Inaction by Utilities, PUC Cost Chance to Avoid Crisis
If long-term electricity contracts at fixed prices are a path out of the power crisis that the state’s two major utilities say nearly bankrupted them, then why didn’t those utilities take that route months or years ago?
The answer, depending on who’s talking, is either miscalculation by the utilities or the stifling autocracy of the California Public Utilities Commission, the state’s almost century-old regulator based in San Francisco. Records and interviews show that it is both.
The PUC sometimes took months to act on the utilities’ requests for permission to sign long-term contracts they believed could save them money, and often allowed less latitude on the terms of those contracts than the companies sought. The utilities did not always use the authority they received, hesitating to enter such contracts for fear that regulators would second-guess them later.
Hindsight makes one thing clear: Had the state’s two largest utilities--Southern California Edison and Pacific Gas & Electric--cut long-term deals with power sellers in 1999 and 2000 they would have saved billions of dollars last year. And, some experts say, the utilities’ credit troubles that thrust California and its taxpayers’ money into a wild power market might never have occurred.
“We just wouldn’t have been in a position of firms losing gobs of money and teetering on bankruptcy,” said Severin Borenstein, director of the University of California Energy Institute in Berkeley.
Electricity prices spiked in May, and unexpectedly rose even higher this winter. PG&E; and Edison say that since May they have paid about $12 billion more for electricity than they can pass on to customers, who are protected by a rate freeze imposed by the state’s 1996 deregulation law.
On Thursday, Gov. Gray Davis signed legislation that put California in the electricity business. The state will buy electricity on long-term contracts at fixed prices yet to be determined, and sell it to the utilities. The move was necessary, Davis said, because Edison and PG&E; have borrowed so much money that banks will no longer lend to them so they can keep buying power.
“We were deliberately constricted in what we could do,” said Stephen L. Baum, chief executive officer of Sempra Energy, the parent company of San Diego Gas & Electric. “They [the PUC] never went away. The idea that we were deregulated is preposterous.”
Others say the utilities simply guessed wrong, hoping for a drop in prices that never came.
“They essentially bet that spot prices would be lower than forward [long-term] prices that were available at the time,” the Western Power Trading Forum, a power sellers’ group, wrote to federal regulators in November. “When they discovered that they had bet on a losing hand, their response was to deny their responsibility and allege that the game was somehow fixed.”
As blame swirls, lawmakers promise to scrutinize the behavior of the PUC and the utilities in hearings that could begin this month.
“We’ll go back in time to do so,” said Assemblyman Darrell Steinberg (D-Sacramento), who is organizing the hearings. “We want to get all of the facts.”
For nearly 100 years, the PUC and its predecessor have overseen California’s for-profit electric utilities. The commission, five appointees of the governor, sets the rates the utilities can charge and reviews most major decisions. It must balance consumers’ interests--reliable and reasonably priced power--with the utilities’ need to make profits for their shareholders.
In the mid-1990s, the state decided to open California’s $23-billion electricity industry to competition. The PUC split over a fundamental issue: Should California encourage long-term deals between individual buyers and sellers, or instead create a public market where prices would fluctuate with bids posted daily?
The bidding market was adopted 3 to 2 by the PUC in December 1995. That vote launched deregulation. The Legislature modified that plan slightly in 1996, primarily by freezing customer rates.
With high hopes, the state in March 1998 opened a computerized bidding market called the Power Exchange, where for a couple of years electricity was bought and sold for prices little different from those previously set by the PUC.
Still, utility officials were nervous. Forced by the PUC to buy all of their electricity from the Power Exchange, they began to feel vulnerable after brief but extreme price spikes in the summer of 1998. They wanted to protect themselves by buying at least some power at a locked-in rate.
In March 1999, Edison sought PUC permission to buy 2,000 megawatts--about 10% of the peak summer demand of the 11 million people it serves--outside the Power Exchange, where prices fluctuated hourly.
Consumer groups, electricity sellers and other parties protested.
“Everybody was fighting the utilities’ ability to enter into long-term contracts,” said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego. “It was a chorus of different stakeholders.”
Shames was an exception. He encouraged the PUC to allow utilities to use long-term contracts as a hedge against price spikes. “If the PUC had acted, . . . the severity of this [current] crisis would be far less,” he said.
In July 1999, the PUC rejected Edison’s request, with arguments that would be repeated the following year: Allowing giant utilities to buy electricity directly from power producers at prices known only to them would weaken the public Power Exchange and hobble smaller companies attempting to compete with them.
In short, the PUC ruled, Edison’s request would violate the core principles of California-style deregulation. But things did not work out the way the PUC hoped.
The few companies that tried to compete with the utilities foundered. They found that in most cases they could not offer cheaper electricity. And the forecast for low prices turned out to be terribly wrong.
The Power Exchange, trying to help the utilities protect themselves from price fluctuations, began in April 1999 offering contracts for up to 18 months. In July, the PUC gave the utilities permission to enter such contracts, with limits on how much electricity they could buy that way.
But prices kept rising, and the utilities asked for more. Generally, records show, the PUC granted those requests, although sometimes months after the fact and at lower limits than the utilities sought.
The utilities acknowledge that they did not always use the full authority they were granted. In June, for example, Edison purchased 85% of the long-term contracts through the Power Exchange that the PUC had authorized. Utility executives explained that contract offers in that market were not tailored to their peak power needs.
In July 2000, as Pacific Gas & Electric was losing millions of dollars a week buying power at prices about three times higher than just a few months before, the utility asked the PUC for emergency authority to buy power outside the Exchange.
In August, the PUC approved that request. “It was only in the face of a crisis that we were able to convince the commission to give utilities this valuable tool,” said PG&E; spokesman John Nelson.
Still, the utilities sometimes hesitated to make those contracts for fear of the PUC’s ability to cut their profits later in a “prudency review” if it deemed the contract terms unreasonable.
“You can’t just allow any contract,” said PUC President Loretta Lynch, when asked in December whether the PUC was hindering the utilities.
The PUC worried that long-term contracts could prove as expensive or more so than the spot market if prices dropped before the contracts expired. Those costs may be passed to customers in March 2002, when the rate freeze expires.
In a PG&E; briefing paper, the company describes meeting with each commissioner to solicit support and guidelines for long-term contracts. “PG&E; received comments such as ‘Good luck, we hope you guess right,’ ‘We’re not comfortable with five-year contracts’ . . ,” the document says.
PUC Commissioner Carl W. Wood said it is not fair to blame the commission for the utilities’ limited long-term contracts. “They had two paths that each posed risks,” he said. “One was long-term contracts and the possibility that the PUC might determine that they were imprudent . . .
“The other alternative is not entering long-term contracts, and taking the spot market. It was their choice.”
Despite its inability to reach agreement on PUC standards, PG&E; said it went ahead and contracted in October for more than $1 billion in long-term power purchases, plus some additional ones later.
Within two months, both Edison and PG&E; were so short of cash and loaded with debt that electricity wholesalers shied away from them, fearing they wouldn’t get paid. More long-term contracts seemed out of the question.
In a move that utility executives call too late and unrealistic, the PUC in December proposed that long-term contracts at less than 6 cents per kilowatt-hour would be deemed reasonable. At the time, prices were averaging 25 cents per kilowatt-hour.
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Times staff writer Joseph Menn in San Francisco contributed to this report.
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PUC Responses to Utilities’ Pleas
As deregulation got underway, rising power prices prompted California’s utilities to seek relief. Records show the Public Utilities Commission granted utilities limited authority to enter into long-term contracts to stabilize power costs. The utilities did not fully use that authority.
December 1995 Launching deregulation, the PUC requires utilities to buy supplies through a market.
March 1998 California opens the Power Exchange, a digital market for electricity.
March 1999 Southern California Edison, hoping to avoid the volatility of spot market prices, asks the PUC for permission to start a pilot program for long-term electricity contracts.
April 1999 Generators, marketers and consumer groups oppose Edison’s proposal.
July 1999 PUC refuses Edison’s request to buy outside the Power Exchange but allows Edison, PG&E; and San Diego Gas & Electric to purchase limited quantities of long-term contracts through the Power Exchange.
June 2000 The utilities do not take full advantage of their authority to buy in the Power Exchange market for long-term contracts.
July 2000 Edison and PG&E; seek emergency permission to sign contracts directly with suppliers.
August 2000 PUC grants permission.
October 2000 PG&E; asks PUC to approve guidelines that will make it easier to get approval for long-term contracts.
December 2000 The PUC proposes a guideline of about 6 cents per kilowatt/hour for long-term contracts. Utility executives say there is no power at that price.
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Sources: California Public Utilities Commission, Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Power Prices
California utilities could have saved billions of dollars last year buying long-term contracts for electricity instead of purchasing power just a day in advance at market prices. Utility executives say state regulators blocked their attempts to sign such contracts. Regulators say the utilities did not fully use the authority they were given.
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* As of Dec. 18, 2000
Source: California Power Exchange
