To regulate or not to regulate

Unprecedented energy prices have many politicians, utilities and ratepayer groups mounting increasing pressure to re-regulate California’s deregulated electricity market, which is still in its infancy.

More and more voices are calling for government intervention to rein in wholesale rates driven up by tight supplies, escalating demand and unfettered capitalism. Public utilities are now openly calling for re-regulation, while private utilities are pushing for new rules to the power game.

Ironically, one of the loudest calls for government involvement comes from Sen. Steve Peace, D-Chula Vista, the brains and muscle behind the state’s 1996 law deregulating the energy industry.

Peace has pushed for multiple investigations of the market and recently urged the federal agency responsible for wholesale power prices generated inside and outside California to grab the Golden State’s electric bull by the horns.

“Clearly, no reasonable, disinterested party would conclude that the prices we have seen in the West are the result of a competitive market,” he recently wrote in an 11-page letter to the Federal Energy Regulatory Commission (FERC), detailing how he thinks it should investigate the “market dysfunction.” Peace added that he supports reliance on markets but knows “competition requires a fair and a vigilant referee.”

One group that wants more than a vigilant referee is a coalition of public power agencies, the California Municipal Utilities Association (CMUA). It recently filed a complaint with FERC, urging it to base the price of energy on the cost of generation, accompanied by a fixed rate of return—the way it was pre-deregulation. The association represents 26 of the 30 public utilities in the state, including the Sacramento Municipal Utility District, which together provide nearly 30 percent of the electricity sold in California.

The unprecedented wholesale power price tag motivated Pacific Gas and Electric and Southern California Edison, both investor-owned utilities operating under a rate freeze, to push to have ratepayers pick up the tab for their higher costs.

Earlier this month, PG&E filed an emergency motion with the California Public Utilities Commission (CPUC) to allow it to charge its customers $2.2 billion in this year’s increased energy costs. Edison petitioned to recover $1.97 billion. If successful, this could defeat the purpose of the rate freeze, the provision in the deregulation statute protecting customers from price spikes.

The utilities, however, aren’t counting billions they made from selling power from their dams and other generation assets into the wholesale market and from recovery of their amorphous “stranded costs,” such as bad investments in nuclear plants recouped from ratepayers.

Yet as the utilities cry poor, the Utility Reform Network (TURN) this week highlighted the fact that PG&E raked in $8.3 billion and Edison pulled in $9.3 billion during the switch to deregulation. “Their profits are overwhelming,” said Matt Freedman, TURN’s attorney.

After analyzing the utilities’ financial statements filed with the CPUC, TURN concluded a hefty chuck of the profit came from power sales and accelerated recovery of stranded costs.

PG&E, which has a vast hydropower network along the Sierra Nevada rivers, Diablo Canyon nuclear plant and other power assets, raked in $560 million in net revenues in August alone, TURN said.

PG&E’s John Tremayne notes that his company’s stock price and bond rating have both dropped since the deregulation crisis hit over the summer, hurting its ability to simply absorb higher wholesale costs. Besides, he said customers should pay for what electricity actually costs the provider: “We turn around and sell [energy] for the price that we purchase it for.”

While the private utilities are trying to maximize their shareholders’ profits, public power agencies that buy electricity on the open market are trying to protect their ratepayers, who are also their shareholders, from footing the bill for higher energy costs. SMUD, for example, which buys between 25 percent and 35 percent of its supply on the open market, is absorbing $68 million in higher energy prices.

CMUA’s fix for protecting consumers includes not only prohibiting the market from dictating the price of power, but also replacing the semi-private California Independent System Operator (Cal-ISO), which manages the ebb and flow on electricity across the transmission grid, with a public, nonprofit agency.

CMUA is pushing for a new agency to operate as well as own the transmission grid. This “transco” would be subject to open meeting and public information laws and would not be involved in power sales. The bulk of the transmission network is owned by the utilities and managed by Cal-ISO, and the latter is involved in some power sales.

“ISO’s infrastructure was set up to deal with a world that doesn’t exist and does not make any provisions for public power agencies utilities,” said Jerry Jordan, CMUA executive director.

Cal-ISO head Terry Winter sees the “transco” proposal as nothing more than “the grass is greener on the other side of the fence,” mentality. Winter said for starters, getting private utilities to sell their lines would be an uphill battle and a greater challenging would be agreeing on a price.

If a new agency were created, it would be via legislation. A bill on the matter—as well as more radical measures to re-regulate the market—may be introduced when the legislative session begins in January.

Jordan said something needs to be done to protect consumers before next summer, when rates are higher and rate caps could be lifted, exposing many more Californians to the full impact of deregulation: "There must be a backstop mandate to protect small consumers and retail business."