Power Deregulation May Linger

SACRAMENTO â€”  The state Legislature is considering new measures to stabilize California’s electricity industry, and the most prominent ones would retain elements of deregulation that were so traumatic in recent years.

In the three years since soaring prices and blackouts shook apart the state’s attempt to create a competitive energy market, the Legislature has debated virtually nonstop how to patch the electricity industry -- and has come to no resolution.

Debate has picked up again, but not exactly where it left off. Last year, lawmakers considered returning to the regulation that had dominated the industry for nearly 90 years, before the disastrous launching of deregulation in 1998.

But now the two most prominent bills under consideration both assume that California will retain certain elements of deregulation. They both also assume a role for the private energy companies that bought or built power plants, gambling that California’s one-of-a-kind electricity market would pay off.

One bill is sponsored by Southern California Edison, a public utility that supplies power to 11 million Californians. The other is backed by private energy companies that want to either lure away Edison’s customers or sell Edison power.

The authors of the bills say their goal is the same: Set clear rules for the regulated utilities and private energy companies so they know how many customers they’ll be serving for the foreseeable future, which would help them persuade bankers to lend money to build more power plants. Otherwise, lawmakers warn, the state could suffer power shortages as soon as 2006, and a power plant can take five years to permit and build.

But the bills take different approaches. The Edison bill, carried by Assembly Speaker Fabian Nunez (D-Los Angeles), would allow only the very largest businesses to walk away from utilities such as Edison.

“They have the appetite and ability to take risk,� said Edison President Bob Foster.

The other bill, written by the bipartisan team of Assemblymen Keith Richman (R-Northridge) and Joe Canciamilla (D-Pittsburg), would open the door wider for more utility customers to leave and sign contracts with private energy suppliers. It would also force utilities to compete against private companies for the cheapest construction of power plants.

Consumer advocates oppose both bills. They remain suspicious of private generators and seek a return to a system in which most Californians got their power from three utilities -- Edison, Pacific Gas & Electric and San Diego Gas & Electric -- regulated by the state Public Utilities Commission.

“People have forgotten the history, and we’ve gone through a time warp,� said Matt Freedman, an attorney with the Utility Reform Network, a San Francisco consumer group. “The Legislature appears to think the energy crisis was a one-time phenomenon that can never be repeated.�

A bill aimed at re-regulating the industry passed the state Senate last year but was defeated by the Assembly utilities committee. Author Sen. Joe Dunn (D-Santa Ana) has until June to decide whether to revive the bill, which was strongly opposed by private generators and the big businesses and school districts that want the freedom to shop for cheaper power.

As lawmakers debate, California continues to rely on a cobbled-together system that includes elements from both the 1996 deregulation plan and the state’s hurried reaction to the emergency, including billions of dollars worth of long-term power contracts held by the utilities that will not expire until 2009.

Canciamilla said the inaction worried him.

“In the Legislature’s failure to act we have seen a failure of the marketplace to invest in new construction in California,� he said. “We’ve had new plants built that were in the pipeline for a number of years. We haven’t seen anything new come on line.

“What we’re looking at,� he added, “is what can we do to bring some stability back to the market and try to encourage a greater investment in new power.�

Some lawmakers fear that, if nothing is done this year, the three big investor-owned, regulated utilities that serve three-fourths of California’s population will wind up building needed power plants and passing their costs to customers, regardless of whether private companies could have done the job more cheaply.

“To not do something means that we are by default moving back to a fully regulated market that will likely result in higher prices for all Californians,� Richman said.

There are two key differences between the private generators’ bill, AB 428, and the Edison-sponsored bill, AB 2006.

The Edison bill would allow utilities to build power plants without first soliciting bids from private generators to provide electricity from existing or new power plants. It would also ban future regulators from undoing past decisions about allowing utilities to recoup their investment costs in new energy supplies.

Jan Smutny-Jones, who represents private generators as executive director of the Independent Energy Producers, said the Edison bill would give utilities a level of security about their ability to recoup investments from customers that is “unheard of anywhere else in the country.�

“What they’re trying to do is bind� all future regulatory commissions,� Smutny-Jones said.

But Foster, the Edison president, said assurance that “a deal is a deal� is needed to expand California’s electricity supply, whether it’s through new construction or a 15-year contract with a private supplier.

New plants require long debt recovery periods, “and what we’re trying to do is attract investment in the state,� Foster said.

In contrast, the private companies’ bill would force utilities to go through a competitive bidding process before investing in any new source of power, whether from a new plant or an existing one.

Another key difference between the bills has to do with what is known as “direct access� -- the ability of a utility customer to buy electricity from a company other than the local utility.

Under California’s 1996 deregulation plan, all utility customers -- from apartment dwellers to steel mills -- were given such choice. But it was exercised mostly by big industrial and commercial customers, and most of them returned to utilities when market prices rose sharply in 2001.

In September of that year, the PUC suspended new direct access deals but did not cancel existing contracts. Today, about 13% of the demand for electricity in the territories of the three big regulated utilities is provided by retail electricity companies, including Strategic Energy, Constellation New Energy, Sempra Energy Solutions and Electric America.

The Edison bill would give certain businesses -- those that use a peak power flow of at least 500 kilowatts -- the freedom to leave the regulated utilities after January 2006, at the same time relieving the utilities of any obligation to serve those customers. If the large businesses chose to stick with the utilities, they would have to do so for at least five years. And if they chose to return, they could face higher costs than existing customers.

In comparison, the bill favored by private generators would allow businesses that use 500 kilowatts and more to sign direct access deals after January 2007. And unlike the other bill, it would allow smaller utility customers to band together to reach the 500-kilowatt threshold that would allow them to sign direct access contracts.

Private energy companies argue that no genuine retail electricity market would develop under the Edison bill, because commercial customers are wary of commitments as long as five years.

The bill would also give choice only to businesses that use energy on the scale of a hospital, said Norm Plotkin, lobbyist for several energy companies trying to compete with the utilities. His clients would prefer to see a threshold of 250 kilowatts, as well as the ability to aggregate small customers.

All sides agree that debate is far from over and that both bills will probably change many times in the Legislature. In a report released last week, the PUC staff concluded that large customers should not be allowed to leave the utilities until 2009 at the earliest to spread as widely as possible the burden of long-term power contracts signed at the height of the electricity crisis.

But PUC President Michael Peevey strongly disagreed with the report.

In a letter to lawmakers, he called it “overly timid� and said he would prefer that medium and large utility customers be allowed to break with utilities much sooner.

Peevey said the PUC would invite all interested parties to explore the issues and help craft recommendations that could feed into the legislative process by May or June.

Everybody agrees on one thing, he said, and that’s that the current uncertainty is keeping utilities from making plans and hindering private energy companies from getting the necessary financing to build power plants.

“That’s the best argument for resolving things this year,� Peevey said. “But I also know how the legislative process works, so I’m not overly optimistic that will happen this year.�