PUC May End Private Deals to Buy Power

In a decision that will have major implications for the future of energy deregulation in California, officials will decide Thursday whether businesses and institutions can continue to buy power from private electricity providers.

The vote by regulators could effectively kill what was once the cornerstone of California’s foray into deregulation. It also could force thousands of customers that entered into cost-effective private deals from July to September last year to cancel them and return to the public power grid within 90 days.

The state wants to rein in private deals to shore up the troubled investor-owned utilities and pay off long-term power contracts purchased at the height of the energy crisis.

The lost savings could be sizable: The University of California and California State University systems estimate their combined costs would rise by $50 million a year. The Los Angeles Unified School District would see $7 million in additional annual costs. Although private businesses arguably can raise prices to cover new costs, the dollars cannot be squeezed out of public budgets, officials for the school systems say.

All are customers of Enron Corp., which despite its bankruptcy delivers as much as half the state’s private power and boasts a client list of many of the state’s largest businesses. Although customers of all private energy service providers could be stung by the action, many Enron customers could face additional hurdles.

During last year’s energy crisis, Enron temporarily transferred many of its customers back to the investor-owned utilities to save money. Now, state regulators contend that those customers not switched back to Enron service by July 1 should not be eligible to renew their private, direct-access contracts.

The California Public Utilities Commission blocked all new direct-access contracts Sept. 20, but left open the issue of whether thousands of deals signed throughout the summer also would be suspended. On Thursday, it will consider extending the ban back to July 1 and forbidding all contract extensions or reassignments on deals inked before then.

Crafted by Administrative Law Judge Robert Barnett and championed by Commissioner Carl Wood, the decision would effectively kill private power purchases. The move is necessary, Wood says, to prevent disproportionately saddling small, mostly residential users with the state’s burden through rate hikes and surcharges.

About 13% of the state’s electricity load is handled by direct-access providers, which tend to serve the state’s biggest customers, up from 2% on July 1, Wood said. That leaves residential consumers and smaller businesses to pick up the state tab.

The Barnett decision is being fiercely opposed by service providers--Enron among them--industry trade groups and private access customers, which would lose hundreds of millions of dollars in savings, directing those dollars instead to help the state pay off its debt.

“I think everybody could be in trouble if [the Barnett decision] gets passed,” said Daniel W. Douglass, a Woodland Hills lawyer representing the Alliance for Retail Energy Markets, a group of direct-access proponents.

Even the Office of Ratepayer Advocates, an arm of the PUC that serves as an advocate for California consumers, sounded an alarm bell in comments filed last week.

“The [decision] would basically give energy service providers 90 days to wrap up their business and leave the state,” the comments said. “Direct access would be over.”

The PUC will consider an alternate decision, drafted by Commissioner Geoffrey F. Brown and supported by direct-access proponents. It suspends contracts signed after Sept. 20, rather than making the ruling retroactive to July, and allows contract renewals and reassignments.

In its comments filed with the PUC, Pacific Gas & Electric Co. supported the less restrictive Brown decision, but called for a surcharge to be imposed on direct-access customers to help shoulder the state’s burden. It also opposes allowing direct-access customers to switch to other direct-access service providers. Southern California Edison favored the more restrictive proposal.

Enron customers have reason to watch the decision carefully. Beginning last spring, Enron moved thousands of customer accounts over to SCE and PG&E--although; it continued to honor its price contracts with those customers.

Then, as prices on the spot market stabilized and utility rates and surcharges climbed, it shuttled them back to direct access throughout the summer. UC and CSU sued to block the switch and settled their case in May. But most other customers were moved without a fight.

“It was another nightmare for Enron, for our customers, for PG&E;, for everybody,” said Michael Lechner, a former account manager at retail unit Enron Energy Services Inc. in Northern California who is no longer with the company. “There were bills being misplaced, bills not being paid, customers threatened with shut-off notices. If I were a customer I would have sued for whiplash.”

Customers in San Diego Gas & Electric’s territory were not moved onto bundled service and back again because SDG&E; rates were already comparable to spot market rates, former employees said.

Under the more restrictive proposal, those customers that were not receiving electrons from a direct access provider July 1 could be forced to abandon their contracts and return to bundled service.

“They’re finished,” said one former executive at Enron Energy Services.

EES does not disclose customer data. But the company is “a major provider, if not the major provider” in California, Wood said. He previously estimated that Enron provides nearly half the state’s private power load.

The company’s customer list includes fast food operators McDonald’s, Burger King and Del Taco, stores 7-Eleven, Safeway and Albertson’s, and major companies TRW, IBM and Kaiser Permanente, according to documents obtained by The Times.

None of the private firms contacted--some of which are in negotiations with Enron on contract extensions--agreed to comment.

Enron says clients that were receiving bundled service July 1 should be considered direct-access customers because they were contractually bound to Enron.

“It’s Enron’s position that since Enron was still charging the customer the same amount for power as they had agreed to under the Enron contract, that they were Enron’s customers still,” said Mike Day, Enron’s outside counsel for regulatory affairs.

But Wood, of the PUC, disagrees, arguing that those customers would be forced back to bundled service within 90 days if the Barnett decision prevails.

“In my view, they would be considered to be bundled customers,” he said. “They may very well have a cause of action against Enron.”

Day said Enron is “purchasing the electricity and providing the natural gas for customers and no customer has suffered an interruption of service.”

Still, customers fear that could abruptly change because of the company’s bankruptcy. Although a disruption in service appears unlikely, even an orderly disposition of assets could sting Enron customers under the Barnett decision. That’s because customers could be barred from seeking service from other energy service providers, leaving them no choice but to return to the utilities.

The Los Angeles Unified School District “naturally has concerns about [Enron Energy Services’] ability to serve in the future, as well as the company’s broader financial and legal crises generally,” LAUSD energy manager Kenneth J. Davis said in testimony to the PUC last month.

Davis’ testimony came in connection with an ongoing investigation into the effect of Enron’s bankruptcy on customers here. Furthermore, the Barnett decision bans new contracts once terms expire. Although Enron worked to save its customers from just such a regulatory pitfall, it appears those efforts may not succeed.

Enron offered across-the-board contract extensions in late June in anticipation of PUC action, sources familiar with the deals said. The bulk of those--brief documents with no negotiated terms and bilateral escape clauses--carried through 2009.

But Wood said that because the terms were not negotiated, those would be considered new contracts under the Barnett decision and disallowed. If that view is upheld, Enron’s customers would be forced back to the utilities at the end of current contracts, which begin expiring as early as March.

It is unknown whether customers of other ESPs face a similar problem. But for all direct-access customers, the main fear is that a forced return to investor-owned utilities will be costly.

CSU spokeswoman Clara Potes-Fellow said annual electricity costs would spike by 40% if Enron service at 19 campuses and the chancellor’s office is replaced by bundled service. For the CSU and UC systems--seven of 10 UC campuses are under EES contract--the change could amount to $50 million a year, said CSU energy and utilities chief Mark Gutheinz.

And in testimony to the PUC last month, LAUSD’s Davis estimated the loss in savings to the district at $7 million a year.