State Switches to Free Market for Electricity Today

After years of high-minded rhetoric and horse trading and months of delay and confusion, a free market for electricity opens today across most of California.

The occasion marks the historic dismantling of a decades-old system in which monopolistic utilities took care of the state’s ever-growing electricity needs and regulators decided what customers would pay. In California, the answer has been some of the highest rates in the nation.

In its place will be a system orchestrated by nonprofit overseers but executed by dozens of new business enterprises that, at 5 a.m. today, begin buying and selling electricity as if it were pork bellies or crude oil. And as of midnight, they will take control of the utility-owned long distance transmission lines and send that electricity flowing to the state’s power customers at market prices.

With luck, nobody will notice the difference when turning on a radio or opening the refrigerator door. Nonetheless, it is an important moment, the start of a vast, complex undertaking that is destined to point the way for the rest of the nation.

“The revolution is about to begin,” said Michael R. Peevey, former president of Southern California Edison and now one of the major new power entrepreneurs.

Actually, it isn’t beginning for everyone.

As of today, the free market affects the 10 million customers of the state’s investor-owned utilities, the largest being Rosemead-based Southern California Edison, San Diego Gas & Electric and San Francisco-based Pacific Gas & Electric. They represent more than 70% of the state’s power customers.

Customers of the state’s 30 municipal utilities, such as the Los Angeles Department of Water and Power, are not yet participating in utility deregulation. But already the public utilities, which were given a two-year grace period to decide whether to open their service areas to competition, are planning layoffs and asset sales to better operate in the open market free-for-all.

No one expected the transformation of California’s $20-billion electricity market into a deregulated world to be as simple as flipping a switch, and it certainly hasn’t been.

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The launch was delayed for three months because of problems with the new computer systems installed at the California Power Exchange in Alhambra and the California Independent System Operator in Folsom. They are the two nonprofit bodies set up by the Legislature to run a market for electricity and to schedule how that electricity will get from the power plant to the customer.

Those extra months have seen enough troubles to prompt complaints from consumer activists, politicians, regulators and industry players. A coalition has sprung up to try to get the whole thing unplugged.

And the change is just beginning, with more choice promised as municipal utilities join in along the way, and lower rates expected in four years as utilities finish paying off old investments.

But all the sparks on the supply side contrast sharply with the quiet on the demand side, prompting the question: What if they threw a restructuring and nobody came?

The response to the revolution in the way customers get their electricity has been downright tepid so far, at least as far as households are concerned.

Big commercial and industrial users--the ones that the restructuring was designed to make happy--appear to be paying somewhat more attention. But they have yet to switch in large numbers to new electricity service providers, as the companies that market electricity are called.

Fewer than 40,000 of the state’s nearly 10 million eligible electricity customers have told their utilities that they want to switch to a different electricity provider. (Don’t panic: You don’t have to choose. Any electricity user who does not designate a new electricity provider will continue to receive electricity from the regular utility, paying the Power Exchange price.)

Of the nearly 300 companies that registered with the California Public Utilities Commission to enter the new market, few seem likely to make a killing in kilowatts. Only about 55 have signed the necessary agreements to get power for their customers from Edison, SDG&E; and PG&E.;

A San Diego consumer advocacy group says that most of the electricity marketers have been ignoring the small energy users, which have been getting a 10% reduction in their bills since Jan. 1 courtesy of the Legislature. But even some big power users have complained that the rate savings that marketers will deliver are not as good as they had anticipated.

Glitches, grousing and gaffes are to be expected in an industry overhaul of this magnitude, said Sen. Steve Peace (D-El Cajon), co-author of California’s deregulation scheme.

“This is rocket science,” Peace is fond of saying.

But doubters find a certain significance in the fact that the first deregulated electrons will flow on April 1.

“It’s one big April Fool’s joke on the utility consumer, but it’s a joke they have an opportunity to fight against by signing our initiative,” said Jamie Court, a spokesman for Californians Against Utility Taxes.

The group is gathering signatures to put an initiative on the November ballot that would dismantle parts of the 1996 utility restructuring legislation and would aim to cut electric bills for residences and small businesses by at least 20%.

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Peace and other supporters of the industry restructuring say that deregulation was necessary to keep big commercial users from leaving California, driven away by electricity rates that were 50% higher than the rest of the nation.

And Peevey, chief executive of New Energy Ventures, one of the most successful new electricity marketers, said big electricity users are responding to the prospect of lower utility bills.

“I can’t think of a major commercial operation in California that . . . isn’t in contact with new energy service providers,” Peevey said. Large commercial and industrial users account for two-thirds of California’s electricity consumption.

Peevey contends that about 10% of those large users have elected to switch to a new electricity provider, and that should grow to about 25% by the end of the year. He said that would far surpass the rate of change in the first year of telecommunications deregulation during the 1980s.

During the three-month delay in the opening of competition for electricity users, con artists have had almost as much success as legitimate sales agents. This has prompted the California Public Utilities Commission to come up with new consumer safeguards, echoing the consumer protections now offered to telephone users. These include measures to prevent “slamming,” the signing up of customers without asking, and requiring companies to disclose all their prices and charges.

But some consumer activists contend that there are still plenty of rip-offs in the telephone arena after all these years, portending continued problems with electricity deregulation.

“I have real problems with some of the claims that are being made out there,” said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego.

Small users should not be in any hurry to sign up with a new electricity provider, Peace said.

“There are not going to be any great deals out there today that won’t be there three months from now,” Peace said. “They should wait and watch.”

The chief executive of the Power Exchange acknowledged that there would be problems ahead for California’s restructured market.

“This is a major transition,” said Dennis W. Loughridge. “I think there is confidence by all the parties in our ability to respond to challenges very quickly rather than an assumption that there won’t be any.”

* HOW IT WORKS

Wondering about deregulation? Some questions and answers for consumers. D1, D4