Prop. 9 Would Alter Formula in Electric Rate Deal

Consider the plight of the state’s poor, confused electric utility customers.

On Jan. 1, three-quarters of them got a 10% cut in electric rates. Only one hitch, though.

Because of creative financing needed to come up with the money for the rate cut, the transaction ended with customers owing a few dollars more each month than they are receiving via the rate reduction, critics contend.

“They were given $4 but then learned they had to pay back $6,” is the way consumer advocate Ralph Nader explained it.

Whipsawed by promises of rate reductions they don’t believe are real, consumer groups decided to fight back.

The result is Proposition 9, the statewide November ballot measure that would roll back controversial elements in the deregulation agreement struck between the Legislature and the utility industry in 1996.

“The utilities would have been better off by not having a 10% rate reduction,” said Harvey Rosenfield, a co-author of Proposition 9 who also wrote Proposition 103, which sought to roll back insurance rates 10 years ago. “They just raised the public’s suspicion about the whole deal.”

Utilities Say 10% Rate Cut Is Real

The utilities contend that Rosenfield is deliberately confusing the issue; they say their customers are getting a genuine 10% cut. Under the deregulation agreement, utilities were allowed to bundle up long-term costs of nuclear plants and other operations, borrow money to pay the debts at significantly lower interest rates and pass the savings on to customers, producing the 10% rate reduction, they maintain.

A new Times poll shows that 36% of registered voters support Proposition 9, 21% are opposed and 43% are undecided.

Hundreds of cities and counties, labor unions, school districts, water agencies and business organizations have already lined up with the utilities to defeat Proposition 9. The Republican and Democratic parties are also opposed.

The nonpartisan state legislative analyst and some Wall Street financial experts have expressed fears that if Proposition 9 removes the responsibility for some bond payments from ratepayers, the state could be stuck with the bill. The League of California Cities, which opposes the measure, said the legal cloud could cast a pall over municipal bond programs and require local governments to pay more.

Proposition 9 promises a 20% electric rate reduction for customers served by the seven private utilities regulated by the California Public Utilities Commission, or roughly three-quarters of all the state’s utility customers. The three largest private utilities are Edison, Pacific Gas & Electric and San Diego Gas & Electric Co., state-created monopolies that serve 9.9 million customers.

Customers of municipal utilities, such as the Los Angeles Department of Water and Power, would not receive the rate reduction.

A key component of the 1996 deal was what critics call a bailout of costly mistakes and mismanagement by utilities in building nuclear power plants. To ease the utilities’ transition to open competition, the power companies were allowed to tack sizable surcharges onto customers’ bills.

Cut Would Come by Ending Surcharge

The 20% reduction promised by Proposition 9 would come by ending the surcharge. Utilities would also be prohibited from making customers repay the $6 billion in so-called rate reduction bonds that were sold to finance the 10% cut in consumer prices.

But business, labor and political activists working to defeat Proposition 9 say there is little chance that customers will ever see a 20% rate reduction.

Instead, they predict prolonged court battles, higher taxes and possibly cuts in government spending on schools and other programs if Proposition 9 passes. The legislative analyst agrees passage of Proposition 9 could increase state costs, which could lead to program cuts or tax increases.

“We think the initiative is aimed at least in part at closing down nuclear power plants,” said Bob Foster, a senior Edison executive who helped broker the 1996 deregulation legislation. Foster said the nuclear power plants provide nearly 20% of the system’s power. “If you take nearly 20% out of the system, you don’t have to be a genius to figure out what happens to the power supply.”

Foster argues that if the utilities are not allowed to recover the costs associated with nuclear power plants, the plants could become too costly to operate effectively on the open market. Estimates are that if Proposition 9 passes, the utilities would have to write off nearly $6 billion in losses associated with the power plants.

California’s long tradition of bellwether ballot initiatives will remain intact with the highly charged Proposition 9. This time, the subject is a weighty, complex and potentially risky issue that states are grappling with from coast to coast.

“Since California was the first with electric deregulation, it is on the cutting edge of trying to roll it back,” said Nader, who signed one of the ballot arguments in favor of Proposition 9. “If Proposition 9 passes, it will have the usual ripple effect throughout the country, where similar battles are going on.”

The stakes are predictably high.

Like the granddaddy of all initiatives, Proposition 13, billions of dollars are at stake--the money to land either in the pockets of private utility customers or remain in the vaults of California’s investor-owned utility companies. Just how much is at stake is uncertain, with estimates of the disputed surcharges ranging from $6 billion to $28 billion.

Utilities Prepare for Media Blitz

By the end of June, Edison, Pacific Gas & Electric and San Diego Gas & Electric Co. had raised $800,000 for a radio and television media blitz of the state, and those ads are just the start. An updated account of how much they are spending on the media campaign will not be available for several weeks.

“This is a consumer-versus-utility-companies-with-more-money-than-God issue,” said Assemblywoman Diane Martinez (D-Monterey Park), who helped craft the state’s deregulation law but now supports Proposition 9.

Competition came to California’s monopoly-controlled utility industry this year, the result of AB 1890, the landmark bill that swept through the Legislature without a single “no” vote in late August 1996, and was signed into law by Gov. Pete Wilson.

Only 1% of Customers Have Switched Service

With California representing the nation’s largest market for electricity, there was widespread anticipation about what open competition would mean. But so far, only about 1% of the utility customers covered by deregulation have switched power companies. The largest movement has been among corporate customers and institutions, such as the University of California.

Critics blame the deal struck between the Legislature and utility companies for an absence of the kind of competition underway in the local telephone industry, which was deregulated in 1996.

Although the electric utility legislation was billed as setting up deregulation, lawmakers protected the state’s power monopolies until 2002, writing into the legislation economic safeguards designed to protect California companies and inhibit outsiders from coming in.

“We did protect our California companies, as well we should,” said state Sen. Steve Peace (D-El Cajon), chairman of a six-legislator negotiating team that drafted the bill.

Once the 10% rate reduction was made, the law froze electric rates for residential and small business customers for four years, even though consumers will be paying off the rate reduction bonds over 10 years. As a result, there remains considerable debate about how big a break consumers are actually getting. Steve Linsey, a senior economist with the California Public Utilities Commission, said an analysis by the commission’s Office of Ratepayer Advocates shows that the rate cut is closer to 2.5% when considered over the 10-year life of the bonds.

Underlying the legislation was the understanding that California utility companies for decades had shouldered the costs of building power plants to ensure the state had a steady supply of electricity. To suddenly end the monopolies and create wide-open competition would have jeopardized the economic health of the companies and invited lawsuits, Peace said.

Another benefit to the companies was the $6 billion in cash from the so-called rate reduction bonds, which were sold last year to be repaid by surcharges on utility bills.

Also, the utilities were allowed to bill customers for billions of dollars more for so-called stranded assets, the name given to expensive generating sources such as nuclear power plants, aged coal-fired plants and so-called green energy, which includes wind, solar and geothermal energy. Estimates of the cost of these stranded assets to the utilities ranged as high as $28 billion.

“We were sold deregulation on the basis that there would be competition and that would lead to lower prices. That hasn’t happened,” said Harry Snyder, an attorney and senior advocate for Consumers Union, publisher of the magazine Consumer Reports and one of the sponsors of Proposition 9.

Both sides agree that the utility companies played a major role in fashioning the law. The utilities sent teams of lobbyists, lawyers and others to heavily influence the way the bill was written.

“Most of [the bill] was crafted by the utilities,” said Assemblywoman Martinez, a Democratic candidate for state insurance commissioner who served on Peace’s Senate-Assembly negotiating committee.

“The deal was too rich for the utilities,” said Nettie Hoge, the executive director of San Francisco-based The Utility Reform Network, or TURN, who helped Rosenfield, Snyder and others draft Proposition 9. “The utilities are almost assured of market dominance in California in the new deregulated world.”

Supporters of the measure concede they face an uphill battle, and

are depending on angry ratepayers to rally to their cause. Many of the same institutions that oppose Proposition 9 ganged up on advocates of property tax reform and Proposition 13 still passed, they say.

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What Prop. 9 Would Do

Proposition 9 would modify the 1996 state law that brought about deregulation of the electric utility industry. Under Proposition 9:

* Private utilities would no longer be allowed to charge customers more than market rates for costs and obligations related to nuclear power plants. They could continue charging reasonable costs for decommissioning nuclear plants.

* Utilities would be required to give residential and small commercial customers at least a 20% rate reduction. A 10% reduction is required under current law.

* Utilities could no longer pass on to customers the costs of repaying bonds that were issued to cover the 10% rate reduction.

Source: Utility Rate Reduction and Reform Act