California Legislators Revisit Partial Deregulation of Electricity
The San Diego Union-Tribune - March 21, 2004
Assembly Speaker Fabian Núñez has introduced legislation he says will spark power plant construction and protect small customers.
To be sure, the blowup of 2000-2001 vaporized public support for complete
deregulation.
But under pressure from large electricity users and independent power plant
builders, the Legislature is considering several proposals for deregulating up
to 30 percent of the state's power market.
Proponents of the partial market loosening are quick to emphasize that their
plans would protect most residential and small-business customers with rates and
service regulated by the California Public Utilities Commission.
But they propose allowing larger customers to sign contracts with unregulated
electric suppliers, so-called direct access agreements.
Lawmakers who support partial deregulation believe that freeing these
customers for direct access would provide an incentive to independent energy
companies to build badly needed power plants.
And the independent providers, deregulation advocates say, would also provide
healthy competition to utilities and drive down rates for all.
Under state law, new unregulated private electricity deals are banned until
2013. That's when the last of the overpriced electricity contracts signed by
California during the crisis expire.
Legislators feared that allowing large power users to make cheap power deals
would burden those who pay for crisis costs as part of their monthly utility
bills.
But state law allows direct access deals signed before the ban to continue.
Within San Diego Gas & Electric's territory, for example, about 18
percent of the electricity is provided under these unregulated contracts.
Those direct access customers are supposed to pay exit fees to cover their
share of crisis costs, but those costs are capped and have not been fully paid.
Advocates of partial deregulation -- known in industry jargon as a
core/non-core market structure -- promise that their new plans wouldn't allow
big customers to escape their share of crisis costs or the overhead of
maintaining the state transmission and distribution system.
"My first objective is to protect core customers," said Assembly
Speaker Fabian Nunez, D-Los Angeles, sponsor of the most recent partial
deregulation bill.
But the assurances from Nunez and others fail to mollify consumer advocates.
They liken guarantees of consumer protection under partial deregulation as
akin to assurances of being careful about unprotected sex.
Allowing partial deregulation, they say, is bound to save big customers money
at the expense of smaller customers.
"I don't believe you can prevent cost shifting," said Michael
Florio, senior attorney for The Utility Reform Network, a consumer advocacy
group in San Francisco.
He says that polls show overwhelming public support for full regulation of
the electric industry, similar to the type in place for most of the last
century. But there's little evidence of that sentiment in the Legislature.
The strongest evidence of the renewed tilt to partial deregulation is the
fact that the latest proposal comes from the Assembly speaker himself.
Nunez says he's concerned about projections of tight state electricity supply
as soon as 2006 and he's sensitive to complaints from utilities that the
regulatory environment is so unstable they can't safely invest in new plants.
During the deregulation experiment, it was assumed that market forces would
create incentive for new power plant construction, so utilities were relieved of
their obligation to plan and provide adequate electricity supplies.
The PUC has since reversed course and reaffirmed the utilities'
responsibility to ensure reliable service. But utility executives say they have
difficulty obtaining financing in the current environment, with lenders fearing
changes that could affect the ability to repay loans.
Financing problems Independent energy companies, meanwhile, say they face the
same financing problem and add that recent PUC rulings leave them at a
disadvantage in competing with utilities in plant building.
Large power users, for their part, believe they could get cheaper power deals
if they were freed from the requirement of getting service from their local
utilities.
Nunez's bill, AB 2006, would allow the 30 percent of the market that includes
larger power consumers to sign supply contracts with unregulated electricity
suppliers. Smaller customers would remain protected by the PUC, he says.
The bill, which Nunez acknowledges Southern California Edison played a
significant role in crafting, guarantees that utilities can recover their plant
building costs and earn profits on their investments. That should offer
reassurance to lenders that utility construction loans will be repaid.
But the speaker also emphasized that under AB 2006, utilities would compete
against independent energy providers for the right to build new power plants.
"If utilities can assure the PUC that the investment they make in
building a generating plant is more cost-effective, they will have a leg
up," said Nunez.
To assure a stable power market and allow for prudent planning by utilities,
AB 2006 would require that large customers who retain local utility electricity
service give five years notice of plans to depart for a private, unregulated
supplier.
John Bryson, chief executive of Edison International, parent of Southern
California Edison, says that provision and others within AB 2006 would provide
the stability missing in the current environment, which is now largely
determined by decisions from the five-member PUC.
Risks cited "In the absence of a longer-term, more-predictable
environment, there are risks," said Bryson, himself a former commission
member.
Chief among those risks, he said, is a lack of investment in new plants and
transmission lines.
"What we see at the PUC is that decisions made by one commission can't
bind future commissions," he said.
To further stabilize the "investment climate," a term favored by
proponents, AB 2006 would narrow the PUC's traditional latitude to revise
decisions as projects proceed.
Supporters of regulation say that involves a significant reduction of the
commission's regulatory clout.
"I would not want to curtail the PUC's discretion in matters of cost
recovery," said state Sen. Joseph Dunn, D-Garden Grove. His own bill -- now
stalled in the Legislature -- would continue the ban on private power deals and
move back to re-regulation of the electricity industry.
Assemblyman Keith Richman, R-Chatsworth, author of a competing measure for
partial deregulation, says the Nunez bill is too protective of utilities in
another sense. He says the bill excessively protects utilities from competition
with independent power suppliers, who might develop electricity generating
plants at lower cost.
In particular, Richman says, the five-year notice requirement for seeking a
private power deal is far too long.
"We think a notice period of six months to one year is
appropriate," said Richman.
Persistently high power rates, meanwhile, remain a drag on consumers and
businesses.
A major factor Dorothy Rothrock, a vice president with the California
Manufacturing & Technology Association, said high power costs have been a
contributing factor in the state's steep loss of manufacturing jobs over the
past three years.
But Dunn says deregulation isn't an answer because it will simply shift costs
to smaller power users.
He and consumer advocates say large users want private deals precisely
because it gets them out from under the high costs that all now bear as a result
of the market meltdown during the last deregulation attempt, as well as the high
overhead costs needed to ensure adequate reserves.
Dunn says all deregulation efforts face an uphill battle in the Legislature.
With limited prospects for legislative action, he says, the debate could shift
to the ballot box by November.
Edison could try a ballot initiative should its bill fail in the Legislature,
he said, although an Edison spokeswoman says no initiative measure is now
planned.
Dunn added that advocates of electricity re-regulation are considering an
initiative of their own, though costs are daunting.
"The polls say it would pass overwhelmingly, but getting the resources
together is difficult," Dunn said. "Just gathering the signatures to
get it on the ballot will require $3 million to $5 million. And the proponents
of a re-regulation measure would have to be able to put at least $10 million on
the table because the resources in opposition would unite and spend at least $50
million."
But deregulation opponents say they have a higher level of resolve than ever
before.
"We are a lot smarter than we were back in the 1990s when deregulation
was just a theory and had a lot of pizzazz to it," said Florio of TURN.
"Everyone who was skeptical of deregulation in 1995 realizes we have to
fight and not let this happen again."
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