Deregulation: Darling to pariah in a summer

California crisis sends shudder through Western states

Max Jarman The Arizona Republic

Feb. 25, 2001 In less than a year, electricity deregulation has gone from being the darling of consumers, politicians and business leaders, to pariah.

Deregulation was supposed to lower electricity costs, create jobs and deliver a steady supply of relatively clean power. Instead, it is blamed for soaring rates, rolling blackouts and financial devastation.

• California, the epicenter of the West's deregulation crisis, had to bail out its two largest utilities, which were on the brink of bankruptcy, and will spend $10 billion to buy electricity for utilities that have been cut off by suppliers for non-payment. California's problems sent a shudder through the power grid that connects 10 Western states, producing industry shutdowns, layoffs and rate hikes.

• In Nevada, rates have increased 13 percent since summer. Legislative hearings on deregulation plans are attracting more political attention than congressional redistricting.

• Montana, which began deregulating in 1998, has 68 bills before the Legislature aimed at neutralizing negative side effects or doing away with deregulation altogether. An estimated 1,500 workers are out of jobs because of high energy costs.

• Bonneville Power Administration, the power marketer for federal hydroelectric plants along the Columbia River System in the Pacific Northwest, doesn't have enough power. Low reservoir water levels have cut generation capacity, forcing the BPA to buy spot power to serve customers.

• Washington has resisted residential deregulation, but deregulated its wholesale market in 1995. Now, many utilities are being hammered by soaring wholesale prices, including the municipal power company in Tacoma, Wash., which recently slapped a 50 percent surcharge on customers.

In the early 1990s, deregulation seemed like a good idea.

Businesses that believed they were paying too much for electricity jumped on the bandwagon along with consumer advocates who wanted to end the stranglehold monopoly utilities held over customers. Even utilities went along, seeing deregulation as a way to accelerate depreciation of assets and escape regulatory scrutiny.

The result was the federal Energy Policy Act of 1992, which opened the wholesale electricity market to competition by allowing generators to sell and transmit their power to other connected utilities. Retail competition, which would allow individual customers to buy power from a utility of their choice, was left to the states, which traditionally have regulated retail rates and service.

California, with electricity costs running 50 percent above the national average, was the first big player to jump in, in 1996.

Arizona followed in 1997 and fully opened its retail market in January.

Jim Irvin, a member of the three-person Arizona Corporation Commission, initially was an avid supporter of deregulation: "It looked like a great way to reduce rates."

But Irvin said recent developments have changed his opinion.

"It doesn't favor consumers, and it won't necessarily lead to lower prices," he said.

In California, leaders also saw a market-driven power industry as a way to protect consumers from fiscal disasters such as the Diablo Canyon and San Onofre nuclear power plants.

"The hope for deregulation was more prudent investment of capital, so if the (utility) companies made a bad investment, the taxpayers wouldn't get stuck," said Severin Borenstein, director of the University of California Energy Institute in Berkeley.

For states that have not started down the path, Borenstein recommends waiting.

"There is a huge benefit to be gained from our experience," he said.

Undermines supply Ironically, deregulation began undermining the West's power supply long before California opened its market. That stemmed from the Energy Policy Act allowing utilities to buy wholesale power, instead of investing in new plants. "Companies cut back on their reserve margins to accommodate growth, thinking they could always buy the power they needed from someone else at reasonable rates," said Dick Silverman, general manager for the Salt River Project.

At the time, the West was awash with power. Buying power was an especially attractive option in California, where tough environmental rules made plant construction difficult.

California utilities were required to sell most of their power plants to third parties and forced to buy wholesale power at a central power exchange for prevailing daily rates. In Nevada and Montana, utilities voluntarily decided to sell their generation.

But Oregon has not required its utilities to divest their plants. Neither has Arizona, where an early plan to require utilities to similarly sell their plants was scrapped. Instead, they were allowed to transfer them to separate subsidiaries.

It all unravels As long as there was ample supply, deregulation worked, Borenstein said. But when temperatures soared last summer and supplies grew thin, everything began to unravel. The huge power surplus in the West a decade earlier had been erased by 10 years of unprecedented growth.

The independent power producers that had, with trepidation, bought the California power plants from Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric saw an opportunity to raise rates. Prices on California's power exchange that ranged from $30 to $50 a megawatt soared to $750 and higher.

Rates skyrocket Because retail rates were frozen at artificially low levels, the rising prices were not felt by individual consumers except in San Diego, where previous plant investments had been paid off and the rate caps lifted. Residents were told their rates would go down when the rate freeze disappeared. Instead they skyrocketed as much as 400 percent. The summer's price spikes were supposed to be history by winter, but that didn't happen. High prices for natural gas, used to fuel some power plants, and power plants being off-line for maintenance kept power supplies thin.

In early February, the California Legislature, struggling to find a solution, approved spending $10 billion to enter into long-term contracts for electricity at relatively stable prices.

Summer worries Other states were relieved, but some still worry about the summer and the Pacific Northwest's dwindling power reserves and low reservoirs. "It could be a dandy," Gary Feland, chairman of the Montana Public Utilities Commission, said of the forthcoming summer.

And it will be hard for residents in Utah facing a 19 percent rate increase, those in Montana facing a 21 percent hike and people in Tacoma whose bills went up 50 percent in January, not to shake an angry fist at California.

"I don't think California caused the high wholesale prices, I know it," Bonneville spokesman Ed Mosey said.

Reach the reporter at max.jarman@arizonarepublic.com or (602) 444-7351.

http://www.azcentral.com/azc-bin/print.php3

-- Martin Thompson (mthom1927@aol.com), February 25, 2001

Answers

Marting Thanks again for another great article!

Just look at the Airline, Phone and Trucking Industries.
Deregulation is a great idea:
...If you want higher prices and lousy service.

Airlines: Passenegers have been held hostage for over 8 hours.

Phone: Slamming, and the stinking universal connectivity fee, as a start.

Trucking: In some cases very crazy drivers and unsafe trucks, but mostly drivers making the exact same pay as when deregulation started.

-- (perry@ofuzzy1.com), February 25, 2001.

OOPS.
Martin,
Typing to quickly!
Marting=Martin

-- (perry@ofuzzy1.com), February 25, 2001.