PERSPECTIVE ON ELECTRICITY : Easing California’s Kilowatt High : Competition won’t bring chaos. But some problems with sharing the burden of bad investments need resolution.

Californians pay far too much for electricity. The $18 billion spent on electricity each year by governments, businesses, farmers and residents is due to rates which are among the highest in the nation. But if California creates a truly competitive electricity market--one whose first principle is choice for the customer, not the producer--the price of electricity could drop as much as 50%.

Giving consumers the power to choose, and ensuring that they have a meaningful number of electricity suppliers to select from, is not that difficult. The British moved from an entirely government-owned and -operated electrical monopoly to an open, competitive marketplace in less than five years.

California is on the brink. But the onset of competition is being delayed by efforts to protect utility shareholders (and thus utility managers) from the consequences of their uneconomic assets--referred to by utilities and regulators as “stranded investment” and by others in business as “bad investment.”

In most cases, bad business investments are paid for by the owners of the business. Seldom do competitive businesspeople enjoy the luxury of recovering the full costs of bad decisions through the price of their goods and services. Utilities, though, have never operated in a competitive environment. Their bad investments, they claim, should be borne solely by their customers as part of the “regulatory compact” they have had with their regulators and customers for decades.

If state and federal regulators took clear positions on the fair sharing of bad investments between customers and shareholders, however, two startling things would happen. First, the stranded-investment issue would be relegated to the status of a detail, rather then continue as the central feature of the restructuring debate, with only the questions remaining of how large it is, and how to collect some of it. Second, with accountability placed on utility managers, the actual costs would be lower and their cost-cutting efforts would be more successful than originally anticipated.

Concerns that competition would bring system chaos and collapse, a fear held by many regulators and policy-makers, may stem from an unclear definition of how utility systems would operate with competition. The notion of an electricity version of the AT&T;/MCI customer telephone wars, complete with electricity “calling circles,” is a misconception that few have tried to dispel.

Today, utility systems consist of three major components--power plants, transmission lines and distribution systems. Of these, uneconomic investments in plants are the primary source of high rates, and thus the most logical place for competition and cost reductions.

* Distribution system competition would not only create few real cost savings, but could also lead to unnecessary distribution facilities (substations and low-voltage transmission lines), causing potentially severe environmental impacts. Distribution systems (and the limited local power plants needed to ensure system integrity) should be left intact as a utility function.

* Transmission should be made competitive to guard against predatory pricing and discriminatory access practices.

* Generation should be highly competitive, to ensure that buyers are given full access to low-cost power.

A truly competitive electricity system differs from today’s utility monopoly in only a couple of ways. First, utility operators would schedule and dispatch more of the cheaper non-utility power available from other sources instead of the utility’s own expensive power, with the savings from low cost power being passed directly through to the buyer. Second, more money would flow directly to and reward those able to produce low-cost power, instead of going solely to the utility.

Achieving a truly competitive market takes courage. Regulators and policy-makers need to recognize that shareholders, not customers, are the voluntary speculators, and that, to hasten competition, they need to split the costs of uneconomic assets between both groups. They need to acknowledge that California’s electrical system technically operates well today, and that competition will not cause the system to collapse, but rather will provide incentives for greater reliability.

Every day that consumers are denied access to low-cost power--even if we assume a savings of only 20%--the California economy takes a $10-million hit in excessive and unnecessary payments. It’s time for regulators and policy-makers to focus on the bottom line and open the door to let in the strong, bracing winds of competition.