Electricity Newcomers in Old-Power Struggle

Having weathered the controversy of Proposition 9, California’s freshly competitive market for electricity has made a promising beginning but continues to experience significant growing pains, participants contend.

In fact, new entrants into the 7-month-old market are complaining that the state’s giant investor-owned utilities are making it difficult for them to do business and lack the zeal to make retail competition work because of a lingering “monopoly mentality.”

“It’s clear that the process of competition is off to a difficult start in California,” said Richard Claeys, vice president of RKS Research & Consulting, a private firm that recently surveyed executives of the electricity marketers. “And now, more than ever, customers need to believe that the utility companies support--not oppose--the shift to competition.”

Those big former monopolies--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric--acknowledge that there have been problems getting the new market to operate smoothly, but they insist that they are opening their territories as required to the new electron peddlers, dubbed “electricity service providers” by bureaucrats.

“The results of the survey are extremely disappointing,” said Denise Grant, Edison’s director of electricity service provider services. “We at Edison are very committed to making the market work.”

Contrary to popular perception, the deregulation of California’s $20-billion electricity industry has not been a dud and actually is progressing faster than earlier efforts in other industries, particularly telecommunications.

The chief beneficiaries of California’s restructuring market so far have been the large commercial and industrial users of electricity that have always been the loudest supporters of deregulation, and they have flocked to the new electricity providers--companies with names like New Energy Ventures, PG&E; Energy Services and Enron. For such customers, even modest savings add up quickly because they consume so much electricity. They are the ones that the restructuring was designed to keep happy, and to just plain keep: Other states had been using the promise of lower utility rates to steal California’s employers.

Residential and small-business customers have received a 10% state-mandated discount on their bills and a rate freeze for four years, but have not enjoyed the savings that the big users get.

“Customer choice is the winner,” crowed Michael R. Peevey, president and chief executive of Los Angeles-based New Energy Ventures, which contends it is the leader among new electricity marketers, having captured about 40% of the electricity load that has switched under the new rules.

“Competition is spurring innovation and change,” Peevey said, pointing to new metering systems linked to the Internet that make sophisticated energy management possible for his customers. “But we’re just in our infancy in this industry.”

In 1996, California’s electric rates, among the highest in the U.S., sparked the Legislature to pass a landmark law that overhauled the electricity industry, requiring the investor-owned utilities that serve about 70% of the state’s electricity customers--nearly 10 million users--to open their territories to retail competitors as of last Jan. 1 and to sell their fossil-fuel-powered generating plants. (The state’s 30 municipal utilities, such as the Los Angeles Department of Water and Power, are exempted for now.)

The grand experiment got off to a rough start when computer problems delayed the opening until March 31 of the California Power Exchange and the California Independent System Operator, new nonprofit organizations that operate the state’s electricity trading and power transmission systems.

In the seven months since, slightly more than 1% of the nearly 10 million eligible electricity users have opted to participate in the new market, leading to the idea that deregulation has flopped.

But those adventurous few represent 10.5% of the electricity used in the big utilities’ territories. That defection rate is greater than that of the early days of the deregulation of the telecommunications industry, in which it took AT&T; Corp. more than 18 months to lose 10% of the market.

What’s more, the overall numbers mask the eager acceptance of the new marketers by large electricity users, such as factories, malls and supermarkets. Customers representing 11.1% of the electricity consumed by large commercial users and 24.9% of electricity consumed by even larger industrial users had switched to a new electricity provider through the end of October, according to figures released Tuesday by the California Public Utilities Commission.

“There’s no question that it’s corporate welfare, plain and simple,” said Michael Shames, executive director of the Utility Consumers’ Action Network, allowing that savvy market watchers had expected this. “Anyone who thought there would be a competitive market for small business and residential consumers was fooling themselves.”

Beyond the grousing about mediocre price savings, which stem from the Legislature’s decision to allow the utilities to recover all of their bad investments in a relatively short four-year period (sparking the since-defeated Proposition 9’s promise of a 20% rate cut), all is not well in this changing market.

Many of the new companies that are competing to sell electricity to Californians contend that the old utilities are still monopolies at heart, and their lack of cooperation is costing these marketers customers and money, straining their shaky finances.

Executives at some of the state’s new electricity marketers saved their harshest criticism for Rosemead-based Southern California Edison but also took potshots at San Francisco-based Pacific Gas & Electric and San Diego Gas & Electric, in the survey conducted by RKS Research. Executives at electricity marketers that hold the bulk of the non-utility market gave SDG&E; their highest overall rating of 7.5 on a scale of 0 (very unfavorable) to 10 (very favorable); PG&E; received a rating of 6.3 and Edison a 5.

North Salem, N.Y.-based RKS interviewed executives at the nine electricity marketers--out of 300 that registered with the California Public Utilities Commission before the market opened--that they believe have attracted most of the new market participants.

Much of the criticism voiced to RKS concerned “back office” issues that state legislators didn’t think to address when they passed the deregulation law in 1996: aging computer systems that vary from utility to utility, billing delays, backlogs in switching customers to new providers and slow training of new meter readers.

But some electricity marketers said the utilities, particularly Edison, are not trying hard enough to make the restructuring of the market a success. Of the marketers surveyed, 56% said Edison is not committed to an open market, compared to 38% for SDG&E; and 22% for PG&E.;

“There have been issues,” acknowledged Pam Fair, SDG&E;’s vice president of marketing and customer service.

“Our billing systems were not designed to handle the needs of the transactions that we’re doing,” but they are being upgraded, she said. “Some of it, to be honest, is just start-up pains on both sides.”

Denise Grant of Edison said the company is doing its own customer-satisfaction study of electricity service providers to see what can be done to improve operations.

“Certainly when you start a new business like this, there are a lot of new procedures and processes” that must be worked out, Grant said. “Our goal is to make sure our customer sees the benefit from the new market and everyone finds success.”

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POWERING CHANGE

California’s electricity market has abandoned the days of monopoly and is wide open to all competitors, who are sparking increasing interest particularly from large, sophisticated users of electricity, like factories and supermarkets. Overall, customers representing 10.5% of the electricity used in the regions formerly controlled by the state’s big investor-owned utilities have chosen a new provider. Here is a breakdown of how much electricity load has switched to the new electricity marketers from the old utilities:

CATEGORY: Large industrial

Market penetration by new providers: 24.9%

CATEGORY: Large commercial

Market penetration by new providers: 11.1%

CATEGORY: Agriculture

Market penetration by new providers: 4.3%

CATEGORY: Small commercial

Market penetration by new providers: 3%

CATEGORY: Residential

Market penetration by new providers: 1.0%

Source: California Public Utilities Commission*About 10 electricity customers, or 70% of the state’s electricity users, can participate in the new market.