PUC Endorses Electricity Deregulation Plan : Energy: Consumer advocates decry the final version but utilities are happy. Plan still needs final OKs from regulators, Legislature.

In a decision decried by consumer advocates but praised by utility executives, a deeply divided California Public Utilities Commission on Wednesday approved a dramatic plan to move the state’s $20-billion electric utility industry toward a more competitive, market-driven system.

The PUC endorsed a plan to deregulate the power-generation part of the industry starting in January 1998 through the creation of a wholesale pool known as a power exchange. The decision, which was widely anticipated, is being watched nationally as a possible model for the highly regulated electricity industry. The plan would give consumers a variety of new choices for the purchase of electric power. The vote came after more than two years of occasionally rancorous debate over the effort to deal with electric power rates that are among the highest in the nation.

“Our debates reveal broad consensus that rates are too high and must be brought into alignment with regional averages if our state is to maintain a competitive posture as we enter the 21st century,” commission President Daniel W. Fessler said before the vote.

He added: “If the issue of customer choice that we set forth and discuss today is realized shortly after Jan. 1, 1998, I believe customers of electric service in California will face the broadest possible range of choices.”

The final vote was close, 3 to 2. The commission rejected a plan put forward by Commissioners Jesse Knight Jr. and Josiah L. Neeper that differed from the winning version in key respects. The winning plan also appeared to reject many of the arguments of consumer advocates, including one calling for an explicit guarantee of lower rates.

The plan that was approved is based in large part on a proposal brokered by Gov. Pete Wilson among Southern California Edison Co., some of its larger commercial and industrial customers, and independent power producers.

Perhaps the most controversial part of the decision is that it would award 100% recovery of so-called stranded costs to the large utilities.

These costs include investments in nuclear power plants whose power would be too expensive to sell under the new system, and the costs of continuing to pay above-market power rates under government-mandated contracts to buy power from alternative power producers. These costs are now built into electric rates.

Under the new system, those costs would be broken out and added to rates as a special charge for all ratepayers until 2005.

That provision raised the ire of consumer advocates, who argued that the level of such costs, estimated at more than $12 billion for Edison alone, would more than offset any rate savings.

“We’re really looking at protecting the utilities first and leaving the crumbs for the ratepayers someday after the utilities are finally paid off,” said Michael Florio, senior attorney with the consumer group Toward Utility Rate Normalization. “It’s a complete abdication of any attempt to benefit ratepayers. It’s really a utility bailout, pure and simple.”

But utility company executives said the decision simply lives up to past agreements and reflects costs already being borne by ratepayers.

“It is the best, soundest way to move to a desirable competitive market that will benefit all customers, large and small,” said John Bryson, chairman of Southern California Edison.

“Southern California Edison . . . is committed to a 25% rate reduction effective Jan 1, 2000,” he said. “As near as we’re able to tell, this is consistent with our goal.”

The plan “endorses most, if not all, of our principles,” said Donald Felsinger, president and chief executive of San Diego Gas & Electric Co. “We end up in a competitive marketplace. Utilities will have the ability and opportunity to recover stranded investments. And in 1998, all customers will have choice at the same time.”

The decision breaks up the traditional top-to-bottom monopoly of the regulated electric utilities. Among the key elements:

* creation of a wholesale power pool into which generators sell electricity. Prices would be set hourly, or half-hourly, in a spot market similar to a stock exchange. The investor-owned utilities would be required to sell power into this exchange; others may participate voluntarily. Buyers would include municipal utilities, retail groups and individual customers;

* creation of an independent system operator, or ISO, which would operate the transmission lines that would remain the property of the utilities. The ISO would control the system, scheduling the delivery of power and ensuring that demand is met. Unlike what was called for in an earlier proposal by Fessler, the independent system operator would be separate from the power exchange;

* customers would have three choices: buy power from the utility in much the same manner as today, enter into so-called hedging contracts for power at a set price with anyone willing to assume the risk for price fluctuations on the wholesale level, or buy power through a direct contract with a power generator, so-called direct access. Such direct access would be limited for the first year of the restructuring;

* utilities would retain control of their distribution systems for customers who choose to remain utility customers. Under the proposed restructuring, customers who buy special computerized meters would be able to take advantage of lower-cost power generated during off-peak periods, such as in the middle of the night. The commission also proposed a public-goods charge to be added to rates to finance research and energy-efficiency programs. The commission, while affirming its support of low-income assistance programs, also urged the Legislature to pass laws to protect them.

Wednesday’s decision does not end the process. A 100-day comment period is next, and changes are still possible.

Some observers believe the fact that the vote was so close might mean the plan will be a hard sell to state legislators and federal regulators, who must also approve it before it can be implemented.

“They’re going to the Legislature and saying, ‘We can’t agree,’ ” said Stanley W. Hulett, an industry consultant and former PUC president.