Megawatt Muddle Getting power to the people is not easy, or thrifty, anymore

By Craig D. Rose UNION-TRIBUNE STAFF WRITER December 31, 2000

Electricity deregulation has been like the used car that handled so well in the test drive. And nearly crashed during the first panic stop.

If consumers learned one thing during California' s harrowing ride in 2000, it was this: High prices are relative.

A megawatt-hour of electricity, which sold for $30 in May, seemed insanely expensive when prices rose to $250 during the summer. But the summer rates seemed a bargain in December when prices climbed above $1,400.

All this as deregulation allowed power generators and traders to charge more and more -- an irony since high prices were the reason for deregulation in the first place.

The state' s electricity costs had been about twice the national average when California moved to deregulate in 1996. Advocates of deregulation predicted that rates would fall if utility monopolies were ended and competition was allowed among generating companies.

The deregulation law even quantified the expectation: a 20 percent rate cut by 2002.

Instead, prices soared out of control this year, while many power generators recorded huge profits.

The generators said California' s attempt at deregulation was flawed because it failed to fully expose consumers to market prices. They also blamed a market structure that steered most sales to day-ahead or even same-day purchases, instead of long-term power contracts.

Utilities balked at long-term deals, fearing they would lock in rate increases -- in direct contradiction

of deregulation' s promise. Only in hindsight, as prices rose even higher, did such deals look appealing.

Consumer advocate Harry Snyder says he wasn' t surprised that some power companies exploited the

market. "That' s what sharks do,"

he says.

Slow start, then sparks fly

For the first two years, deregulation in California was about as exciting as a utility bill.

Consumers were largely shielded from the vagaries of the market. Even in 1999, when San Diego Gas & Electric was allowed to end its customer rate freeze, little drama occurred.

Call it luck. Call it the learning curve. Mild weather surely helped keep power consumption low. And to hear one utility executive tell it, even sophisticated marketers need time to understand and take advantages of the complex rules.

In June of this year, however, a price spike signaled the first problems for consumers. Power marketers blamed an unusual heat spell in the Northwest.

Looking back, the June increase -- about $20 for a typical homeowner and clearly a hardship for many -- seems a relic from a quieter time. The market hasn' t returned to the relative calm seen during the first two years under deregulation.

Why prices surged was, at first, explained by simple shortages.

California had not built new power plants in 10 years, the public was told, and demand had grown throughout the West.

"The prices in June were unbelievable, but I could sort of imagine the conditions that would cause them," says Frank Wolak, a Stanford University economics professor and member of the market surveillance committee of the Independent System Operator.

"But I said to myself, come September or December when demand is low, the surplus power would discipline the market."

Wolak would be proven wrong. step in

The first price spike spawned the first political skirmishes.

Many critics claimed that the California Independent System Operator, which manages the state power grid, failed to deal decisively with the spikes.

The ISO, whose board includes many generating companies, moved only fitfully and after much resistance to lower the caps at which power could be sold -- from $750 to $500 and later down to $250.

Utility companies, meanwhile, ended up in a curious position: in the middle. SDG&E and others major utilities had been forced to sell off most of their generating plants. This left the utilities largely as buyers of power for their customers. Under deregulation, they were supposed to pass along these costs, without mark-up, to consumers.

By mid-August, SDG&E' s electric bills had nearly tripled -- pushing the average homeowner' s bill from $50 to nearly $130. The summer also heard state Sen. Steve Peace, D-El Cajon, suggest that customers not pay their power bills.

"The rates are illegal," said Peace, who largely authored California' s deregulation law but has criticized what he says has been the failure of federal officials to police the market.

By the end of August, the state Legislature had placed a cap on electricity bill payments for SDG&E customers. But the cap came with a catch: Costs incurred by SDG&E that exceeded the cap would be paid by customers later, in 2002 or 2003.

San Diegans learned all about "balancing accounts," the regulatory lingo for IOU' s.

Elsewhere, utilities continued to buy power at sky-high prices and collect less from their customers, thereby building up substantial debts.

To be sure, the picture for California' s three big utilities -- SDG&E, Pacific Gas & Electric and Southern California Edison -- is mixed.

While they have been hurt by capped customers payments and by ever-increasing power costs, their sister companies, which own generators of their own or trading operations, have posted strong profits from the price hikes. flurry

Earlier this month, after the state grid operator effectively removed price caps -- saying it could not acquire essential power unless it paid more -- the market launched prices toward the stratosphere.

Prices rose from $250 per megawatt hour to more than $1,400. Utilities went from being hard-pressed to being unable to finance power purchases from suppliers who demanded cash.

The out-of-control market caused Energy Secretary Bill Richardson to blow a whistle, in effect, with a declaration of emergency. He ordered more supplies directed to California and a settlement conference to lower prices.

The experiment with deregulation was suspended, at least until the new administration in Washington takes office in January.

Deregulation had been such an intriguing concept for many. Thoughts of new products and services, innovation and vigorous competition were in the air.

But little competition ended up developing.

In fact, aside from a small number of people who opted for electricity from renewable sources, 97 percent of local consumers continue to allow SDG&E to buy power for them. The nation' s largest energy marketer -- Enron -- quickly abandoned attempts to sign up residential customers in the state.

More recently, smaller electricity retailers, such as Tenderland, found themselves unable to deliver power profitably as prices rose. Their customers went back to SDG&E.

But if there was little innovation or competition at the retail level, there was a strong growth in another part of the market: energy trading.

In the trading market, companies such as Enron -- with few power plants in the West -- buy and sell the output of power plants through a growing chain of transactions.

Through these trades, even companies without generating plants could become major providers of power to California.

It' s entirely possible that a company can control a critical amount of power for California at any given moment -- only to trade it away the next.

The companies say these trading operations help the industry control risk. What is known for certain is that trading power, as opposed to actually generating power, is a rapidly growing source of profits for power companies.

Troubling to many is that secrecy is a key to trading. Thus, when SDG&E said in the fall it had signed a long-term power contract, it added that it was unable -- because of the agreement -- to reveal the price, duration or the other party. next debate

So the debate in California is now between those who advocate fixing deregulation and those who will press to scrap it.

Edison International, the parent company of Southern California Edison, was a prime force in pressing for deregulation. But after seeing its debt mount into the billions, Edison has called for scrapping the system and moving back to cost-based rates.

"The companies knew the risks associated with deregulation and they wrote the law to protect themselves," says Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. "Now that their foolish scheme has backfired they want Gov. Davis to give them another bailout."

In the meantime, the Federal Energy Regulatory Commission this month seemed to thumb its nose at Davis. Ignoring calls for refunds or a crackdown on power companies, FERC sent a simple message to California: Let the market work its way out of this mess.

For the near term, that appears to mean higher rates -- now under consideration by the state Public Utilities Commission -- and higher profits for power generators and traders.

But it' s unlikely this prescription will continue to be heeded without greater resistance from the most populous state in the nation. Getting power to the people is not easy, or thrifty, anymore

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-- Martin Thompson (mthom1927@aol.com), December 31, 2000