Published Wednesday, September 27, 2000, in the San Jose Mercury News

Power deregulation backfires in infancy MANY OFFICIALS SAY IT WILL WORK EVENTUALLY BY STEVE JOHNSON Mercury News

With its residents reeling from surging summertime electricity bills, this coastal state's deregulated energy market has triggered bitter accusations, legislative hearings and a push to re-regulate the whole system.

Sound familiar? Except this isn't California. It's New York, one of 23 other states that are ending what has been for decades one of government's key functions -- keeping tight control on the price of power.

The great national experiment to open the sale of electricity to competition, which California has been largely credited with pioneering, was supposed to lower prices by freeing consumers from the monopolistic grip of government regulated utilities. Indeed, energy officials in many states retain hope that it eventually will do that.

But throughout the country, a sense of foreboding has overtaken people like Susan Peckman, who manages Peckman's Liquor Store in Pearl River, N.Y. Hers is the only state outside California so far where consumers have been exposed to the discomfitting impact of fully deregulated prices. And she doesn't feel liberated.

``There's nothing we can do about it,'' said Peckman, who estimated that her store's electricity bill has jumped about 20 percent this summer over last year's. Faced with the option of paying it or closing down, she added, ``you're between a rock and a hard place.''

It has been four years since California became one of the first states to pass an energy deregulation law. Yet the movement to revamp the way power is sold in this country remains mired in a ``prolonged and muddled transition,'' according to a study published this month by Cambridge Energy Research Associates and the Arthur Andersen consulting firm.

It's unclear when or even if that transition will ever be completed. In many parts of the country, public officials are terrified of plunging ahead with deregulation, given the high prices and other problems in California and New York. Some even harbor suspicions that California has led the nation astray by promoting an idea that is inherently flawed.

California Public Utilities Commissioner Henry Duque said he encountered that attitude during a summer meeting of the National Association of Regulatory Utility Commissioners in Los Angeles.

``I had other commissioners coming up to me saying, `What the hell is going on here,' '' Duque said. ``They were concerned. I think their thought was, did we in California see something that was wrong with deregulation but weren't going to level with them now that they had started down the path?''

Actually, the federal government bears much of the responsibility for initiating the drive to ease public control of electricity markets.

Hoping to encourage new sources of electricity, Congress passed laws in 1978 and 1992 that forced utility companies to buy increasing amounts of the power they use from other, unregulated energy suppliers. In 1996, the Federal Energy Regulatory Commission also made it possible for other firms to ship their power over the high-voltage lines the utilities owned.

Consumers were looking for a change, too. By the mid-1990s, the service provided by utility firms had become a sore subject. California had some of the highest utility rates in the country, and the electrical system's reliability was under fire.

If only other companies could be lured into the market to compete, it was widely assumed, prices would plummet and overall customer satisfaction would improve.

New York, New Hampshire and Rhode Island passed laws or made administrative rulings to deregulate slightly before California, where deregulation was approved in September 1996.

Rhode Island and Massachusetts were first to give residents the ability to choose which company sold them their electricity. But because of its size and much publicized deliberations about its plan to deregulate during the 1990s, California was labeled the national leader on the issue.

In many ways, however, deregulation in the state has been a flop -- at least, so far.

Californians have had the right to pick their energy supplier since March 31, 1998, when the electricity market was officially unfettered. That ability to choose was seen as an essential way to spur competition and, ultimately, lower energy prices.

But as of Aug. 15, less than 2 percent of California's homeowners, businesses and others had seen fit to drop their local utility for some other supplier.

By contrast, in Pennsylvania -- one of 13 other states that now let people choose -- 10 percent of customers have switched.

Critics say that's a misleading comparison since Pennsylvania, unlike California, gives an energy price discount to consumers who make the switch. Nonetheless, Pennsylvania officials are clearly happy about how deregulation is working.

A study in August by Pennsylvania Gov. Tom Ridge concluded that electricity competition will result in 36,400 new jobs and a $1.4 billion boost in personal income across the state by 2004.

``We do not anticipate the problems in Pennsylvania that you have out there in California,'' said Kevin Cadden, a spokesman with that state's Public Utility Commission. ``I am not nervous at all.''

A study this summer by the non-profit Center for the Advancement of Energy Markets, which promotes deregulation, found that Pennsylvania has pushed electricity competition more effectively and quickly than any other state. Others listed in order in the top 10 were New York, Maine, Massachusetts, Texas, Nevada, Maryland, Rhode Island, New Jersey and Connecticut. California was 16th.

But consumers may have a different measure of success: whether their lights will stay on and how much electricity will cost them once government controls are removed. Unfortunately, in the two states where prices have been fully deregulated, the evidence is not encouraging.

In San Diego, the first place in California to have its state-mandated cap on utility rates lifted under deregulation, electricity bills for many consumers this summer doubled, while power blackouts also rolled through Northern California. New York's experience wasn't quite as bad. But in the few counties there that were exposed to fully deregulated electricity rates this summer, the average residential bill rose 22 percent.

Investigations are under way in California and New York to determine what happened. Nonetheless, the problems in both states have been largely blamed on an insufficient supply of power plants to meet their demand for electricity, which has forced consumers to pay just about whatever power-producing firms want to charge.

``It's the piece that the economists missed'' when deregulation was touted several years ago, said Mike Donovan, a spokesman for Orange and Rockland Utilities, Inc., which supplies power to Susan Peckman's Pearl River liquor store, among other parts of New York. ``There isn't sufficient generation to really administer a full-scale competitive market.''

Ralph Cavanagh of the National Resources Defense Council in San Francisco maintains that deregulation has been unfairly maligned because the dearth of power plants has made it impossible for consumers to benefit from competition. Once that and some other problems are fixed, he said, ``I'm confident we'll have a more orderly market in the future.''

Others are growing nervous, however. This summer's difficulties have spurred calls to significantly stall or even reverse deregulation in North Carolina, Nevada, New Mexico, Minnesota, Oregon and Alabama, among other states.

A Wisconsin consumer advocate recently chuckled over the phone as she read aloud a story about California's energy crisis, noting that such news made her opposition to deregulation much easier.

``I am absolutely convinced that we are on an inexorable march toward the choice model,'' said Ken Malloy, president of the Center for the Advancement of Energy Markets. But he acknowledged that the experience in San Diego and New York ``is undeniably a bad thing that has happened to this movement, and it will set us back.''

http://www.mercurycenter.com/premium/front/docs/dereg27.htm

Contact Steve Johnson at sjohnson@sjmercury.com

-- Martin Thompson (mthom1927@aol.com), September 27, 2000

Answers

With all of these energy disruptions going on it is unfathomable to me that the Consumer Confidence Index just rose--over the past month. Incredulous!

Where are people hiding their brains these days?

-- Uncle Fred (dogboy45@bigfoot.com), September 27, 2000.

Beware of stupid people in large numbers.

-- Martin Thompson (mthom1927@aol.com), September 27, 2000.