Radical Changes in Power Industry Pass Legislature

The California Legislature passed a historic electricity deregulation bill Saturday that would break the grip of utility monopolies on power generation and ultimately let consumers choose their power provider. Most residential customers would receive a 10% rate cut in 1998.

If Gov. Pete Wilson signs the bill, as expected, California will set a national precedent by freeing its $20-billion power industry to the forces of market competition. Forty-six other states are at some stage of power deregulation and are watching California closely.

Despite the law’s complexity, its billion-dollar consequences and the diversity of interests affected, the Senate approved the bill 38-0 Saturday--a day after the Assembly approved it 71-0.

“This is an extraordinary result given how difficult the problem,” said state Sen. Byron Sher (D-Palo Alto).

Deregulation aims to give California residential customers and businesses access to the cheapest power available in the nation, a Public Utilities Commission mandate first laid down in April 1994.

Customers of California’s three major investor-owned utilities--Southern California Edison, Pacific Gas and Electric and San Diego Gas & Electric--pay 50% more for power than the national average.

The rate cut affects only customers of those three utilities, which represent 70% of the state’s customer base.

Those served by government-owned power providers, such as the Los Angeles Department of Water and Power and the Sacramento Municipal Utility District, would not get the 10% rate cut. The municipal power companies, however, will join the statewide power pool and grid being set up by the legislation, and expect to lower their costs.

What little criticism the bill attracted as it swept through the Legislature came from environmental and consumer groups who complained that it favors big manufacturers and utilities over residential customers. But even those groups mounted little formal opposition to the bill, seeing it as an improvement over provisions in a detailed restructuring blueprint adopted by the PUC in December.

“The PUC decision set forward a framework that’s favorable to big utilities and soaks ratepayers and small businesses over time,” said state Sen. Tom Hayden (D-Los Angeles), who voted for the bill. “We got some improvements on that.”

Legislators, confident that deregulation will bring savings, have written in the across-the-board rate cut for residential and small business bills effective January 1998, when energy deregulation would begin to be phased in over five years.

But most Californians will have to wait years to reap the full benefits of a free energy market. That’s because residential and business customers are on the hook to pay utilities up to $30 billion for money-losing assets, mainly investments in five nuclear plants.

That money will be taken out of consumers’ bills in the form of a special “competition transition charge” until 2002. At first, the charge will represent about one-third of a typical monthly statement.

Environmentalists’ protests were muted by some concessions granted to renewable energy producers during three weeks of conference committee hearings chaired by state Sen. Steve Peace (D-El Cajon). And the state’s ratepayers already are paying the bloated nuclear power costs embedded in their monthly utility bills.

The difference under deregulation will be that those costs will be itemized and lumped together with other bad utility assets on their statements.

Winners and losers notwithstanding, the law will create a new playing field for all California buyers of electricity and the utilities and independent power companies who will vie to sell it. Consumers will be faced with more choices while utilities, long a protected monopoly, will have to learn how to compete.

Under deregulation, consumers likely will have to band together in buyer groups akin to HMOs to realize any significant savings. Residential ratepayers should be prepared for an onslaught of mailings and telephone solicitations, like the ones they receive from marketers of long-distance service and credit cards.

Joining buyer groups will be essential for consumers because without strength in numbers, the residential customer will have no leverage in a market geared toward big players. Industry observers see consumer groups forming according to geographical proximity.

Deregulation’s centerpiece is the wholesale energy pool to be set up in 1998 called a Power Exchange. It will be similar to a spot commodity market where utilities will be forced to buy the lowest-cost power from sources connected by grids throughout the nation.

To make sure that consumers have untrammeled access to the exchange, the utilities are turning over operation--but not ownership--of their statewide transmission lines to an independent operator to be overseen by federal regulators.

Most states have been moving toward electricity deregulation since the federal Energy Policy Act was passed in 1992 legalizing a free, nationwide wholesale market for electricity. Although Rhode Island and New Hampshire each passed energy deregulation laws this year legalizing free retail power markets, California’s would be the most far-reaching law yet.

California is ahead of the rest of the nation in establishing a retail market because high energy costs here have mobilized manufacturers and business groups to put enormous pressure on state regulators to push-start the process.

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Big business, which has spent heavily to lobby for the law, is seen as a clear winner because deregulation will enable it to strike agreements directly with power providers to buy electricity at far lower prices than they pay utilities today. Big power marketers with interstate alliances are already lining up power supplies and customers in preparation for 1998.

Despite concessions in the bill, the future of wind, solar, geothermal and other renewable energy generation companies is uncertain. They would lose most of the federal and state incentives that enabled them to become viable players in the state’s regulated market. They may go by the wayside once forced to compete on price, now 15% to 25% higher than natural gas, the cheapest fossil fuel.

Utilities favored the deregulation bill because it puts into law a guarantee that their shareholders will be reimbursed for up to $30 billion of nuclear and alternative energy costs, investments that have proven grossly inefficient and costly.

Those “stranded asset” costs are already built into the rate base paid by all consumers, but up to now they have been subject to ongoing review at the PUC, a nerve-racking process for the utilities.

Losing those reimbursements would have meant financial disaster for utilities, according to E. Gregory Barnes, assistant general counsel of San Diego Gas & Electric, which owns a 20% share of the money-losing San Onofre Nuclear Generating Station.

“Now that you have a legislative enactment, that ought to provide some certainty to the marketplace,” Barnes said

But several public interest groups complained that the subsidies for utilities contained in the bill, which include guaranteed profits on bad investments, were too generous and should have been negotiated down.

“The bill is a colossal piece of corporate welfare” for the utility companies, said Rich Ferguson, national energy chairman for the Sierra Club. “If what you want is competition, it’s a strange way to get it.”

Another deregulation stakeholder at risk is labor. Hundreds of utility workers may lose their jobs as the power industry becomes more efficient and as utilities follow the PUC mandate to sell off up to half of their power generation capacity to ease their dominance of the state’s power market.

With jobs in jeopardy, labor unions representing utility workers won guarantees in the bill of between $100 million and $200 million to retrain workers who are laid off, as well as for severance packages and early retirement for older workers who lose their jobs.

Meanwhile, Wall Street analysts have expressed concern that the state is moving too fast to set up a free energy market. As a result, stocks of the parent companies of Edison, PG&E; and SDG&E; have sold at lower prices than U.S. utility stocks as a whole since the deregulation drive began, said Dan Rudakas, a utilities analyst at Chicago-based Evren Securities.

The stock market has “a little more confidence in the way deregulation is going elsewhere because other states are not going ahead quite so fast. . . . California was looked on as going off half-cocked,” Rudakas said.

Not all states are in as big a hurry as California to deregulate, said Kenneth P. Linder, director of rates and regulation at Edison Electric Institute, a Washington, D.C.-based trade group representing the nation’s utilities.

New Hampshire and Illinois have implemented pilot projects rather than jump into statewide deregulation all at once. “There are ways of going more cautiously,” Linder said.

Some states such as Idaho and North Carolina with low-cost energy have decided that it is not in their residents’ best interests to deregulate because opening up the market would mean their cheap energy would “migrate out of state.”

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Despite the risks and unknowns of the deregulated energy market, California’s bill took on the aura and momentum of inevitability over the past few weeks. Peace said this was an indication that most of the interest groups with stakes in deregulation got some, if not all, of what they wanted during the three weeks of intense hearings.

“That’s the way democracy is supposed to work,” Peace said. “You can go through and pick out the threads. What you have to look at is the fabric.”

Times staff writer Dan Morain contributed to this story.

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How Electricity Deregulation Would Affect Consumers

* A Power Exchange, a kind of spot market for energy, would be set up. Utilities would buy the cheapest energy available from across the nation through the exchange and sell it to consumers. Starting in 1998, businesses and consumer groups would gradually be given the right to buy energy directly from power suppliers, or to continue to buy from the Power Exchange through the utilities.

* Residential electricity customers of the state’s three major investor-owned utilities would receive a 10% reduction in their electricity bills beginning January 1998.

* Residential customers would receive telephone and mail solicitations from energy marketers who will try to entice them into huge buying groups with promises of cheaper energy.

* A portion of all bills would be dedicated to reimbursing utilities for the costs of money-losing nuclear power plants and above-market alternative energy contracts. The charge already is embedded in consumers’ monthly bills.

* The electricity portion of consumers’ bills would be broken down from a single charge into at least four parts: the cost of raw energy; the cost of energy transmission and distribution; the cost of public benefits, including subsidies to low-income rate payers, and costs incurred by utilities in the transition.