Officials Oppose Utility Choice

Consumer choice was a mantra when California moved in 1996 to restructure its electricity industry. But the right of utility customers to shop around for power is falling victim to the state’s own strategy to drag itself from the energy debacle.

Warning of a “spiral of declining customers and rising power rates,” top state officials are calling for swift action to curtail the freedom of utility patrons to buy from alternative electricity providers.

They fear that California’s ability to pay for nearly $50 billion in past and future electricity purchases would be jeopardized unless regulators or legislators suspend or restrict the state’s so-called direct-access program. A flight of customers from the traditional utilities, the officials say, would saddle the remaining businesses and consumers with paying off an unfair share of those billions.

Under direct access, thousands of utility customers--ranging from big commercial and industrial users to environmentally aware residential consumers who wanted “green power”--signed up with companies promising lower prices, better service or the security of long-term contracts.

But the energy crisis changed all that.

In January, the state’s Department of Water Resources became the major electricity purchaser for most Californians, as skyrocketing wholesale prices put Pacific Gas & Electric Co. and Southern California Edison deeply into debt and many suppliers refused to sell to them. The same legislation that authorized the department’s purchases called on the California Public Utilities Commission to suspend direct access until the state stops buying power--which could be almost two decades under some of the long-term contracts the state has signed with suppliers.

The commission is poised to vote Thursday on a proposal to suspend direct access by July 1, and it is expected to pass. Bills in the Legislature would resurrect the program while requiring new customers to pay “exit fees” designed to protect the state’s planned $13.4-billion bond sale for electricity purchases, but the proposals have been mired in negotiations.

In any case, state officials say they can ill afford to lose big commercial and industrial users as utility customers help pay off the state’s current $8-billion power tab and more than $40 billion in long-term power contracts.

“If such customers are permitted to ‘exit the system’ without [paying] their share of costs incurred by DWR . . . the burden of covering debt service payments will fall on a smaller base of remaining customers, significantly and unfairly increasing their power rates,” said a June 12 memo from state Treasurer Phil Angelides and the heads of the Finance and Water Resources departments to the PUC and the Legislature.

“There is a concern that as power rates paid by the remaining customers would rise, customers would have additional economic incentive to abandon DWR power, creating a spiral of declining customers and rising power rates,” the memo said.

Statewide, the total number of direct-access customers has fallen from a peak of more than 200,000 to about 88,000 in mid-May. Figures from the California Energy Commission show that these customers--including hotel and hospital chains, factories, farms, the state’s university systems and about 78,000 residences--accounted for about 2.1% of the power consumed in California.

The level of participation by residential customers was 1.1%--about a third as high as for large commercial and industrial customers.

The penetration rates were much higher early this year, when about 13% of industrial users had direct-access contracts. But many providers sent their customers back to Edison, PG&E; and San Diego Gas & Electric, as wholesale energy costs soared and they could not compete with the utilities, whose rates were frozen by the 1996 deregulation law.

One provider, AES NewEnergy, claims 60 to 70 customers, ranging from mom-and-pop stores to grocery chains. About a year ago, the company had 150 to 200 customers.

“Direct access is at the heart of the concept of competition and choice,” said Aaron Thomas, the company’s manager of government relations. “The [PUC] order stinks, and it is not necessary to put a stake in the heart of direct access to float a bond.”

Said Rick Counihan, a spokesman for Green Mountain Energy: “Unless we see a legislative solution, direct access is dead. We’re being driven out of California.”

Green Mountain, a Vermont-based company that sells power from renewable sources, has seen its California customer base shrink from 60,000 to 7,000, all in San Diego and Orange counties.

Although they have never fled en masse to direct access, many businesses and institutions want to maintain direct access as an option, especially because it is uncertain whether the state’s power contracts will prove to be a bargain or a bust in the long run.

Bill Dombrowski, president of the California Retailers Assn., representing more than 50 large companies, said it is important to maintain direct access as an option because “the market is in a shambles.”

“At its peak, before the market was dysfunctional, you saw 5% to 10% reductions [in electricity rates] compared to local utilities, which is significant dollars when you are talking about larger companies,” he said.

Like other proponents, Dombrowski maintains that the fears expressed by state officials and Wall Street bond underwriters are exaggerated.

“Realistically, you will not see a wave of people going to direct access,” he said.

The utilities commission measure, which would halt new direct-access enrollments, was put off until this week in hopes that a solution could be worked out in Sacramento. PUC Commissioner Jeff Brown, one of three appointees of Gov. Gray Davis on the five-member commission, said that, like the governor, he favors direct access on philosophical grounds but sees no way to avoid suspending the program.

“We are tied up in the realities of the bond sale,” he said. “If the Legislature wants to do something in the future, fine.”

Commissioner Richard Bilas, another supporter of direct access, acknowledges that “it could at the margins jeopardize the bond sale.” But direct access, he said, “is what restructuring was about in the first place. . . . Without it, you no longer have restructuring.”

Advocates of direct access remain hopeful that a legislative solution could balance the desires of the business community and the bond underwriters. A bill by state Sen. Debra Bowen (D-Marina del Rey) would require exit fees and other provisions sought by state finance officials.