This is how energy competition is supposed to work

This is how energy competition is supposed to work

4.6.05

When the architects of energy deregulation launched California on the road to a free market for electricity in the 1990s, they must have had something like the SMUD/PG&E example in mind: two systems side by side, essentially doing the same thing, except one routinely charges less for electricity than the other.

A new report by the Sacramento Municipal Utility District (SMUD) brings back some old memories. The SMUD report, by an outside consultant, suggests that Yolo County residents could see lower rates and improved service by abandoning Pacific Gas and Electric and joining SMUD. PG&E, to no surprise, suggests the opposite. We have heard this before. In Sacramento many decades ago the community wisely decided to create SMUD.

What a fine thing for Californians if such purveyors of power had to compete for customers. Fat and excess would get squeezed out as dwindling sales punished the inefficient sellers. Good systems would grow. Savings would flow to businesses and households.

Didn't work out that way, of course. The deregulation was partial, malformed and got gamed by bright manipulators who leveraged high demand and scarce supplies to their profit. The state's economy is still lugging from the financial fallout. Power supplies still risk falling short of projected demand as early as the first heat storm of 2006.

But the SMUD/PG&E example remains -- customers of the Sacramento Municipal Utility District continue to pay less for electricity than their regional neighbors who buy from San Francisco-based Pacific Gas and Electric. In a rare display of how a version of competition might work, the part of Yolo County that includes its three biggest cities will get a chance as soon as next year to drop PG&E as their local electric utility in favor of joining SMUD.

An initial study of the potential "Yo SMUD" annexation came out this month (credit the public utility for the nickname). There's more review to come and PG&E has yet to argue its side of the case, but the nut of the deal is that about 85,000 customers from Davis, Woodland and West Sacramento would get a better system and probably pay less for electricity than they would if they stuck with PG&E. The price range is 11 percent less to 2 percent more, with the best guess a savings of about 8 percent.

And that's after the Yolo customers shoulder the cost of SMUD buying the Yolo electricity infrastructure from PG&E, plus gain a $27 million investment in an improved transmission system.

Power companies aren't like restaurants, where flavor rules, or cars, where styling and status are part of the package. Customers mainly want three things from their local utility -- safety, reliability and a good price. SMUD is safe. SMUD is reliable. SMUD costs less. It has the bonus attraction of being locally run. In the Yolo match up with PG&E, it's winning. Too bad California hasn't yet figured out a way to spread similar competition throughout the state.

PG&E says it is too expensive to create a new municipal utility today. Public power's proven record of reliable, affordable power gives this expansion idea merit.

For SMUD, expanding the boundaries of the utility would be no small step. Neither would it be for the residents of West Sacramento, Davis and Woodland, who would be asked to vote to join a bigger, regional public power utility. An expansion would have to make sense for all parties.

Using some of PG&E's own financial information, the SMUD report provides a good beginning for what should be a lively public discussion.

The consulting firm R.W. Beck analyzed whether it made more financial sense for all these communities to join SMUD or whether the potential savings were greater if, say, only West Sacramento were to switch to public power. The conclusion was that the broader the expansion of SMUD, the better.

Calculating the actual costs involved in switching from PG&E to SMUD, however, is simply impossible at this point. Customers exiting the utility would likely have to pay two surcharges. One would cover bills left over from the electricity crisis. The other would buy the local poles and wires from PG&E so that SMUD could take them over.

Since SMUD is so much cheaper than PG&E and likely will be for years, there's room to pay off surcharges and still end up with lower rates and more reliable service. (The consultant identified service as a problem, which came as no surprise to Yolo leaders).

The cost of buying the poles and wires is being contested. Using PG&E's own figures, the consultant calculated the full replacement cost of the Yolo hardware at $108 million. A PG&E official, however, says the cost is "well above" $400 million.

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