San Diego Gas & Electric executives snapped to attention earlier this month when the Navy, upset that its 1986 electric bill in San Diego will hit $80 million, threatened to abandon SDG&E; and build its own power plant.
Hoping to keep its single largest electricity customer from weighing anchor, SDG&E; countered with a rate package that would match or beat the Navy's predicted annual cost savings of $15 million.
SDG&E;'s plight is a graphic example of how, when the economics are right, heavy users of electricity will turn off high-priced utility power and generate their own.
Navy officials said they will study the lower rates but insisted that they will "move forward on . . . a more cost-effective means for providing steam and electricity" to the Navy's six shore establishments that ring San Diego Bay.
Aware that negotiations with the Navy might prove fruitless, SDG&E; also began a push for "mitigating legislation" to prohibit major federal installations from abandoning the nation's utilities.
The Navy turned to cogeneration more than 10 years ago to supply inexpensive steam for its San Diego shore operations. It now receives steam generated by three cogeneration plants owned and operated by a third party that turns a profit by selling electricity to SDG&E.;
The three proposed cogeneration plants being considered by the Navy would provide electricity, steam and compressed air, and would generate additional electricity that a third-party owner-operator would sell to SDG&E.;
Cogeneration has become a viable alternative for industrial companies such as General Dynamics and Rohr Industries, which consume large amounts of electricity and steam. Several San Diego hospitals, hotels and colleges also have built cogeneration plants.
Falling gas and oil prices have helped SDG&E; in its fight to reduce electricity rates. The utility has asked state regulators to pass the bulk of those savings to its industrial and commercial customers, a move that has drawn opposition from the San Diego-based Utility Consumer Action Group.
The public-interest group worries that, as large industrial customers win decreases in their gas and electricity rates, residential and small-business customers will be forced to pick up the slack, according to UCAN Executive Director Michael Shames. He argues that, rather than penalizing smaller customers, regulators should revamp the state's rate-setting processes to mirror new realities in the gas and oil market.
Larger customers such as the Navy, however, aren't necessarily going to wait for change to occur.
"Utilities have to get their acts together because if they continue to raise rates to their commercial and industrial customers, they'll do exactly what the Navy said it's going to do--and that's cogenerate," said Gary Estes, executive director of the San Diego Energy Alliance, a lobbying group that includes energy managers at several manufacturing companies in San Diego County.
"Customers now have alternatives, so we can't continue to load up the costs on them and expect them to stick around," agreed Hudson T. Martin, director of rate analysis for Pacific Gas & Electric in San Francisco. "Giving us the most flexibility (in rate-making) is the only way for us to keep large electric customers on line."
Jan Hamrin, executive director of the Sacramento-based Independent Energy Producers, said utilities are "extremely concerned that they'll go into a death spiral as larger customers start leaving the system."
To keep its electricity customers satisfied, PG&E; has asked the state Public Utilities Commission for permission to negotiate long-term, lower-cost electricity contracts with larger customers that otherwise would install cogeneration plants and abandon PG&E.;
However, letting utilities and customers set prices "raises antitrust questions or the possibility of discriminatory rates," Hamrin said. "If I were ABC Widget Co. and found out that Ace Co. is paying lower electric rates to the utility than I am, I'd be bent out of shape (because) one of the utility's charges is to provide non-discriminatory rates."
Utilities defend the proposed special rates, arguing that they "reflect the true costs of service to our larger customers," Martin said. "If we can make the sale at cost plus something a bit less than our retail charge we can make it uneconomic for (customers) to install a cogeneration plant."
Utilities won the ability to negotiate contracts with their natural-gas customers several years ago when large industrial companies began switching from utility-supplied natural gas to free-market natural gas, fuel oil, butane and propane, Martin said.
PG&E; successfully negotiated a gas contract with Chevron when the utility's largest natural-gas customer threatened to take its business elsewhere.
Martin said, "Several years ago, we realized that, on the gas side, the 'one size fits all' (pricing scheme) doesn't always work."
Earlier this month, utility regulators began studying the "whole question of making (electric rates) more sensitive to the market," said Duncan Wyse, director of the PUC's policy and planning division. "We need to determine whether or not the rate-making decision process fits the era we're in."
California's existing rate-making scheme, which was created in the midst of an energy crisis, pushes utilities to reduce sales of electricity and gas in the name of conservation, said Mike Florio, an attorney with San Francisco-based Toward Utility Rate Normalization, a lobbying group.
"The economics have changed remarkably over the last five years," Florio said. "We've gone from an era of shortage to an era of surplus."
Interestingly, Applied Energy, a former SDG&E; subsidiary, installed and operated the Navy's first cogeneration plant more than 10 years ago during an energy shortage. The utility championed the technology because cogeneration plants provided steam for the Navy's industrial processes and generated relatively cheap electricity that SDG&E; purchased.
By 1995, cogeneration will account for 8% of the utility's electricity needs.
Most cogeneration plants being built in the state generate 20 megawatts or less of electricity, according to Claudia Barker, a public information officer with the California Energy Commission. The commission has control over plants that produce 50 megawatts or more.
Although more small plants are being built, "most of the megawatts being chalked up are coming in the 20-megawatt to 50-megawatt range," Barker said.
The commission is reviewing 19 major cogeneration proposals, including a 395-megawatt operation planned by Arco oil company in Los Angeles.
Although utilities have relied on cogeneration to meet electricity demand, they "now see their historical monopoly being destroyed," Florio said. "Cogeneration has seen a lot more development than anyone ever expected because, between tax credits and other incentives, it really took off."
It is unlikely that Congress would prohibit industrial and commercial customers from developing cheaper sources of power.
Robert E. Burt, a Sacramento-based energy consultant for the California Assn. of Manufacturers, said: "I don't think the compact that the citizens of this country have signed with their utilities is an all-events situation. No business that has built a given capacity to serve customers is automatically entitled to have a guaranteed market."