Accord Nearing on Electric Power Deregulation

In one of the most heavily lobbied California legislative actions this year, a conference committee is nearing agreement on a package of bills that would deregulate California’s electric power industry and set a precedent for much of the nation.

The bills would order a 10% rate cut for consumers and business by 1998--though the cuts could later be restored--and dramatically reduce the role of the California Public Utilities Commission in regulating electric power.

The legislation, which would carry out a deregulation mandate ordered by the PUC in December, would establish a Power Exchange--a statewide pooled market similar to a commodity spot market for power from which consumers and businesses will buy power according to the cheapest rates. The exchange would be supervised by a seven-member board appointed by the governor.

The effect would be to break the utilities’ grip on state power generation, enabling power producers from all over the country to sell energy into the state’s Power Exchange. It would ensure consumer and business access to the pool by setting up an an “independent systems operator” to run the state’s power transmission grid.

The emerging bills, mandated when the PUC ordered the power industry to shift to a competition-based system, come after two weeks of horse-trading into the early morning hours by legislators, state utilities, big manufacturers, consumer groups and alternative energy producers--all of which have a huge stake in the outcome.

Whether the change will benefit residential customers and small businesses as much as it will big industries is unclear, although the big energy users with bargaining leverage appear to be clear winners. Two consumer groups, Utility Consumers Action Network and Toward Utility Rate Normalization, have not endorsed the conference bill because they say the effects on consumers aren’t clear.

“We haven’t been able to figure it out,” said Michael Shames, spokesman for UCAN.

The PUC mandate in December called for big utilities, such as Pacific Gas & Electric and Southern California Edison, to sell much of their fossil fuel-based generation capacity to competitors to create competition, but the conference bill as of yet contains no language to that effect.

So confident are legislators of the cost savings to be had from free market power that the bill in its current form would order a 10% across-the-board rate cut for residential and small-business consumers no later than January 1998, a measure that was not ordered by the PUC.

The rate cut is planned even though all California consumers and businesses will remain on the hook to pay the $20-billion-plus cost of utilities’ “stranded assets”--debt still owed on the high-cost nuclear power plants and the above-market cost of alternative energy contracts such as geothermal and wind power that cannot compete with lower cost energy sources.

Ratepayers will pay those stranded-asset costs through a surcharge that will be added to their monthly bills from 1998 at least through the year 2002, said Molly Hillis, consultant for conference committee Chairman Sen. Steve Peace (D-El Cajon). However, the 10% rate cut still applies.

Bonds financed by the revenue stream created by the CTC will be sold by 1998 to raise the cash to pay the utilities so they can pay off the debt on the plants. The bond revenue will also be used to cover the subsidies required by existing energy contracts with producers of alternative power, such as geothermal, wind and cogeneration.

That financing mechanism was described as a breakthrough in the complex negotiations. The sale of bonds quickly compensates the utilities for their stranded asset costs, a payoff that will immediately lower utilities’ costs and therefore consumers’ rates.

Although the bill would extend the subsidies to honor the contracts, its message is that such power producers will soon have to compete on cost alone. Such producers have received subsidies since the 1970s as the state and federal governments attempted to encourage the development of non-fossil-fuel energy sources.

The bills will also reduce the role of the Public Utilities Commission--and with it some consumer safeguards, consumer advocates warn. They don’t like provisions transferring complaint handling functions from the PUC to the Department of Consumer Affairs in the governor’s office.

The PUC’s role will shrink because all that will be left for it to regulate will be the lines carrying power into homes and businesses. Ultimately, it will have no role in regulating power generation.

The deregulation bill has six bipartisan sponsors, three senators and three assemblymen led by Peace and Assemblyman Mickey Conroy (R-Orange).

If passed and signed into law by Gov. Pete Wilson, as expected, the deregulation will mark a historic change from the traditional monopolistic practices of utilities. More than 40 states are edging toward similar laws, and all are watching how California manages the extremely complex transition.

Once approved by the conference committee, the Senate and Assembly would vote on the finished bill, probably early next week.

One utility negotiator said that getting “all these disparate interests to get together was a monumental task. . . . They got together because of the consequences of not agreeing. “

“Utilities want their CTC, small customers want to be sure they don’t get the shaft, independent power producers want access to customers and renewable power producers want subsidies. . . . Everyone wants something, and everyone is afraid that they will be the ones who don’t get it,” the negotiator said.