Deregulation of Electricity Calls For Bold Action on Every Side

Ultimately, there is something to be gained by everyone from the emerging deregulation of lifornia’s $20-billion electric industry: consumers, businesses, investors, voters, taxpayers, regulators and legislators. All will be touched.

The question is: When will it happen and how it will turn out? The complete answer is missing from the electric restructuring plan outlined last month by the five-member California Public Utilities Commission, which has circled and recircled the issue for almost two years.

What has been forgotten as time elapsed in the endless studying and political posturing is why California (as many other states) wants to deregulate electricity: It’s the customers, stupid!

Worldwide economic forces are giving consumers more choices. The California PUC, in an effort to be both economically and politically thorough, has been squeezed between the large investor-owned utilities with their multibillion-dollar capital investments and the political and investment communities, which are fickle even on their best days. Looming squarely in the middle are the customers--you and I.

All of the parties in the restructuring debate continue to pay lip service to the customers, but little more than that. (The rationale for dismantling the century-old structure of public utility monopolies is to lower rates for electricity, which in California costs 50% more than the national average.) Utilities don’t often look at themselves as the customers perceive them. As mature monopolies, they tend to think that they “know what’s best” for their customers.

What is needed is bold action on all sides. For example, the regulators have to “let go” more cleanly and quickly and the utilities have to make some real changes--not just talk about doing so. The power-generation and rate-making processes must be governed more by market forces and less by regulatory fiat. Delivering electricity through power lines, meanwhile, will remain more traditionally regulated. (Under the PUC plan, deregulation is supposed to begin in 1998 and continue through to completion by 2005.)

The economic obstacle here is what to do with the outstanding large capital investments in generation facilities and long-term, above-market purchased power from nonutility sources that are economic in a tightly regulated, monopolistic world but will be uneconomical in the world of freer electricity markets.

These are the so-called “stranded investments” that need to be recovered in transition charges by the utilities through 2005. We all will have to pay them in a “competitively neutral” surcharge, regardless of whether we buy power from a utility or a new competitor.

The rates of return on the capital investments should be in keeping with today’s single-digit interest rates, and the period of time for recovery should be shortened so the utilities can begin operating in the new environment without unnecessary shackles from the past. The PUC also appears headed in this direction.

What bothers Wall Street more than the stranded costs themselves is the uncertainty of how they will be dealt with. That uncertainty has prevailed since the original proposal to deregulate California’s electric industry was made in 1994. So far, the PUC, in its restructuring decision and a subsequent rate case for Southern California Edison Co., has given the utilities the opportunity to recover their “prudently incurred” investments over an accelerated time period. But what will happen to smaller customers’ rates?

The test should be: What is going to help lower customers’ bills without unduly weakening the large utilities?

With its plans for a semi-voluntary wholesale power exchange, the PUC has grasped the need to provide customers who want it with direct access, allowing individual deals with power generators. That will happen starting in 1998, but on a phased-in basis that could take up to five years. Within this program, an economically attractive system should be put in place for smaller customer groups to pool resources to buy as cooperatives. This would be the best way to bring prices down and open up the market, two fundamental goals of any deregulation strategy. The PUC needs to be clearer about its intent in this regard.

I think the PUC is underestimating the adaptability of the utilities and the extent to which technological advances make these market changes possible. The utilities needed the motivation that a bolder PUC decision on deregulation, supported by a clear majority, would have provided. They didn’t get it from the PUC commissioners’ split, 3-2 vote.

Meanwhile, many other electric companies and newly emerging “power brokers” situated around the West, Southwest and Midwest are busy establishing relationships with customers in California and finding out what sorts of new electric services they will need once the restructuring takes place. They are establishing themselves in a good position to sell electricity to customers in California who want a better deal. California’s own electric companies so far have been less innovative and assertive.

This isn’t to imply that California utilities don’t deserve a fair chance to compete and an orderly transition to the brave new competitive world. They need legislative and regulatory help in seeing that the “social service” role is shared equally among all electric providers.

If everyone concerned really wants lower rates and more choices for all customers--large and small--then both regulators and utilities need to act boldly during the PUC’s current 100-day comment period. Both sides know that their roles will change radically in the next century. Now is the time to try to shape that future.