Customers Keep Paying Price of Energy Deregulation Fiasco

Chapter by chapter, California is rapidly closing the book on its disastrous experiment in electricity deregulation.

As that happens, energy experts say, one thing is becoming painfully clear: Consumers have lost at nearly every turn in the four-year odyssey.

One major chapter ended Friday when a federal judge approved a deal to rescue Southern California Edison from bankruptcy. Negotiated in secret by Edison and the state Public Utilities Commission, the deal had been unveiled earlier in the week.

Now Edison and the state’s largest utility, Pacific Gas & Electric, are moving back toward credit-worthy status. Fast disappearing are the triple threats of the electricity crisis: power shortages, soaring prices and debt-crippled utilities.

Supplies are abundant, thanks to heavy conservation and the construction of new power plants. Wholesale prices are one-tenth the levels of January.

“We’re out of crisis mode and now we’re in serious cleanup mode,” said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego.

But despite that, the 10 million owners of homes and businesses who pay monthly bills to Edison, PG&E; and San Diego Gas & Electric seem certain to be locked into high electricity rates for years to come--even as market prices sink.

“The industrial guys for a while did quite well,” said PUC Commissioner Richard Bilas, an economist who has watched deregulation play out since 1997. “But that didn’t filter down to what I call the anchovy, the residential ratepayer. The residential ratepayer has always been group of last resort where, if you need revenue, you go to them, and they got stuck again.”

A spokesman for power generating companies, which supported deregulation, concedes that point. From the opening of California’s electricity market to its demise, utility customers “have borne the heavy weight on their backs and haven’t gotten the benefits,” said Gary Ackerman, executive director of the Western Power Trading Forum, a group of power plant owners and power marketing companies in California.

In 1998, California opened a power market based on a deregulation plan crafted by the PUC and the Legislature. The idea was to use competition to set the price for the electricity utilities bought for their customers. At the time, advocates of deregulation promised that the change would bring lower prices for consumers.

The goal was spelled out several years earlier in a September 1995 agreement among Edison, its largest customers and private energy generating companies. The agreement greatly influenced the shape of California’s deregulation.

“SCE has established a goal of reducing system average rates by the year 2000 by 25% after adjusting for inflation,” states the 1995 agreement.

In fact, the typical homeowner in Edison territory now pays 18% more each month than in 1995.

At no point during the deregulation process did residential consumers enjoy the sharply lower electricity prices that advocates of the policy had forecast.

For the first couple of years after deregulation was passed, wholesale prices in the new electricity market stayed low. The state’s economy still was recovering from recession, supplies outstripped demand, and the price of natural gas--the main fuel for the state’s power plants--was low.

But most utility customers didn’t enjoy those savings. That’s because the Legislature, as part of the 1996 deregulation bill, had rolled back utility electricity rates by 10% and froze them there. The rollback and freeze--financed through the sale of $7 billion in bonds that ratepayers had to pay off--were designed to win immediate political support for deregulation.

And so, in 1999, when wholesale market prices averaged slightly more than 2 cents a kilowatt-hour, utility rates were frozen at 6 to 7 cents per kilowatt-hour for homeowners. Utilities were allowed to keep the difference and use it to pay off what were called “stranded assets.” Those were past investments in nuclear power plants and contracts with wind, solar and small independent energy producers that were deemed the expensive residue of a regulated era.

Utilities should be allowed to pay off these stranded assets quickly, policymakers decided, to be ready for a new era of competition. By May 2000, consumers had paid more than $11 billion to put toward those debts, according to consumer groups.

The utilities also passed substantial sums to their parent companies, Edison International, PG&E; Corp. and Sempra Energy, which used the money to leverage investments in lucrative, unregulated markets elsewhere around the country.

One of the key promises of deregulation was that electricity users would be able to pick among competing companies. Some large industrial customers signed deals with independent power companies for the cheaper electricity, but few companies offered viable deals for homeowners.

By the time a heat wave hit Southern California in May 2000, a rapidly expanding economy had pushed electricity demand close to the limits of supply. Prices spiked well above the frozen rates, and they didn’t come down for months.

The rate freeze now protected utility customers. But PG&E; and Edison began to bleed cash, paying out more for electricity than they collected from customers. San Diegans bore the price spikes directly, because SDG&E; had paid off its debts, triggering the end of the rate freeze for that company.

State Forced to Buy Power for PG&E;, Edison

By January, PG&E; and Edison owed so many billions of dollars that no one would lend them money or sell them electricity on credit. Blackouts hopscotched across the state on Jan. 17 and 18. Gov. Gray Davis pushed the state Department of Water Resources into the business of buying electricity on behalf of the utilities.

The state is still the biggest power buyer in the West, having spent $10.7 billion by the end of September. Making the utilities credit-worthy again--thus allowing the state to get out of the power-buying business--became a top goal for state government.

But that, in turn, required eliminating the debt that the utilities had piled up buying expensive power.

Under the deal struck Tuesday between Edison and the PUC, the utility’s customers will pay off a good share of Edison’s $3.3-billion debt through their current electricity rates, though the exact proportion is not yet clear.

Matt Freedman, an attorney with the Utility Reform Network, said his analysis shows that Edison’s average residential customer will pay roughly $100 a year to retire the utility’s debt by the end of 2003.

“It looks like more than 10% of their bills will be dedicated for this purpose,” Freedman said.

Under the agreement, even though wholesale prices have dropped to one-tenth the level of January, Edison customers will probably not see their electricity rates drop until all the debt is eliminated. It is not clear yet how much, if any, of PG&E;’s debt will be paid by its customers in Northern and Central California. Under a reorganization plan filed by PG&E; to emerge from bankruptcy, the company would eliminate its debt by selling hydroelectric and nuclear plants to a holding company.

That plan is under attack by consumer activists and state officials who note that it would remove the nuclear and hydroelectric power from state price regulation. After a few years, they say, the company could greatly raise prices for that power, which is far cheaper to generate than power from natural gas plants.

In addition, customers of all three private utilities will be on the hook for paying off $43 billion worth of long-term power contracts that the state has signed over the course of the year.

The state signed the contracts to guarantee adequate supply for the 27 million people served by PG&E;, Edison and SDG&E.; State officials--and many outside experts--say the contracts helped stabilize the market, bringing the blackouts and power spikes to an end.

Although the prices in those contracts are far cheaper than market prices in January, February and March, they are far more expensive than the market price today. Under the contracts, the state is obligated to buy the more expensive power for years to come.

Davis and his aides defend the contracts, saying the price should be considered the cost of insurance against future blackouts. Critics say at least some of the contracts, however, are unreasonable. Consumer groups and the PUC have sought to have some of the deals nullified.

If those efforts fail, however, ratepayers will have to bear the cost of the contracts.

In sum, said Ackerman, the spokesman for the generating companies, “When rates were low the first time, utilities took the money for stranded costs. Now consumers have to wait even longer for what is arguably a benefit from deregulation. People in other parts of the country look at this and shake their head and go, ‘Tsk, tsk, you guys did it wrong.’

“Somehow we’re our own worst enemy,” he said. Taxpayers at large haven’t yet escaped the electricity crisis, either. If a $6-billion gap in the state budget is not plugged through the sale of bonds, lawmakers next year may have to slash law enforcement, environmental, health or other programs from a state budget already threatened by a faltering economy.

“We’ve got this massive cleanup that is going to cost millions if not billions of dollars that we’re going to have to pay off over time and we don’t have the federal government rushing in saying how can we help you,” said Shames, the consumer activist. “It’s not a pretty picture from where the small consumer sits.”

Now, many experts say, California’s electricity industry is beginning to take the same unfortunate shape it had in the early 1990s, when policymakers scrapped the state’s 80-year-old system of regulation.

At that time, the price the state’s three big investor-owned utilities charged for electricity was 50% higher than the national average. Deep recession gripped the state. Business owners warned lawmakers that if they couldn’t break free of the utilities and buy cheaper electricity, they’d move out of state.

Deregulation, which seemed to have worked for the natural gas industry and airlines, became the answer.

‘We Screwed Up in Many Ways’

“This is where we were in 1996,” said Severin Borenstein, executive director of the University of California Energy Institute in Berkeley. “We had high embedded costs for the power already being produced and we believed we were going to have much lower costs in the market going forward.”

Trying deregulation in 1996 was not a mistake, he said. California simply did it wrong.

“Sometimes you take risks and they don’t pay off,” he said. “Did we do the best we could? Absolutely not. We screwed up in many ways and those are the reasons it blew up in our faces.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Higher Bills

In 1995, Southern California Edison executives set a goal of reducing customers’ rates by 25% by 2000. Instead, the typical monthly bill for a residential Edison customer costs 18% more now than it did in 1995.

May 1995: The typical homeowner used 417 kilowatt-hours and paid $48.61.

May 2000: The typical homeowner used 480 kilowatt-hours and paid $55.38.

May 2001: The typical homeowner used 454 kilowatt-hours and paid $57.57.

Source: Southern California Edison