PUC Plan Would Allow Choice of Utility Firms : Electricity: Proposal is expected to cut prices. Environmentalists fear setback for their cause.

Proposing the most dramatic overhaul ever of how Californians get electric power, the state Public Utilities Commission said Wednesday that it wants to let customers of the state’s three big investor-owned utilities choose their own power source by the year 2002.

Going further than experts had expected in its campaign to cut electric prices--by breaking the utilities’ monopoly on power generation--the PUC said it would introduce choice in 1996 for large industrial customers of Southern California Edison Co., San Diego Gas & Electric Co. and Pacific Gas & Electric Co.

Smaller industrial users would be added in 1998 and small-business customers in 1999. And if the PUC sticks with the plan after a set of public hearings to begin June 14, the three utilities’ more than 8 million residential users will be free to select their power supplier beginning in 2002.

For customers, buying electric power will be like buying long-distance telephone service. Customers will choose their power company, and the local utility--which till now has enjoyed monopoly status within its geographic turf--will simply deliver the power to their door.

“It’s a fundamental shift on the national scene,” said Jan Hamrin, an energy expert and consultant to the National Assn. of Regulatory Utility Commissioners. “It will probably set a standard for everyone to focus on.” A few states have launched experiments in electric deregulation, but none has proposed going so far as the PUC plan.

The commission hopes that competition among producers will significantly lower Californians’ electricity bills. But consumer activists objected Wednesday to several aspects of the PUC’s scheme--including a plan for ratepayers to pay off some big, existing utility investments, largely in nuclear power plants, that critics say were the companies’ own mistakes.

Covering the costs of such investments--and the new way that the commission proposes to regulate utilities in the future--could stick consumers with higher costs instead of savings, critics said.

“This is a system completely stacked in favor of the utilities,” said Michel P. Florio, senior attorney for Toward Utility Rate Normalization, a San Francisco-based consumer group.

But environmentalists expressed concern that wide-open competition--with the winners being those power producers who can make electricity most cheaply--will erode the state’s decades-long commitment to renewable and environmentally preferable energy sources.

The proposal would have no direct affect on power customers in the city of Los Angeles, who get electricity from the municipally owned Department of Water and Power, or in other cities with municipal utilities, including Glendale, Burbank, Pasadena, Anaheim, Riverside and Sacramento.

“But clearly it will have an impact on us,” said Michael T. Moore, director of public and governmental affairs for the DWP, whose rates now are 15% to 20% below those of Southern California Edison.

The utilities had opposed deregulation through more than a year of public--if obscure--debate, but the commission proposal appears to offer them a buffer against the worst potential financial damage from deregulation.

They had feared that their shareholders would be left to pay off long-term investments in power plants that won’t be competitive under the new system.

The utilities also had worried about losing their large industrial customers, some of which already have been moving operations out of state in search of cheaper electricity. Had the commission allowed only such customers to shop for power, small-business and residential ratepayers might have seen dramatic rate hikes as they shouldered more of the utilities’ overhead.

“This looks like a thoughtful, well-conceived plan,” said John E. Bryson, chairman and chief executive of Southern California Edison and its parent, SCEcorp. It both gives customers choice, he said, and provides “fairness to all customer groups and to utility investors who supported the development of the infrastructure that we have.”

Investors seemed to signal initial agreement, though utility shares generally were strong in stock trading Wednesday. PG&E; rose 62.5 cents to $29.625, SCEcorp added 12.5 cents to $16.625 and SDG&E; gained 50 cents to $22.75.

The PUC also endorsed the utilities’ ideas for how they would earn profits in the regulated portion of their business that will remain basically monopolistic--the delivery of electricity to homes and businesses, from whatever source.

All three utilities want to switch away from the traditional ratemaking process, which allows them to charge ratepayers the cost of their services plus a regulated profit.

They prefer a system known as performance-based ratemaking, which ties their earnings not to how much power they sell, but to their efficiency. If they cut operating costs below an annual goal set by the commission, the utilities want to be able to split the difference between savings to ratepayers and profit to their shareholders.

The commissioners also expect utilities to find new markets outside their traditional service territories, just as utilities from other parts of the country are expected to enter the electricity business in California.

Indeed, Commissioner P. Gregory Conlon said Wednesday that he would expect a regional spot market in electricity to develop, with prices updated every hour or half hour, as now exists in England and Wales. That would let utilities sell their excess power into a national transmission system for use wherever there was customer demand.

Meanwhile, environmentalists expressed concern about damage to the state’s policy of encouraging diverse sources of energy, which dates to the first Middle East oil crisis in 1973. The oil shock hit California harder than any state in the nation. The Legislature and regulators quickly moved to encourage non-fossil fuels, such as wind, solar and geothermal power.

As the commission deliberated, Conlon argued for a rate surcharge in the new system to continue such support. But Wednesday’s proposal leaves customers only the option of specifying--perhaps by marking a box on their bill--that they want their power purchased from one of these sources.

Otherwise, such energy sources will be left to compete with all the others--including a new class of dramatically efficient natural gas turbines--and environmentalists say some will be hard-pressed to be competitive.

Independent power producers also were furious over a PUC decision--also announced Wednesday--to hold off resolution of a bitter dispute over renewable energy.

The utilities have protested an auction that would have meant more than $1 billion worth of power contracts for independent producers. The commissioners said they would hold off adjudicating the dispute until after hearings are held on the deregulation plan.

“On the commission’s first step into a competitive future, they’ve tripped,” said an angry Jan Smutny-Jones, executive director of Sacramento-based Independent Energy Producers. He objected that further delays leave these companies with an uncertain financial future and expressed concern that the commission may not live up to the rules of the auction, which were set up years ago.

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