State casts a wary eye on deregulation

Times Staff Writers

California’s energy crisis ended seven years ago, but electricity customers are still paying for it, lawyers are arguing over it and regulators are reigniting debate over the policies that led up to it.

The U.S. Supreme Court will hear arguments today about whether the high-priced energy contracts signed amid the crisis can be reopened to make sure the rates are fair.

And later this month, state utility regulators are expected to move toward allowing Californians to buy electricity from companies other than the traditional utilities -- a central feature of the previous deregulation effort.


“All this stuff that got put on the side burner for a while is all coming back,” said Michael Shames, executive director of San Diego-based Utility Consumers’ Action Network.

If you’re wondering why these things matter, check your utility bill. Customers of Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric are still paying for the energy mess circa 2000-01.

A sample bill from Edison lists the ways.

There’s the “DWR bond charge” to repay bonds the state Department of Water Resources issued so it could buy power during the crisis. And there’s the cost of the electricity the agency bought -- and is still buying -- under long-term contracts. Edison’s bill lists that as “DWR generation.”

Then there’s the “trust transfer amount,” earmarked for repaying 10-year bonds that funded rate reductions for the first four years of the deregulation plan. The utilities’ customers are paying an estimated $3.4 billion more than they will have gotten from the rate rollback.

Finally, there’s the competition transition charge, which Edison calls “ongoing CTC.” That reimburses the utilities for expensive energy contracts and power plant investments that weren’t fully recovered when the companies sold them as part of deregulation.

The CTC is getting smaller but will be on Edison bills until 2028. There’s little chance of relief on the bond charges. But the cost of DWR’s power contracts is another matter. The state believes it is due between $1.45 billion and $3.08 billion on four contracts that were never renegotiated -- money that could go back to electric customers in some form, possibly by reducing or eliminating future charges.


That’s what the Supreme Court fight is about.

In 2002, the California Public Utilities Commission, the California Electricity Oversight Board and others complained to federal energy regulators that the DWR contracts should be nullified because they contained unreasonably high prices resulting from a rigged market. Similar complaints were filed by Nevada and Washington, where electricity prices also soared.

The Federal Energy Regulatory Commission refused to void the agreements. It cited a “long-standing policy . . . to recognize the sanctity of contracts.”

In a separate case, however, the commission acknowledged that energy prices were unreasonably high during the crisis and approved refunds and settlements that returned nearly $6 billion to the utilities and their customers.

State lawyers won a potentially significant victory in the U.S. 9th Circuit Court of Appeals. In December 2006, a three-judge panel said the long-term contracts could be voided if “market manipulation” resulted in rates that were above what was reasonable. The decision ordered FERC to reconsider contracts from all three states.

But before the commission could do so, wholesale energy traders and providers asked the Supreme Court to throw out the 9th Circuit’s rulings. They argue that a deal is a deal.

Erik Saltmarsh, former executive director of the Electricity Oversight Board, said such an argument was “almost synonymous with saying, ‘If you’re lucky enough to find someone who desperately needs power in the middle of a crisis, you want the right to lock them into a bad deal that nobody can get them out of.’ ”


During today’s session, the justices will hear arguments in a related case brought by a Washington state utility, and they will rule by late June on whether FERC should reconsider its decision allowing the long-term power contracts to stand.

Whatever is decided will be applied to the pending cases from California and Nevada.

Back at the California Public Utilities Commission, there’s a move afoot to deregulate again, beginning with a system known as direct access. That change would give customers a choice of electricity providers.

A group of big power users and energy providers called the Alliance for Retail Energy Markets asked the commission to reinstate direct access, arguing that the state law that prohibited that move no longer applied even though the DWR contracts extended through 2015.

“It wasn’t direct access that caused the energy crisis,” said Norm Plotkin, executive director of the Sacramento-based alliance. He added that now, “everything is normalized . . . and there is an urge for competitive options.”

Mary Orem, a resident of the San Diego County city of Carlsbad, is intrigued by the concept.

“It’s risky, because obviously it failed before,” said Orem, a big proponent of alternative energy. “But I like the idea of opening up to new choices.”


The group’s request alarmed legislators and consumer advocates. Several lawmakers sent a letter to PUC President Michael Peevey warning him that he shouldn’t consider actions that “contravene existing statutes and are not within the discretion” of the commission.

“Direct access was the justification for deregulation,” said Shames of the San Diego consumer group. “Here we are trying to fire it back up, saying basically that the lessons have been learned. I wish I could be that sanguine about it.”

In December, Peevey agreed that the state shouldn’t bring back direct access until DWR was out of the power business. However, in a decision that won’t be final until it is voted on later this month, Peevey also said the commission should forge ahead and “explore proactive alternatives” that would bring back competition more quickly.

He said the state wouldn’t have to wait until 2015 if DWR canceled, renegotiated or handed off the remaining contracts to the utilities.

State Assemblyman Lloyd Levine (D-Van Nuys) isn’t in favor of deregulating the power market, and he suspects that direct-access proponents within state government are pressuring DWR to speed up the agency’s exit from the energy market, even if the changes increase the costs to consumers.

Levine said he believed that’s what happened in December when DWR renegotiated a contract with Calpine Corp. that was one of the few long-term agreements considered to be a good deal.


PG&E; said the new contract left it with 82% less power and would force it to pay an extra $150 million to $200 million to make up the shortfall. DWR disputed PG&E;’s estimates, contending that the revised contract was “a clear winner” when all the provisions were considered.

SDG&E; and Edison both rely on DWR contracts for 28% of their power. In a hearing last month, Edison warned DWR that making contract changes that required utilities to replace thousands of megawatts of energy on short notice “could increase costs significantly.”

Levine, who hosted the state hearing on the Calpine contract changes, echoed their concern.

“This is exactly what happened during the energy crisis,” he said. “The utility companies were forced, on a very short time frame, to go out and buy power from people who knew they had them over a barrel.”