Deregulation Didn’t Foster Competition
The way people scrambled for a stake in California’s power market three years ago, you’d have thought it was the second coming of the Gold Rush.
Politicians and free marketers boasted that they were freeing millions of customers from their monopolistic utilities so they could shop for cheaper electricity. The state ordered an $87-million publicity campaign, promising a brave new energy world bustling with competition.
But those dreams of capitalism unleashed never materialized, dashed by provisions in the 1996 deregulation law that effectively undermined competition and gave the utilities a substantial edge over newcomers. In the end, only 1.7% of the utilities’ residential users switched to other providers, many opting to pay more for “green” energy.
Although the chaos swirling around California’s electricity crisis has chiefly focused on soaring wholesale prices, the virtual absence of competition at the consumer level has played a key role in deregulation’s undoing.
Had competition among retailers flourished, garnering the millions of customers deregulators expected, prices might never have reached today’s unprecedented peaks and the turmoil might have been tempered, economists and retailers say.
Retail competition “would not have prevented a crisis, but it would have toned it down,” said Richard Counihan, spokesman for Green Mountain Energy, which has returned most of its 50,000 customers to the utilities’ ranks.
Now even the prospect of competition is gone. A measure enacted by the Legislature last week, which made state government the biggest electricity buyer in California, suspended further retail competition, preventing anyone from underbidding the state.
“That buries us,” said Tony Wayne, president of UtiliSource of Brea, which, under the new law, can keep its relatively small number of customers but is barred from entering into new contracts.
Few thought it would come to this.
High Hopes Collide With Reality
Almost 300 firms registered with the state to sell electricity to consumers. Many of them, quick-buck hucksters or small-time operations, were scared off by background checks, fingerprinting and the $25,000 deposit required to enter the market.
But then there were the likes of giant Enron Corp., which predicted that the new market would pull 700,000 customers from the utilities in the first few weeks. Another firm deployed 400 salespeople, nabbing residential and business prospects by the thousands.
They quickly discovered that the structure of California’s landmark deregulation effort erected protective barriers preventing most retailers from beating the prices of the big three utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric.
For example, deregulation law allowed the utilities to keep their 9 million customers until each took the initiative to switch. Any ratepayer who used a moderate amount of energy and wanted to change companies had to pay $600 for a new meter--unless the retailer wanted to eat the cost itself.
In contrast, Pennsylvania, where deregulation has been more successful than in California, requires most of its utilities to surrender some of their customers. Last year, 300,000 customers of one utility were auctioned off to the retailer who could promise them the most savings. All together, close to 1 million customers have switched from utilities to retailers, with savings estimates ranging from a few dollars to $15 per month.
In California, the next barrier was expressly designed by deregulation architects to keep new retailers at bay, at least temporarily.
Before throwing utilities into a free-for-all, lawmakers felt obligated to give them time to pay off debts that would hurt their ability to offer competitive prices. The Legislature froze customer prices at 1996 levels, well above what the utilities were then paying for electricity. The difference would be used to pay their debts.
The hitch for prospective retailers was that their customers--like those remaining with utilities--would be charged the extra amount too. That seriously hurt the retailers’ ability to shave prices for their customers without taking a hit themselves.
Utility executives say the so-called competition transition charge accomplished its intent: providing some protection against new players until the utilities could shed their debt and compete on an even field.
According to those executives, the plan went awry when wholesale electricity prices soared before the special debt charge was lifted and competition had a chance to flourish.
“We haven’t had enough time for this market to work,” said Denise Grant, director of the Edison division that works with retailers. She said Edison expected to lose 150,000 customers annually--a far cry from what has happened.
Retailers say they faced other obstacles that seemed designed to help the utilities keep as many of their customers as possible.
One of the biggest was a newly created energy marketplace called the Power Exchange.
Under the exchange’s rules, all buyers--little guys with a few hundred customers and mammoth utilities with millions--paid the same price for electricity. Once again, retailers were stymied in their search for ways to cut their customers’ bills.
Retailers had no place else to shop for energy because suppliers could make more money selling in high volume to billion-dollar utilities on the Power Exchange, rather than cutting small deals with upstart companies.
Wayne, the president of UtiliSource, learned the hard way. He was peddling electricity in California in early 1997, before the state created the Power Exchange. After arranging a good, but informal, deal with a Washington generator, he sent out hundreds of salespeople, took to the road himself and soon cornered 10,000 customers.
But the birth of the exchange caused the death of his deal, Wayne said. The generators pulled out when they realized how much money they could make selling on the open market.
“That was an oh-my-god. They said, ‘Why should we give you a discount when we can sell it to the Power Exchange ourselves?’ ” he said.
Retailers say the state protects the utilities in subtler but no less damaging ways. That includes billing customers who switch companies for certain overhead costs of their old utilities, such as weather forecasters and accountants involved in procuring electricity.
In late 1999, a coalition of retailers filed a complaint with the Public Utilities Commission arguing that their customers should not be forced to pay costs for utilities they had decided to leave.
Earlier this month, the PUC finally reached a decision that favors the retailers’ argument but accepts the utilities’ calculations of the expenses borne by retailers, an amount critics say is far too low.
In dissenting, Commissioner Richard A. Bilas called the decision’s paltry award to retailers another strike against them.
“We cannot keep stymieing retail competition if we are seeking rational markets,” he said. “Energy service providers [retailers] have left the state in droves. . . . They need all the encouragement we can give them.”
Retailers Found Little Opportunity
Be they multinational giants or kitchen-table entrepreneurs, retailers are dismayed by their experiences with deregulation.
Enron spent $5 million trying to sell electricity in 1997 and the spring of 1998. But, unable to offer enticing discounts, the firm picked up only 30,000 customers.
In a recent meeting with reporters and editors at The Times, Enron Chief Executive Kenneth Lay suggested that the framers of deregulation kept market forces pinned down in the retail sector. As a result, there was little money to be made and little incentive to stick around.
“The more customers you signed up,” Lay said, “the more [money] you lost.”
Last week, Enron returned a number of its remaining electricity contracts to PG&E.; “In the end,” Lay said, “we couldn’t change the rules and we pulled out.”
On the other end of the spectrum, Paul Oshideri is now a one-man operation since he laid off his seven employees during his unprofitable two years trying to entice customers to Cucamonga Energy.
“You don’t have that many options,” said Oshideri, who is still holding on to his 250 customers and vows not to quit. “What can you do? You can’t do anything right now.”
Only when it came to businesses and big institutions such as universities were retailers able to make a dent in the market. The small price reductions they offered translated into huge savings for those large users of electricity. The retailers also offered a variety of other services, including aid to help businesses become more energy efficient.
Although fewer than 2% of all residential customers have switched to new energy companies, 13% of industrial users have done so, according to the Public Utilities Commission.
“If they’d structured this differently they would have had households able to make big savings just like industrials,” said Cal State Fullerton economist Robert Michaels.
There is some dispute among deregulation critics over whether legislators designed the law to protect the utilities from an onslaught of competition, or it just turned out that way.
Jesse Knight, a former member of the Public Utilities Commission who dissented on the panel’s deregulation plan, said the law is biased against retail competition.
“But I don’t think it was the legislation’s intent to protect the monopoly,” Knight said.
There is general agreement, however, that not enough attention was paid to the mechanics of the retail market.
Much of the deregulation legislation deals with generation, transmission and wholesale prices of electricity. The only provisions on the retail end simply allow consumers to shop for deals.
Lay, the Enron executive, recalled that the utilities fought hard to maintain their customer base. The irony is that, with wholesale prices skyrocketing over the last six months, buying electricity for all those customers has driven the utilities to the brink of insolvency.
“With 20-20 hindsight, I expect they wish they’d agreed to more choice at the customer level,” Lay said. “Then maybe they wouldn’t be in the circumstances they’re in.”
