Electricity Deregulation a Shock to the System

SACRAMENTO —  California’s electricity market--more volatile, expensive and vulnerable than ever--has made born-again regulators of politicians who tossed away state control four years ago.

Experts disagree on whether today’s problems are rooted in the 1996 law that launched deregulation or in economic forces that no one could predict. But one thing is clear: A lot of people miss the top-down control California once exerted on power prices.

Private companies now own 40% of the state’s power generation. Before deregulation, those plants were managed, with state oversight, by three monopolistic utilities.

“The state of California no longer possesses the tools to ensure that its citizens can procure reliable electric service at reasonable prices,” top energy advisors lamented in a report to the governor this week

And in fact, re-regulation, on a small scale, is already underway. This week, pressure from Gov. Gray Davis helped lead to a lower price cap for wholesale electricity in the state.

“Generally we don’t support price caps, but right now we think they’re a necessity,” said John E. Bryson, chief executive officer of Edison International, parent company of Southern California Edison, electricity provider to 4.3 million people.

He, like many others, blames recent blackouts and price spikes on the state’s failure to anticipate how hot the economy would get and how badly that would tax the state’s aging power plants and undersized transmission system.

Between 1996 and 1999, according to the Public Utilities Commission, peak demand for power in the state grew by 5,500 megawatts--enough electricity for about 5 million homes--but new or expanded power plants added only 672 megawatts. No major plants have been built in a decade.

Experts predict that, within three years, as utilities and private firms expand and install power plants, California will regain a safe buffer in its electricity supplies.

“We’ve got to ride this through,” said Carolyn Kehrein, who owns an energy consulting firm and represents business interests on the board of the California Independent System Operator, the nonprofit agency that controls most of California’s electrical grid. She ticked off the innovations that blossomed after the nation deregulated telephone companies, from the availability of different colored phones to cheap, reliable cellular phones.

“We’re short [on] generation, and that has absolutely nothing to do with restructuring,” she said.

But one consumer activist said she regrets her group’s neutral stance on deregulation. She remembers vividly the rushed, three-week negotiation sessions at the Capitol that led to the passage--without a single dissenting vote--of the 67-page deregulation bill.

“If the PUC had done nothing, if the Legislature had not enacted [the deregulation bill], rates would have gone down because fuel costs were lower,” said Nettie Hoge, executive director of the Utility Reform Network in San Francisco. “And we’d still have control over rates and we’d still have control over production.”

Next week, the Legislature will hold hearings on what has gone wrong since 1996, when it launched deregulation to dampen electricity rates that hovered at least 30% above the national average. Today, soaring electricity bills have socked San Diego hard enough to raise the price of hamburgers and make school officials fear that they’ll have to spend their budgets, not on classroom reform, but to pay the electricity bill.

State Sen. Steve Peace (D-El Cajon), who drove deregulation through the Legislature with promises of lower rates, wants government to step in now that his own constituents have seen their electricity bills double. Peace said Thursday that a bill probably will be submitted soon to freeze rates in San Diego.

He also said he will ask authorities to reimburse San Diegans for some of the electricity they have conserved to help prevent rolling blackouts in the state. And he wants to freeze the flow of money from the San Diego utility to private power producers.

“The smart thing to do is not let them get their hands on the money,” said Peace, who has accused electricity generators and sellers of manipulating an uncompetitive market.

Meanwhile, state Atty. Gen. Bill Lockyer is investigating possible antitrust violations and unfair business practices among electricity producers and marketers. A few companies, he said, dominate the industry.

“That’s not illegal,” said Lockyer, “but it doesn’t bring the competition necessary to help consumers.”

According to the PUC, Californians will pay billions of dollars more for electricity this year than last. The companies getting those profits remind people that they bought power plants for billions of dollars when nobody else was building any in California. And Californians, they say, haven’t learned yet how to behave in an open electricity market.

“When prices vary, as they did in June, the consumer’s monthly electric bill can double, as the public is now well aware,” said Gary Ackerman, who represents buyers and sellers of electricity for the Western Power Trading Forum. “One of the goals of deregulation was to preserve scarce resources by allowing consumers to make informed choices about their electricity use.”

“They can . . . set their thermostat at 80 degrees, use electric appliances like dishwashers and dryers during off peak hours,” he told the state Electricity Oversight Board on Tuesday.

“We are concerned that the June price run-up, although significant and newsworthy, has triggered a host of unsubstantiated conclusions to the effect that wholesale markets are not working,” Ackerman said. “We respectfully disagree.”

Ackerman said that in the non-summer months of 1999 and 2000, the customers of Pacific Gas & Electric and Edison, who are still protected by a rate freeze, paid two to three times the competitive price because of the locked-in rate.

“Let’s give consumers a taste of the sugar,” said Ackerman.

Under the 1996 deregulation law that forced PG&E;, Edison and San Diego Gas & Electric to sell their power plants, the cost of electricity to consumers was rolled back 10% and frozen there.

The rollback was a coating of icing that helped make deregulation palatable to politicians and consumers, even though, in a mind-boggling twist typical of the deregulation bill, the actual rollback turned out to be more like 2%, because ratepayers were asked to float billions of dollars of bonds to fund upfront the 10% rate decrease.

Rates are still frozen, at least until early 2002, for utility customers outside SDG&E; territory. The 1.2 million customers of SDG&E; have seen bills double this summer; homeowners now pay on average more than $100 a month.

Those customers lost the rate freeze July 1, 1999, because the San Diego utility earned above book-value prices selling power plants in Chula Vista and Carlsbad to private companies such as Houston-based Dynegy. Those earnings allowed SDG&E; to pay off ahead of schedule its debt on investments it made in California’s old, regulated era, such as part ownership of the San Onofre nuclear power plant. Once SDG&E; paid down most of that debt, it was free to shake off the rate freeze.

Edison and PG&E; officials are eyeing the San Diego situation and trying to figure out how they can avoid soaring bills and political backlash, come the time that their customers are exposed to market price swings.

Edison would at least try to average ratepayers’ costs across the year to give them consistent monthly bills, said Bryson.

In the meantime, he said, another swift, radical restructuring of California’s recently restructured electricity market would do more harm than good.

“It’s absolutely critical that changes are made here,” said Bryson. “But I think they have to do with making the current system work.”

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* PATT MORRISON ON DWP

The DWP can gloat now, but nature will have the last laugh, Patt Morrison writes. B1

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Power Players

The chart below shows who has owned electricity generating capacity in California since deregulation, and the percentage of total generated power that they supply.