DEREGULATING ELECTRIC POWER : Powerful Questions : Q & A: How the Plan Would Affect Residential and Industrial Users

The California Public Utilities Commission’s proposal to make sweeping changes in the way the state’s electricity services are regulated eventually would give all industrial and residential customers the power to choose which company they want to supply their electrical power.

Here are answers to some key questions about the plan and how it could affect utilities, customers and regulators.

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Q: What exactly did the PUC propose?

A: The commission laid out a two-pronged plan. First, beginning Jan. 1, 1996, large industrial and commercial customers in California would be allowed to buy electricity from any source of their choosing, rather than simply from the utility company holding a monopoly in their service territory. That option would gradually, by 2002, be extended to all business and residential customers. Any customer could, of course, continue to tap the utility company as its source.

Second, the state would shift away from traditional formulas that have tied electric rates to utilities’ costs for power plants and other expenses. Under that approach, major investor-owned utilities have been able to recover costs by raising rates, even if the power-generating facilities have proven uneconomical, as was the case with Pacific Gas & Electric Co.’s Diablo Canyon nuclear plant.

With the new method, known as a performance-based approach, utilities would be rewarded for more efficient operations, management and investments. To the extent that a utility could reduce costs below an established target, it could divide any savings between ratepayers and shareholders.

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Q: Why did the PUC propose these steps?

A: The goal is to reduce the state’s electricity prices--which generally run 50% higher than the national average--by fostering competition. Lower rates would make California more attractive to businesses and therefore help create jobs.

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Q: How would the plan work?

A: PG&E;, Southern California Edison Co. and San Diego Gas & Electric Co. would be required to open their transmission lines--for a fee--to companies seeking to sell electricity. Customers could choose any provider, but at least during a transition period, they would still be obligated to cover certain costs incurred by the utilities under the previous regulatory formulas. Utilities should not be forced to absorb those costs, the PUC said, since the plants were built under an earlier system.

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Q: Who would stand to benefit most?

A: Utilities could benefit by competing without many of the previous regulatory restraints. For example, the current process of setting rates for large customers can stretch to 18 months. The new performance-based formula would put an end to that. Furthermore, utilities’ shareholders would be insulated from most risk, particularly with regard to expensive nuclear power plants.

Large industrial customers could gain by having the option of shopping around for better rates.

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Q: What about small customers?

A: Some consumer advocates fear the PUC proposal would leave small business and residential customers out in the cold by letting the utilities compete without risk. Performance-based regulation, they say, would allow utilities higher profits with less regulatory scrutiny. Also, they would have control over transmission lines and would tend to favor themselves.

The PUC said one of its chief goals is to protect residential customers by ensuring that utilities will pass on any savings from increased efficiencies to small ratepayers.

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Q: When would the changes take effect?

A: Nothing has been formally decided. The PUC has asked interested parties to respond in writing by May 20. On June 14, it will hold its first public hearing on the proposal in Los Angeles. After that, it will determine whether other hearings are necessary before it adopts a final policy, probably in August. Customers would probably not see any effects until at least 1996.

The End of the Electric Monopolies

The California Public Utilities Commission has proposed an unprecedented deregulation of the electric utility business. Over the next eight years, all customers of Southern California Edison Co., Pacific Gas & Electric Co. and San Diego Gas & Electric Co. would be freed to buy electricity from the supplier of their choice, just as they are free now to select a long-distance telephone service.

HOW DEREGULATION WOULD WORK

Under the PUC’s plan, a range of power suppliers--from the existing local utility to out-of-town utilities to upstart independent producers--will compete to sell electricity to power customers. The local utility’s existing transmission system--including existing power lines to homes and businesses--will deliver the power to the end user.

THE PUC’S PROPOSED TIMETABLE

Deregulation would be phased in over six years.

1996: Large industrial customers can buy electric power from any producer. 1998: Deregulation extends to smaller industrial customers 1999: Deregulation extends to commercial customers, including small business 2002: All California customers, including residential ratepayers, may choose power supplier of their choice.

IMPACT ON KEY PLAYERS

Customers: The PUC says the freedom to shop North America for electric power would lower rates for all categories of consumers. But a transition fee covering the costs of big past investments by the utilities--notably for nuclear plants--will be tacked onto bills, trimming the savings.

Utilities: They win in two ways. The commission endorsed in concept their proposal to switch from traditional rate-making to a method that allows utilities to pass on savings from efficiency gains to shareholders and ratepayers. And the transition fee would make ratepayers--not shareholders--shoulder the costs of retiring old investments.

Environmentalists/Alternative energy producers: They are unhappy with the plan to eliminate utility set-asides guaranteeing business for suppliers of environmentally benign power. Consumers still would be able to buy power from such sources, but the sources might not be competitive.