Consumer Advocates Draw Battle Lines on California Governor

Consumer Advocates Draw Battle Lines on California Governor's Energy Plan

San Jose Mercury News, Calif. - May 11, 2003

Gov. Arnold Schwarzenegger's push to give more large power users freedom to shop for the best electricity deal faces opposition from Democrats and consumer advocates who fear it will lead to higher residential bills.

So-called "direct access" lies at the crux of the debate over whether California should once again loosen regulation in a market that was tightly controlled until the late 1990s, temporarily set free and then restricted again.

Proponents of the plan say freeing more big buyers would increase market competition, drive prices down and force utilities to be more cost-efficient.

Currently, large customers who must buy electricity through a utility company such as PG&E endure high rates and little flexibility, said Dorothy Rothrock, vice president of the California Manufacturers and Technology Association. "We think there is a lot of innovation and creativity in the market that will be exposed once it's opened up."

But if the state goes down that path, critics fear, the rest of California's electricity customers -- the small businesses and residential users tied to utilities -- could end up paying more.

That's because utilities save money by signing long-term contracts with generators for a major portion of the state's power. If large customers leave the utilities, those remaining could be left shouldering the cost of the contracts.

"We give some customers an opportunity to flee cost," said Bob Finkelstein, executive director of The Utility Reform Network, "and the cost will ultimately be borne by the customers who don't have the chance to flee."

In addition, there are $43 billion in long-term contracts the state signed in 2001 to get out of the energy crisis. Again, the issue is who will bear the cost if large users leave the utilities.

"The biggest problem," said Sen. Debra Bowen, D-Redondo Beach, "is there are two conflicting goals: locking up as much power as possible in long-term contracts and promoting direct access."

The desire for lower electricity prices, especially for manufacturers and other large consumers, fueled the state's original, 1996 push to deregulate energy. Under the plan, utility companies were supposed to sell their power-generating facilities and become only deliverers of electricity. New generators would compete for retail business, just as long-distance phone carriers do.

The plan crashed when supplies grew short, power companies manipulated the market and large utility companies, forced to buy electricity on the exorbitantly priced spot market, could not pay the soaring costs.

The state stepped in, purchased electricity through long-term contracts and required that most consumers stick with the utilities so there would be enough customers to pay off the $43 billion obligation. The move toward direct access was frozen.

As a result, just 15 percent of electricity in California is purchased today through direct access. Business leaders and the governor want the state to loosen the limit so more can partake.

But the devil is in the details: How do you allow greater direct access that is fair to everyone? Both sides of the debate agree big users abandoning the utilities should be required to pay an "exit fee" to cover their fair share of the state's electricity debt. The battle is over the amount of the fee.

"The difficult part of this is coming up with the coming-and-going rules," Bowen said. "Where I'm at is, 'Show me the money.' Show me how this would really work."

Then there is the fight over whether large consumers should be able to return to the utilities if they leave. Large customers want that freedom in case the wholesale market goes haywire again. But consumer advocates say that would allow the big users to game the system, reaping the benefits of the utilities when they have the better prices and leaving small users to bear the costs alone when prices rise.

While lawmakers may be reluctant to act given the state's botched attempt to deregulate the market eight years ago, pressure is building. The state's energy needs are rising, supplies are tightening and experts forecast blackouts could return as early as next year.

"The reason this year is important is this is the last year we can make decisions to plan competently for the future without panic," said Loretta Lynch, a member of the California Public Utilities Commission.

Business leaders grumble that fast action is needed to keep businesses from leaving the state. "There's a huge risk in relying on the status quo," said Allan Zaremberg, president of the California Chamber of Commerce. "We have a tough enough time keeping manufacturers here."

Whether the issue gets resolved this year depends on how aggressively Schwarzenegger pursues it, said Assemblyman Joe Canciamilla, D-Martinez, who has co-authored one direct-access bill. In a letter to state regulators last month, the governor said he favors more direct access but offered few details and left many wondering about his timetable.

Direct access probably won't be viable until the end of the decade, when the state's long-term contracts expire, if lawmakers follow the governor's pledge to force large customers to pay a fair exit fee and assume full responsibility for their decision to leave the utilities, Canciamilla said.

"I'm sure they (businesses) would like it to be sooner, but the reality is they have to share in the responsibility for these contracts just like everyone else, and there's no easy way to do that," Canciamilla said.

For Frank Wolak, a Stanford University economics professor specializing in energy, direct access is a side issue that means less to the health of California's electricity system than the condition of the state's transmission lines and the ability of the large utility companies to hedge exposure to the expensive spot market.

Adding transmission lines would allow the state to import more power, and that would foster greater competition among suppliers that would lower prices, Wolak said.

Opening the door to more direct access is difficult to do without punishing other customers, he said. "I'm a strong supporter of it, if there is no cross subsidy. But, how do you get there?"

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