of these boards will be appointed by the PUC.

Electricity users already pay to fund these programs through a monthly surcharge buried in their bills. By mid-1998, that charge will be itemized on the monthly statement.

Q. Who will look out for consumers in the deregulated environment?

A. The PUC will continue to license new service providers and protect consumers from shady practices. Southern California consumers should report suspicions of abuse to the agency at (800) 649-7570.

Consumer watchdog groups such as the Utility Reform Network, Consumers Union and UCAN are likely to be active as well.

THE GREAT BEYOND

Q. What’s to prevent my electricity bill from going up again when the four-year transition period is over?

A. Nothing. Although legislators and market experts believe deregulation will cause the price of electricity to drop, there are no guarantees.

Q. Will this system really spur competition?

A. Yes, but we’re already seeing that it could be very selective. Many of the 200-plus companies registered to sell electricity in California are mainly interested in going after big-ticket, high-volume commercial users rather than residential customers and small businesses. So it’s questionable how much choice the small fry will really have.

Conversely, the typical residential customer, whose average bill is $65, may have little incentive to switch when the discounts amount to only a few dollars a month.

Q. Is the ISO ready to operate California’s vast power grid?

A. The good news is that most ISO employees are industry veterans moving directly from the three major utilities, where they did the same jobs they’ll be doing after Jan. 1. The bad news is that it’s never easy to merge complicated systems like that into a single, seamless network. Software bugs, computer glitches and other problems appear inevitable.

One thing is certain: If the ISO is not ready for prime time, millions of customers are going to know about it.

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Powering Up

On the eve of the Jan. 1 deregulation of California’s $6-billion electricity market, power companies are most interested in wooing high-volume commercial customers, who have almost doubled their power consumption in the last 20 years. A look at commercial electricity consumption here since 1977, in billlions of kilowatt hours*:

1996: 81.388

*A kilowatt hour would power a color TV for five hours.

Source: California Energy Commission

Researched by JENNIFER OLDHAM / Los Angeles Times

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Expensive Electricity

California residents pay about 50% more than the national average for electricity, helping the state to tie for eighth on a list of the nation’s most expensive residential electricity markets. Ten states with the most expensive residential electricity:

*--*

Rank State Average 1996 revenue in cents/kilowatt hour 1. Hawaii 14.2 cents 2. New York 14.1 3. New Hampshire 13.6 4. Maine 12.6 5. Connecticut 12.1 6. New Jersey 12.0 7. Rhode Island 11.9 8. California 11.3 9. Massachusetts 11.3 10. Alaska 11.2

*--*

* A kilowatt hour would power a color TV for five hours.

Source: Energy Information Administration

Researched by JENNIFER OLDHAM/Los Angeles Times

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Rate Check

Los Angeles residents pay less for electricity than those in San Francisco and San Diego. A sampling of several cities’ electricity bills:

City: Bill for residential use of 500 kilowatt hours per month

Long Beach: $64.67

San Francisco: 61.86

Oakland (East Bay): 61.86

Bakersfield: 60.51

Fresno: 60.39

Stockton: 60.38

San Jose: 59.24

San Diego: 56.70

Los Angeles (central): 48.67

Redding: 38.67

Sacramento: 36.89

Source: California Energy Commission

Researched by JENNIFER OLDHAM /Los Angeles Times

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If You Want to Know More

How can I get more information about electricity deregulation?

A: Ratepayers are financing a $73.5-million public education program called Plug In, California to inform consumers about deregulation. Residential customers can call (800) 253-0500. The number for small-business customers is (800) 789-0550. The campaign also has a Web site at https://www.knowledgeispower.org

The PUC’s Web site at https://www.cpuc.ca.gov is loaded with deregulation information, including the latest legislative developments and a list of companies registered to sell electricity in California. Or call the PUC’s deregulation hotline at (800) 555-7809.

Consumer groups also have some valuable tips. Check out the Utility Consumers’ Action Network Web site at https://www.ucan.org and the Utilities Reform Network site at https://www.turn.org