Utility Deregulation: Consumers Could Be Big Losers
Other than taking a few moments to pay their monthly utility bills, most Californians probably don't think much about electricity. But all that will soon change as California restructures its massive electrical utility industry.Beginning March 31, consumers will be allowed to select their electricity provider, a drastic change from the monopoly power currently enjoyed by utility companies. As a result, the state's Big Three utilities -- Southern California Edison, PG & E and San Diego Gas & Electric -- are busily plying their existing customers with television and radio ads that promise cheaper rates if they simply "do nothing" and stick with the status quo when it comes to receiving their electricity. But such complacency could prove harmful to utility customers, say consumer advocates and environmentalists. Indeed, they argue that consumers are the big losers under the plan to deregulate the state's $23 billion electricity industry. And the three major utility companies are the big winners because of their ability to pass the costs of bad investments on to ratepayers. A "do nothing" attitude among consumers could also reverberate elsewhere, according to consumer advocates, because Congress and several other states are looking to California's plan as a possible blueprint for utility deregulation across the country."The architects of this deregulation plan never intended residential ratepayers to be the beneficiaries," says Harry Snyder, executive director of Consumer Union in San Francisco. "It was created to keep industry in the state by providing them with lower priced energy." Cloaked in baffling jargon, the deregulation plan has been difficult for most consumers to decipher. But after analyzing the fine print, consumer groups and some environmental advocates began collecting signatures for a November ballot initiative that would replace the deregulation scheme with a version they say will favor consumers. In particular, they are upset with a provision in the current plan under which consumers will pay a surcharge on their bills to compensate utility companies for bad business investments, including nuclear power plants. "All we have to say is 'read your utility bill' and voters want to sign thepetition," says Bill Gallagher, who's coordinating the initiative drive for Californians Against Utility Taxes, a group formed by Harvey Rosenfield, the author of a 1988 ballot measure that was supposed to lower auto insurance rates. Proponents of the utility-related initiative say it would lead to a 20 percent reduction in electricity rates for residential customers.Under the initiative, consumers would not be required to repay the Big Three utility companies an estimated $14 billion worth of investments in nuclear power plants. "Nuclear energy was forced on California consumers with promises that it was safe, clean and cheap, none of which is true," says Snyder. "The initiative shifts the burden of these investments to the utilities' shareholders."Underlying both the current deregulation plan and the consumer-oriented alternative is the existing three-part system of bringing electricity to homes and businesses. First comes the generation of electricity, followed by its transmission through power lines. Finally, there is the distribution, via poles, easements and local wires. In exchange for monopoly status -- which has allowed the Big Three utilities to own and operate each aspect of providing electricity -- the companies were required by state regulators to supply power within given service areas without having to worry about competitors. For example, San Francisco-based PG&E's geographic reach covers much of Northern California.In 1996, the Legislature decided to break up the vertically integrated system of manufacturing and selling electricity. Under AB 1890, distribution will still be provided by the three monopoly utilities, but the state's 30 million customers will now be able to choose which company will provide their electricity.Theoretically, consumers benefit from competition among utility companies. However, consumer groups were galvanized into drafting their alternative plan because of a provision in AB 1890 that requires customers to help the utilities recoup bad investments, known as "stranded costs," that total $28.5 billion. Nearly half of that amount is for PG&E's Diablo Canyon reactors and Southern California Edison's San Onofre nuclear plant, both of which are running, but, according to consumer groups, are not cost effective.. In December, the state sold $10 billion worth of bonds, with the proceeds going to the three utilities to help pay off their losses. The interest on the bonds will be paid by utility customers regardless of which company they select to provide their electricity. State lawmakers defended the bond sales by arguing that state-issued bonds enjoy tax exempt status, which results in a lower interest rate. But consumer advocates say the utility rescue operation will bolster monopoloy utilies' profits and stymie competition. "This huge stranded-cost bailout creates a large warchest for incumbent utilities, which means it will be more difficult to introduce competition," says Wenonah Hauter, director of Public Citizen's Critical Mass Energy Project in Washington, D.C. Hauter and others argue that utility shareholders should be responsible for paying off utility company debts. Officials at PG&E defend the bond issue by arguing that stranded costs were originally incurred in part because of the federal government's past requirement that utilities purchase alternative energy. To make the stranded cost issue politically palatable, ratepayers were given a 10 percent reduction on their electricity bills. Reduced utility bills supposedly have been made possible by savings associated with the lower interest rates on the state-issued utility bonds. But customers' bills could only end up dropping anywhere from 1¸ percent to 2¸ percent after repayment for bad investments is factored in, according to Elena Schmid, director of the California Public Utility Commission's Office of Ratepayer Advocates.Moreover, Dian Grueneich of Grueneich Resource Advocates says that electricity prices -- which run an average of 50 percent higher in California than the rest of the nation -- were about to decrease anyway. That's because many of the utilities' supply contracts were about to expire, with the three companies projecting rate decreases of 15 to 20 percent by the year 2000 due to declining costs of generating new electricity."In my mind, we gave up a clear certainty of lower rates in the near termfor the possibility of greater rate decreases four or five years from now,"says Grueneich, whose consulting firm specializes in energy and environmental issues. "Who knows if this will happen. I think it might, but it's a risk."Significant reductions in utility rates will depend on a vigorously competitive marketplace, say consumer advocates.But there are signs that such competition may not materialize. For example, the added stranded-cost surcharge that consumers will find on their bills regardless of which company they select for their electricity, already has discouraged some companies from competing for utility business. Enron, based in Texas, recently canceled plans to build a $60 million electricity-producing wind farm in the state because it would not be able to compete for customers after adding the surcharges to its bills. While AB1890 includes various environmental incentives, some of the plan's critics wonder whether the benefits are substantial enough to justify going ahead with the deregulation scheme. The new law provides $872 million for conservation and energy efficiency efforts and another $540 million in subsidies to boost the renewable energy industry. But lawmakers voted to end these programs after four years. "The concept is that by then, these services will be provided by the privatemarketplace, but we don't know if that's true," says Hauter. In an effort to qualify a competing utility plan for the November ballot, the group behind the proposed Utility Rate Reduction and Reform Act Initiative has sent out more than 1,000 signature gatherers -- most of whom are volunteers -- while also posting petitions on a Web site (www.nonukebailout.com). Faced with a mid-April deadline, the group is trying to collect some 650,000 signatures in order to ensure the 420,000 valid names needed to send the measure to the voters. According to Rosenfield, the state Legislative Analyst's office waited until the eleventh hour to write the title and summary for the initiative, leaving his group only ten weeks to gather signatures. Rosenfield says petition campaigns normally have five months to collect signatures for ballot measures.The effort to qualify the utility measure has been complicated further by the refusal of several signature-gathering firms to handle the issue, according to Consumer Union's Snyder. He also says that some signature gatherers have been approached by utility officials with offers to pay them not to collect names. Each of the Big Three utilities deny any role in such tactics.The California Chamber of Commerce, meanwhile, has formed a coalition of business interests to defeat the initiative, if it qualifies for the ballot. In forming Californians for Affordable and Reliable Electric Services, Chamber president Allan Zaremberg says the initiative "would eliminate the ability to have competition for the generation of electricity."Although consumer groups expected opposition from business interests, they did not count on resistance from the National Resources Defense Council, a prominent environmental group that supports AB 1890. Critics of the deregulation plan point to ties between NRDC and Southern California Edison -- John Bryson, Edison's president, is a founding member of the environmental group. NRDC officials say the connection has no bearing on the group's position on utility deregulation. "For first time, you will have the opportunity to decide where your electricity payment goes," says Ralph Cavanagh, NRDC's energy program director. "If you don't want to send it to nuclear suppliers, you have that option. If you'd rather use renewable energy, you can do that. While we don't suggest that California's plan is the answer to all world problems, we think it's a positive thing." Most of California's nearly 30 municipally owned utility districts are taking a wait-and-see approach toward deregulation. These districts represent 25 percent of the state's consumers. Under AB 1890, such districts are not required to join the newly competitive marketplace. But the Legislature also offered a carrot to induce them to do so. If they do, the districts will be allowed to pass on their own stranded costs to their customers. "All utilities are sitting on these stranded costs," says Jan Schori, general manager of the Sacramento Municipal Utility District.Shori has put together a business plan that promises a five-year freeze in utility rates and a commitment to paying off much of the district's existing debt by 2002. To pave the way for full market competition by that year, district officials in July approved a pilot program that begins with competition in the generation of electricity. At the moment, four companies are vying for business, but they are targeting larger businesses rather than residential consumers. "Because the costs of this plan are pretty high, the competitors are targeting the areas where there is potentially the most profit," says Shori."That's not the small consumers." Such targeting, he adds, also might reflect a general wariness among individual consumers toward deregulation.Hauter, with Public Citizen, says there's good reason for such caution. "If you look at the effects of deregulation in other industries, it's been a disaster for the small consumer," she says. "With natural gas, there was a reduction in prices, but not for most residential consumers. In the airline industry, there are lower prices in some markets if you buy far enough in advance, but safety and service are problems. In telecommunications, long distance prices went down, but not local prices. The bottom line is deregulation benefits larger [business] consumers."