SDG&E; Raises a False Specter in Effort to Eliminate Co-Generation

<i> Michael Shames is executive director of the Utility Consumers Action Network. </i>

Even those stalwarts who do not believe in ghosts have witnessed the horrors caused when mistakes come back to haunt. San Diego utility customers are the target of two particularly nasty haunts: competition and conspiracy. Both are major factors in the hot debate over how to regulate the electric utility industry. However, competition may be a friendly ghost for San Diego Gas & Electric Co. customers and may even save us from yet another round of electric rate increases.

A number of forces combined to create SDG&E;’s currently inflated rates. Overbuilding and overextension of capital combined with a drop in customer demand has led to a prolonged period of extremely high electric rates. These inflated rates and recent technological advances have compelled those who use a lot of electricity (industrial and large commercial customers) to seek out cheaper energy.

The large users found a solution. They purchased co-generation equipment, which generates electricity from natural gas at prices lower than those charged by SDG&E.; Their size and wealth enabled them to do what most San Diegans have long dreamed of--to get out from under SDG&E.; In San Diego, most of our large industries, such as the Navy, General Dynamics, Convair, Union-Tribune and others, have turned to self-generation of electricity as an economical alternative to inflated electric rates.


This “industrial flight” from SDG&E; has created a dark cloud of potential rate increases for other users. SDG&E; claims that residential and small business customers have to make up for the profits lost from industry.

At first glance, the competition from co-generators appears to be bad news for residential and small business ratepayers. However, if handled properly, the increased competition could well mean lower rates in the long run.

Competition is now possible because the industrial flight has sparked a gradual restructuring of the electrical utility industry. It has become a trilevel industry.

At the highest level are the customers who purchase electricity to live and work. The second level consists of the distributors of electricity, the utilities such as SDG&E; that maintain the network that transmits the power.

The third level is made up of power producers. In the past, this level has consisted primarily of utilities. Now it also includes businesses using co-generation, wind and geothermal to either generate power for their own use or to sell to utilities. Furthermore, private companies, such as Catalyst Energy Inc., have purchased power plants from utilities and sell electricity on the open market.

This competition has come at a time when SDG&E; and many other utilities have more electricity than they can sell. They obviously don’t want competitors taking away profitable customers, thus posing a further threat to utility profits and customer base.

The utilities have two options, they can join in the battle or they can throw up obstacles to prevent competition. Interestingly, many utilities, such as SDG&E;, have commenced a campaign to do both.

Their strategy is deceitful. For example, SDG&E; publicly states that it wants to join in the increasingly competitive generation market. Yet, its actions reveal the truth: SDG&E; wants to compete on its own terms, terms that will not jeopardize its substantial profitability.

To gain its own terms, SDG&E; has chosen to place obstacles in the way of its budding competition. It has tried to implement a plan to raise backup rates that increase the cost of co-generating to uncompetitive levels. It also seeks to decrease industrial rates on a case-by-case “negotiated” basis. In addition, SDG&E; has lobbied the Public Utilities Commission (PUC) and federal agencies to decrease payments to private generators who seek to sell electricity to the utility. Federal law requires utilities to buy this privately generated electricity, but the price paid for that energy is set by the PUC, and it is dropping quickly.

The utility is also playing games with its forecasting. At hearings addressing the future of co-generators and conservation, the company claims that it has no need for additional energy until the mid-1990s. At other hearings, SDG&E; expresses a need to invest in new plants and sign more long-term contracts with Southwest utilities within the next five years.

Utilities throughout California are taking action, although no others as severe as SDG&E;’s, to undercut the nascent competition. The utilities’ actions are premised upon the need to protect the “captive” small customers (residential and small business).

Consumer groups in California and other states recognize that small customer protection is a flimsy cover for the utilities’ true fear of competition.

UCAN harbors some concern that if competition is handled poorly by regulatory agencies, today’s competition could become tomorrow’s oligopoly. A similar deregulation and consolidation is occurring in the previously competitive airline industry. In the event of an energy shortage, an oligopoly market can exploit dependent customers. And, as evidenced in the telephone deregulation, small customers could possibly end up with higher rates and poorer service.

But the risks posed by competition may be worthwhile. The status quo is not satisfactorily working in small customers’ favor. State regulatory commissions are understaffed, underbudgeted and frequently captive to the moneyed persuasiveness of the utilities. Electric utility regulation is a notable example of the principle that most regulation is but a time-limited restraint upon most monopolies. Over time, the utilities have learned to stack the cards to their advantage.

Thus, small users and their advocates may be well-advised to support moves toward competition. They should work to ensure that if competition is to occur in the electricity generating level of the industry, then it should be true competition. All of the competitors should be subject to the rigorous disciplines of the open market. Generous rates of return need not be guaranteed. Losses should not always be shouldered by the ratepayers.

This isn’t a radical proposition. Private utilities, such as SDG&E;, differ from municipal utilities in that their main focus is the “bottom line.” Generally speaking, we’ve seen that private utilities are more prone to raise rates than slash costs. It is noteworthy that SDG&E; proudly advertises its rigorous employee slashing of 4%. It is less known to San Diegans that other similarly sized utilities have cut their staffs by more than 11% in the same time period.

The new game must be: build or purchase imported electricity at your own risk, and let the market determine what you can charge for electricity. By imposing the disciplines of the marketplace, utility management would need to be more accountable to its shareholders. Rather than a slap on the hand from the PUC, utility executives would face shareholders whose own money is at risk. These new rules should reduce the utilities’ need for capital by encouraging smaller generating projects or shifting building new capacity to others.

The utilities will oppose true competition since it enables the utilities’ past mistakes and miscalculations to come back and haunt them. However, long-suffering utility customers shouldn’t be expected to pay for the exorcism of the utilities’ poltergeists.