Initiative on Alternative Power Sellers Revives Regulate vs. Deregulate Debate

Four years after enduring power shortages and rolling blackouts, California voters are being asked to decide whether to reverse a key element of the state’s disastrous experiment with energy deregulation.

Proposition 80, an initiative on the Nov. 8 special election ballot, would ban consumers who aren’t already doing so from buying their electricity from independent power providers.

By limiting the state’s retail market for electricity, which gives users such as homeowners, hospitals, factories and farms an alternative to buying power from regulated utilities, Proposition 80 would roll back an important feature of the state’s 1996 electricity deregulation law.

It also would provide at least a partial answer to the question of “whether we’re going to have a market-based system or a regulated system” of power production and consumption in California, said Peter Navarro, a business professor and energy expert at UC Irvine.

It’s a question of great import in a state that’s preparing for electricity shortages this summer. The officials who oversee the state’s power grid are bracing this week for record electricity usage and the possibility of issuing the first Stage 1 power alert of the year.

Proposition 80 would do little to quickly solve the problem at the core of California’s energy woes -- getting enough power where it’s needed, when it’s needed. But backers, led by the Utility Reform Network, a San Francisco ratepayers’ advocacy group known as TURN, say the initiative would bring stability to the state’s power grid and encourage investors to provide the financing for new power plants, helping the state meet its future energy needs.

The pro-Proposition 80 campaign mounted by TURN will seek to remind voters of the disaster that followed passage of the 1996 deregulation law, which created a dysfunctional power market that fell prey to manipulation by out-of-state energy traders during the crisis of 2000 and 2001.

“This is about restoring and maintaining reasonable regulatory control over the provision of electrical service and preventing another costly deregulation experiment that could cost consumers billions of dollars,” said Mike Florio, a TURN attorney.

Opponents, which include nonutility power producers such as San Jose-based Calpine Corp., independent electric service providers such as Constellation NewEnergy Inc., and large power consumers such as factories, hospitals and universities, counter that limiting the options of power users would skew the market in favor of giant investor-owned utilities.

That, in turn, would hike power bills for all customers by discouraging technical innovation and competitive pricing while encouraging utility cost overruns, which are passed on to ratepayers by state regulators, opponents say. California businesses are already coping with the nation’s highest electricity rates, they say.

Jan Smutny Jones, director of the Independent Energy Producers Assn., contends that re-regulating the California energy market would put utilities “in the catbird seat” by giving them an unfair advantage over independent power generators such as Calpine. Jones’ association has filed a lawsuit in state Superior Court in Sacramento, seeking to get the TURN initiative off the ballot because it allegedly discriminates against independent producers.

The initiative also could spell big trouble for Constellation and other nonutility power sellers, which currently provide about 13% of California’s electricity. Although the Legislature in 2001 put a halt to Constellation and its kin signing up new customers, that ban could be lifted at any time. Proposition 80 would make the freeze permanent, dooming the incipient retail electricity industry to “death by attrition,” said Norman Plotkin, a lobbyist in Sacramento for the Alliance for Retail Energy Markets, a trade group.

For now, the state’s three investor-owned utilities -- Southern California Edison, a unit of Edison International; PG&E; Corp.’s Pacific Gas & Electric Co.; and Sempra Energy’s San Diego Gas & Electric Co. -- are staying on the sidelines, at least publicly. Analysts say the utilities are waiting to see how the ballot battle develops between Republican Gov. Arnold Schwarzenegger and his business allies, and Democratic legislative leaders and their labor union supporters.

Indeed, Proposition 80, whose signature drive was bankrolled by the Alliance for a Better California, a labor-backed anti-Schwarzenegger campaign committee, is in some ways a pawn in an escalating battle for political supremacy in Sacramento.

The governor has enraged his opponents by pushing a series of hot-button ballot initiatives that would redraw legislative districts, tighten teacher tenure and limit government spending. He’s also mulling over whether to support a potentially explosive ballot measure that would make it harder for unions to raise political funds from members.

Unions are fighting back by pushing Proposition 80 -- which would throw a monkey wrench in the governor’s own plans for the state’s energy grid -- and an initiative to pressure drug companies to deeply discount prescription medicines. Democrats claim that both issues are popular with voters; similar bills passed last year and were vetoed by the governor.

But asking voters to decide a complicated question such as how to structure a statewide electricity market is bad public policy, said Severin Borenstein, director of the UC Energy Institute and a professor at UC Berkeley’s Haas School of Business.

“This issue should not be dealt with as an initiative,” he said. “Most voters have only the vaguest idea what this means.”

Moreover, TURN’s initiative is jammed with technical language that does more than ban expanded retail electricity sales. Although the 14-page proposal limits for-profit companies from selling electricity independent of the utilities, it gives a green light to local governments to provide the same type of service in their communities.

The initiative also would prohibit utilities from making small-business and residential customers install high-tech but expensive “real-time” meters that could be used to charge higher rates and encourage conservation during periods of peak demand. And the measure also would put into law rulings by the California Public Utilities Commission that require utilities to increase power capacity reserves and boost purchases of renewable energy such as solar and wind power.

Meanwhile, large electricity customers have their own complaints about Proposition 80.

The initiative “definitely puts a cloud over the business community” because it’s “just another change in the rules in the middle of the game,” said Scott Guge, vice president of California Steel Industries Inc. in Fontana, the largest producer of flat-rolled steel in the West.

California Steel was one of the power users that opted to take advantage of deregulation by cutting the cord with its old utility and switching to one of the newly minted retail electricity providers. Although the company shifted back to utility service after regulatory uncertainties boosted costs, Guge said he would like the option of again using an alternative provider.

In the end, said Navarro, the UC Irvine energy expert, it matters little whether Proposition 80 passes or fails. Either way, the state will be saddled with an unreliable energy system.

California “is the greatest state in the nation and the fifth-largest economy in the world,” he said. “But basically, we’ve got a confederacy of dunces” making energy policy.