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July - Duke Energy Employee Advocate

Deregulation - August 2000

"The Love of Money is the Root of ALL Evil"

Power Woes
Associated Press - August 29, 2000

A rescue plan for San Diego's strapped utility customers moved through the Legislature on Wednesday night, offering a $150 million bailout, lower rates and a speedup in power plant construction.

Two parts of the three-piece legislative package were sent to Gov. Gray Davis, who has said he will sign the legislation only if the third bill _ still in the Senate _ reaches his desk. That bill would accelerate power plant licensing. The voting began after lawmakers met through the day seeking a compromise on the issue that has dominated the final weeks of the 2000 legislative session. The Senate, first to act, approved the $150 million proposal, which would defray ratepayers' hikes if increases exceed 10 percent over the previous month. The Assembly later sent the bill by Assemblywoman Denise Ducheny, D-San Diego, to the governor on a 59-8 vote.

The Assembly sent Davis the core of the relief package, a bill to lower utility rates by averaging costs through 2003, which would reduce the monthly rate $68, down from the current $120.

The governor said the rate-cap bill sponsored by Assemblywoman Susan Davis, D-San Diego, ``has many positive aspects,'' calling it ``relief for overburdened ratepayers.''

But moments after the vote, a major consumer group denounced the proposal and said it is considering a ballot initiative in 2002 to impose controls over the electrical power industry that were removed by California's 1996 deregulation law.

``This is an awful bailout. It basically lets the taxpayers on the hook for $150 million, and if that's not enough the ratepayers will pay the rest. It bails out SDG&E after the 2002 elections. This is a ghost of a plan,'' said Jamie Court of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. Court said the foundation is ``seriously exploring a ballot initiative to re-regulate the electrical industry in 2002.''

The bill's supporters said the $150 million rescue would be used to offset a potential balloon payment, while critics labeled it a government bailout of a rapacious market operators.

``This is one of the most complex issues we will have addressed during the entire two years of this Legislature,'' said Assemblyman Tom McClintock, R-Northridge. ``But we don't know what's in the package. We don't even have an analysis. We do know it will roll rates back until 48 days after the 2002 elections.''

Assemblywoman Davis urged lawmakers to vote for it, calling it a necessary stop-gap to help San Diegans through a difficult period. ``We've got to stop the bleeding,'' she said.

The legislative package targets utility bills in San Diego and southern Orange counties, which are served by San Diego Gas and Electric Co.

The single bill remaining, which would expedite new power plants by cutting to six months the usual one-year time for review by the California Energy Commission, was scheduled for votes Thuresday.

Currently, 13 power plants are under review in California. Earlier, a proposed bill to cushion California's largest utilities, Pacific Gas and Electric Co. and Southern California Edison Co., from the full impacts of deregulation was scrapped.

By midday, it was transformed into a legislative resolution directed at the Public Utilities Commission.

An early draft of the document reviewed by The Associated Press asks the PUC to investigate potential excesses in the wholesale power market, seeks investigative help from the Federal Energy Regulatory Commission, and urges the commission to take an active, watchdog role in policing the market. Both utilities, in a transition period to full deregulation, have rate freezes in effect. That means that, unlike SDG&E, they cannot pass on the increased costs of wholesale power to their retail customers.

Both companies are engaging in short-term borrowing to meet their costs. Each are losing an estimated $15 million to $20 million daily, and since the end of April each company has lost about $1.1 billion to $1.5 billion. The full extent of the shortfalls are expected to be detailed next month in the companies' quarterly filings to the Securities and Exchange Commission. Meanwhile, Wall Street, sensing the fiscal hemorrhaging of two major California utilities, monitored the negotiations.

``We're looking at whether the creditors are going to get their money back,'' said David Wyss, chief financial economist for Standard and Poor's.

``Generally, utilities are highly rated, but their ratings have been slipping after deregulation. Obviously, we're worried about anything in the political process that makes it uncertain,'' he said.

He said that at the heart of the problem is an adequate power supply. ``This is not a price problem. The only way it is going to be solved is if you have more generating capacity,'' Wyss said.

A year after deregulation, few have switched electricity suppliers
Associated Press - By J.J. THOMPSON - August 29, 2000

New Jersey consumers have been able to choose their electricity suppliers for over a year, but only about 2 percent of the state's residential customers have made a change.

About 71,000 of the 3.1 million residential customers have chosen a different supplier, according to the state Board of Public Utilities.

The numbers were disappointing for the Division of the Ratepayer Advocate. ``We would have hoped more customers would have switched to new suppliers at this point,'' said managing attorney Greg Eisenstark. ``Things have gone more slowly than we hoped for.''

In February 1999, Gov. Christie Whitman signed the energy deregulation law, claiming it would trigger competition as out-of-state companies vied for New Jersey's consumers. They have been able to choose their electricity suppliers since last August. Choice for natural gas suppliers wasn't available until this year.

The Utility Education Commission, which educates the public about deregulation, does see reason for hope. Eighty percent of the general population has heard about deregulation, according to the utilities board.

``This is a market that's going to take time to mature,'' commission chairman Fred Abbate said. ``To me, I'm happy with the way things are going. I think we've got good numbers in terms of consumer awareness.''

He said there should be more consumer interest in switching companies in the next year.

Eisenstark said while the rate cuts included in the deregulation bill are good for consumers, it may actually be discouraging them from shopping around. The law mandated a 5 percent reduction in 1999 and second cut of 5 percent to be phased in over the following three years.

The number of competitors is another concern. Nineteen companies are licensed to supply electricity in the state, and the number of choices customers have may vary from five to 17, depending on where they live.

``Part of the problem is that some of the suppliers are only interested in serving larger customers,'' Eisenstark said. ``Most residents only have a choice of four or five suppliers.''

Wholesale electricity prices shot up over the last year as New Jersey was trying to offer retail choice. Eisenstark said that makes it difficult for suppliers to enter a new market and offer rates lower than existing utilities.

A decision by the Board of Public Utilities to allow consumers to change their electric and natural gas suppliers over the Internet beginning Sept. 1 may help attract more suppliers because of the reduced marketing costs. Eisenstark said it could also increase the number of customers who sign up, although it's only available to those who have a computer and Internet access.

But John Paul Guinan from the New Jersey Public Interest Group said the system favors commercial power users and the group has seen little consumer interest in changing suppliers.

``As soon as we got out of the deregulation gate we saw our big industrial users head for the West,'' he said. ''(Residential customers) are either unaware or misinformed or realize they're dealing with little in rate reductions.'' Most of the customers that did take action switched from PSE&G. While the number fluctuates, spokeswoman Kathleen Ellis said over 50,000 had switched.

Electric Deregulation, State officials still grappling with deregulation
Associated Press - By SCOTT MOONEYHAM - August 27, 2000

State lawmakers admit it's a hard sell: let power customers in 90 percent of North Carolina help pay off $5.5 billion in debt racked up by the remaining 10 percent, with vague promises of future rate relief.

Yet such a proposal, in one form or another, is at the heart of the electricity deregulation debate in North Carolina.

To deregulate the power industry, allowing competition and ending monopolies, lawmakers know they will have to deal with the $5.5 billion debt hanging over 51 cities that run their own power systems. Officials in some of those cities also see deregulation as an opportunity to get out from under the huge debt, which represents more than a third of the state's public debt liability.

How to balance the concerns of the municipalities, private power companies, businesses looking for lower electricity rates and consumers has been a frustrating experience for lawmakers. It's complicated by legitimate questions over whether deregulation, even without the debt issue, will help lower residential rates.

``I thought, going into this thing three years ago, there would be some common ground,'' said Sen. David Hoyle, D-Gaston, co-chairman of a legislative commission studying the issue. ``But I'll be real honest with you, I haven't found it. Everybody's got to put something on the table. That's what we've got to find.''

The commission headed by Hoyle and Rep. Ronnie Smith, D-Carteret, will meet again next month in hopes of putting a deregulation plan before the Legislature next year.

The commission aims to implement some form of deregulation by 2006.

But Hoyle and Smith say any plan seen as a taxpayer or rate payer bailout of the municipal systems will have little chance of success in the Legislature. Both are frustrated that officials in the 51 cities seem to have little appreciation for that political reality.

Still, they admit the municipalities can't shoulder all of the blame.

The debt is largely the result of a decision by the 51 cities to invest in nuclear power plants built by Carolina Power & Light Co. and Duke Power back in the 1970s. The cities formed two municipal power agencies, issued bonds and bought pieces of the power generated by the nuclear power plants. The cities looked at the investments as a way to control costs. Instead, construction overruns had the opposite effect, forcing the cities to borrow more money. The debt grew as large as $6.5 billion, but some has been paid off.

Smith and other critics point out the municipalities have raided the revenue streams of their power systems to the tune of more than $700 million over the past decade. Those raids have helped hold down property taxes in those cities, while delaying payment on the debt.

Meanwhile, residents of those cities typically pay 20 to 30 percent more for electricity than customers of Duke and CP&L, the state's largest private power providers.

Duke and CP&L had proposed taking over the municipal systems and their debt, but a number of the municipalities want to keep their power distribution systems.

A proposal accepted by the cities, which formed a lobbying group called ElectriCities, would instead allow them to get out of the power generation business but keep the distribution systems.

Under that plan, a municipality that wanted to keep its distribution system would contribute an amount equal to its value toward paying off the debt. The remainder of the debt, about $3 billion, would be paid through a $2 monthly surcharge to customers of Duke, CP&L and municipal power systems. Rates would be frozen until 2005.

Smith and other lawmakers have questioned whether the $2 surcharge will fly. Alice Garland, a lobbyist for ElectriCities, says the commission ought to give it a chance before the full Legislature.

``I prefer to continue to try for this compromise position until we get a reading from the Legislature that it will not work,'' Garland said. ``Our board of directors is going to stand by our position, because it really hasn't had any serious discussion yet.''

A more recent proposal by State Treasurer Harlan Boyles would simply have the state take over the 51 municipal systems, liquidating their assets, assuming the remaining debt and levying a tax on electricity consumption to pay it off.

The proposal by Boyles, who is retiring at the end of the year, recognizes the debt situation could eventually turn into a financial crisis for the entire state. The municipal power bonds issued to finance the debt, if they are downgraded from investment grade, could potentially threaten the state's triple-A bond rating.

Some observers suggest such a move would force the state to step in to head off lawsuits by the bond insurers and protect the municipalities, as well as its own bond rating.

Smith says it is the lack of recognition of the seriousness of the problem that most concerns him.

``I think they (the municipalities) are playing a very deliberate game in saying they can make it on their own,'' Smith said. ``I don't think they can make it on their own. I would like to see them show a little more humbleness.''

The commission, meanwhile, faces pressure from industry groups which expect solid proposals on deregulating power, reducing rates and helping them to be more competitive.

Horror stories in California, where residents in the San Diego area have seen rates double since deregulation took effect in May, have abated some of that pressure.

Hoyle says it is clear that Congress and industry will eventually demand a deregulated energy market.

``Everything that I know of that was a monopoly _ airplanes, telephone _ everything that I know of other than energy, has been deregulated,'' Hoyle said. ``We feel like ultimately there will be deregulation. The federal government will mandate it.''

A shocking backlash: Power deregulation under attack
The Economist - August 26, 2000

Tassie Dykstra is mad as hell, and California's big power producers had better pay attention. That may seem odd, for she is an 85-year-old grandmother who lives peaceably by the San Diego shore. During the five decades that she has lived in the state, she has given nary a passing thought to electricity supply. That was before deregulation of the state's electricity industry sent her bill shooting through the roof this summer. Ask her about it, and she will provide an impassioned and informed analysis of the pitfalls of deregulation. She also echoes the rallying cry of the current backlash: "You just can't make such a drastic change overnight!"

Californians are up in arms because their path-breaking efforts to deregulate their power markets, beginning in 1996, seem to have gone awry. About half of America's states have followed California's lead and introduced liberalisation; others are thinking about it. All are watching California's wrenching experience with great interest. None of the promised benefits of cheaper power, more reliable supply or innovative services have yet materialised in the state, but unfamiliar devils such as price surges and brown-outs have. Since June, wholesale prices for electricity have increased by 270% over last year. San Diego's SDG&E happens to be the first Californian utility whose retail market has been opened up to free pricing: on average, electricity bills there have doubled. What will happen when the rest of the state is freed in March 2002?

That question gives nightmares to California's politicians and regulators, who are scrambling for ways to appease angry voters. So far they have produced only ad hoc fixes that may do more harm than good. On August 11th, for example, utility regulators imposed a partial rate cap on bills for San Diegans: residential customers who use only a small amount of electricity (up to 500 kW-hours) can now be charged no more than Dollars 68 a month. But the relief will be illusory: when the rate cap ends in two years' time, consumers may face unpaid bills worth tens of millions of dollars. On August 23rd, President Clinton weighed in with federal subsidies to low-income families and small businesses that face higher electricity bills in southern California, but these too will be temporary.

Stephen Littlechild, formerly Britain's electricity regulator, argues in a forthcoming paper that Californian officials have needlessly inhibited the development of retail competition. He points to the fact that regulators have burdened new entrants with part of the cost of "stranded assets" built by incumbents; so these newcomers have not been able to compete effectively on price. Because customers did not realise that retail prices would soon fluctuate, few understood the benefits of fixed-price or "energy service" contracts offered by newcomers. As a result, few Californians (only around 2%) have switched retail suppliers, far fewer than in states such as Pennsylvania; in Britain the figure tops 25%.

This sort of muddled half-measure is typical of how power liberalisation has been carried out in California. It also explains why it is wrong for Californians to blame the whole notion of deregulation for their current woes. What is really at fault is the flawed model that California's politicians embraced. Inspired by Britain's successful, relatively smooth experience of the past decade, they decided in 1996 to forge ahead with a framework that, on the surface, appears similar. Stephen Baum, the boss of Sempra, which owns SDG&E, says that "California embraced competition as a religion and the English model as our guide."

The problem is that reformers rushed ahead without reflecting on the differences between California and Britain in such crucial matters as reserve capacity. In particular, California's regulators overlooked the boom in electricity demand in recent years. One person who forecast the current crisis is Mark Bernstein of the RAND Corporation, a think-tank. He has argued for some time that economic growth and changing demographics would set the state's electricity demand surging and prompt a crisis. But the Californian government's aged economic models underestimated the size of this surge.

California's reformers were also lulled into complacency by the apparent ease with which other markets had liberalised. Europe's deregulation, early on in Britain and Scandinavia and more recently across the rest of the European Union, has not resulted in reliability problems. But credit for that belongs not to European models of reform, but rather to excess capacity. Europe's top-heavy, state-dominated power sector has tended to "gold-plate" its assets (through higher tariffs paid by captive customers).

In contrast, California's supply situation has been tight and worsening. For this, state officials deserve full blame, for they have found plenty of ways to discourage firms from building new power plants. The state has long had the toughest environmental laws in America; these have made power generation unattractive. Making this worse was the murky and politicised way in which deregulation happened. Thanks to such uncertainty, no new generating plants have been built in the state for a decade. Larry Makovich of Cambridge Energy Research Associates (CERA), a consultancy, argues that California's regulators made another mistake that acted as a disincentive to generators. Britain's "pool pricing" mechanism had a two-tiered structure in which power suppliers were paid not only a sum based on the short-term marginal cost of supply, but also an explicit top-up to encourage them to create reserve capacity. The desirability of this subsidy in an oversupplied market is debatable (indeed, Britain is now in the midst of a transition to a new arrangement that does not offer such a payment). California decided not to adopt that bit of the British model. Mr Makovich argues that, by not providing a top-up, regulators worsened the shortfall in supply.

Worse yet, they are tinkering with the reform process in ways that are both arbitrary and unhelpful. Shocked that the liberalised market for wholesale power responded to this summer's squeeze by - surprise, surprise - raising prices, officials have now introduced price caps. This supposedly temporary measure has perverse effects. The main reason why prices rocketed is that there is not enough supply available; the obvious remedy is to provide incentives for new supply. But caps discourage new generation.

The better solution is to let market forces respond. When America's mid-western states suffered price spikes and outages in recent summers, regulators did not introduce price caps. Firms are now swiftly building new plants; so far, the crisis has not recurred. Richard Priory, the boss of Duke Energy , a big electricity firm, is keen to do the same for California, but the regulatory approval process is simply too slow. His firm alone has projects worth some 1,300 megawatts caught in the bureaucratic mire. He draws this conclusion from his firm's experience in liberalising markets around the world: "If you deregulate in a tight market, the market will respond with new supply - but you must move fast on the generation backlog."

Perhaps the most profound muddle in the design of California's new regime is over the role of regulators. Sometimes, as with price caps, they meddle arbitrarily. They also cling to old suspicions: San Diego's retail prices have shot up in part because regulators discouraged SDG&E from hedging its risk by using derivatives. And at other times, officials naively expect the market to sort out the problems of transition by itself. Dallas Burtraw of Resources for the Future, a think-tank, believes that California is guilty of regulatory failure: "Regulators have pulled out before institutions have matured. They have created a vacuum."

Michal Moore of the California Energy Commission, one of the state's top regulatory bodies, puts it in even stronger terms: "We have one foot in the old regulated world, one foot in the market, and a legislature that keeps changing its mind...there is simply no clear path forward." That will come as little comfort to the ordinary folk such as Mrs Dykstra who must pay the price.

Simple Steps May Ease Self-Inflicted Electricity Woes
L. A. Times - By JAMES FLANIGAN - August 25, 2000

Let's be clear, the fact that the state botched the job of deregulation to begin with is one reason California's electricity market is such a mess.

But failure to build a single new power plant in the state even as California's economy expanded its use of electricity is the basic cause of today's shortages and soaring prices in San Diego, Orange County and other areas.

Still, some simple steps can be taken by regulators, legislators and Gov. Gray Davis to provide immediate relief.

The state's major utilities should be free to buy power wherever they can get it. They should not have to buy exclusively from the Power Exchange, the Pasadena-based power pool that was set up by the 1998 deregulation to achieve auction-based prices for roughly 80% of the state's electricity.

Approval should be expedited for adding smaller generating plants that supply power at times of peak demand. That could alleviate a tight supply-demand situation over the next year or two while larger plants are built.

Long term, the state needs to speed up the approval process for building new electricity plants. The state also should force utilities to invest in the still-regulated system of power transmission lines, which now has weaknesses in the San Diego and San Francisco areas.

Perhaps the most glaring fact about California's electricity problem is how few companies have stepped up to supply power to this enormous market, the nation's biggest. Only 15 or so suppliers, including federal agencies, the state's own utilities, municipal companies and private generating firms, supply power to California's system.

By contrast, Pennsylvania, which has an electricity market less than 12% the size of California's, has 130 separate suppliers of electricity today, reports John Quain, chairman of that state's Public Utility Commission.

It's no coincidence that Pennsylvania has seen monthly electric bills drop 3% on average since deregulation. "It's worked out terrifically," Quain says.

What did California do wrong? It allowed the state's major utilities--Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric--to recover 100% of their unrecovered or "stranded" costs for nuclear and hydroelectric plants and for past power purchase schemes mandated by the California legislature to encourage alternative sources of energy. Then California's legislators told the utilities to sell their conventional power plants to private generating companies, all of which would sell their power to a central Power Exchange.

The California scheme was flawed, at once over-regulated and yet commercially clueless in not foreseeing trouble from a single power pool fed by only a handful of suppliers.

How did Pennsylvania do it? It allowed the state's utilities to recover no more than 67% of their stranded costs for nuclear plants--reasoning that company shareholders should accept some of the risk of their investments. And rather than set up a central power exchange, the state allowed its utilities and newcomers to the state's electric system to compete for business. Competition, after all, is what deregulation is supposed to encourage. And competition is not happening in California.

It should be noted that the summer is relatively cool in the East this year and extraordinarily hot throughout the West. All the Western states are suffering electricity problems. That's another reason for California's trouble.

Normally, 28% of California's electricity comes from U.S. and Canadian government systems and from utilities in Oregon and Washington, Nevada and Arizona. But this year, because of lower hydroelectric supplies and higher demand from booming economies in those other states, power for California is in shorter supply and more expensive when the state can get it. Now there are accusations that some suppliers to California have taken advantage of their market leverage to extract premium prices for power.

There's nothing illegal in angling for a better price or in using futures markets and other trading techniques, as some generators may have done. If any stepped over the line to illegal collusion, federal and other investigations will determine the facts.

But who gave the generators the market leverage to exploit us? The California regulators, legislators and utilities did. Told to sell their generating plants in 1998, the utilities sold dozens of plants in package deals of two and three to single buyers. They received premium prices from buyers such as AES Corp., Duke Energy, Southern Co. Reliant Energy, Dynegy and NRG. The premiums were paid for the market leverage that multiple plants afforded the buyers.

Nobody in the utilities reckoned that they were handing market leverage to potential commercial adversaries. Nobody in the Legislature or the regulatory staffs reckoned that the central Power Exchange could be held up by market leverage.

As outsiders often say about Californians: "Maybe it's the sunshine makes them slow."

New England Utilities Demand Federal Protection from Price Spike
The Boston Globe - August 24, 2000

Four months after a freak May heat wave sent New England wholesale electric prices through the roof, Maine regulators and a Connecticut utility are demanding federal action to stop what they call a potential $100 million windfall for generating companies at the expense of consumers.

While it lasted just four hours, the May 8 price spike that sent wholesale electric spot-market prices up to 200 times normal levels is continuing to send shock waves through the local power industry.

The agency that runs New England's power grid, which had knocked down spot-market prices more than price retroactively, saying it reflected administrative failures at best and market manipulation at worst.

If left to stand, up to $100 million in windfall profits could be collected by power generators and resellers, a cost that ultimately would be passed on to consumers at about $4 or $5 for every person in New England, and considerably more for many business customers.

Some electric industry officials also contend that left unchanged, the price spike will scare off potential power brokers from entering the New England market, dampening the development of stronger competition for residential and business electric service.

The price spike occurred on an unseasonable hot afternoon when power demand in the six states suddenly shot up and several New England power plants were down for pre-summer service.

That forced ISO-New England, the Holyoke agency that runs the power grid and wholesale markets, to accept a bid of $6,000 for emergency power, which set the price paid to everyone selling over 18,000 megawatts to the grid during the four-hour period.

In its filing, United Illuminating, based in New Haven, said: "The extraordinary price spikes ... on May 8 constitute unjust and unreasonable pricing that, if not disregarded in setting the energy clearing prices, would result in a transfer of approximately $100 million from electricity customers to producers without any redeeming market or social benefit.

"Permitting such punitive prices to stand would create a public perception that regional entities such as ISO-NE, and also the commission, are either unable or unwilling to ensure that prices for energy are just and reasonable," the utility said.

Both UI and Maine's utilities commission faulted the ISO for mismanaging the market and urged federal regulators to retroactively order a much lower price for those four hours. NStar, the parent company of Boston Edison and Commonwealth Electric, petitioned for price caps in the wholesale market. Ellen Foley, a spokeswoman for the ISO, said yesterday, "We are confident that the records show that the ISO properly interpreted and applied the market rules."

Neal B. Costello, general counsel for the Competitive Power Coalition, which represents several major New England generators, said, "The ISO has already looked into this and concluded it was the right price."

Costello said UI and Maine utilities such as Bangor Hydro and Central Maine Power "are looking for other entities to bail them out of their own arrogance and their own incompetence" by failing to line up adequate power contracts to protect themselves against foreseeable price spikes.

California Spur Move; Emergency Loans Planned
The Wall Street Journal - By Rebecca Smith and John J. Fialka - August 23, 2000

The Clinton Administration and federal energy regulators stepped up efforts to respond to a politically disastrous rise in California electricity prices, threatening to go as far as re-regulating some prices if they determine that the free-market experiment in the state has failed.

The moves by federal authorities come as California regulators and lawmakers scramble to come up with an expedient solution to high power prices in the San Diego area, where monthly bills have in some cases quadrupled since last summer. In a 21-page order issued yesterday, the Federal Energy Regulatory Commission said that under the Federal Power Act it can intervene to limit the prices charged by generators to the California market -- if it determines the prices they are charging aren't "just and reasonable," and the market is not "workably competitive."

The order accompanied an upgrade of the FERC's effort from a staff probe to a formal investigation, requested by President Clinton, who also yesterday extended $2.6 million in federal emergency loans to low-income residents in the San Diego area to help pay their electric bills.

"There is a crisis of confidence in California wholesale electricity markets that threatens to erode the political consensus necessary to sustain a market-based approach to regulation, "William Massey, one of four FERC commissioners, said yesterday in an opinion attached to the order. "In these circumstances, the FERC must act forcefully and decisively to . . . insist that jurisdictional wholesale markets produce consumer benefits and just and reasonable rates."

As prices have risen, power generators such as Duke Energy Co., the local utility, San Diego Gas & Electric Co. and public officials have all pointed the finger at one another for what appears to be a badly flawed market. California governor Gray Davis, who is pushing for local legislation that would lower bills and accelerate power-plant construction, yesterday said "out-of-state generators" were most responsible for "bringing San Diego residents to their knees."

FERC's action yesterday originated in a complaint filed Aug. 2 by San Diego Gas & Electric Co, a unit of Sempra Energy, the utility whose customers have riased the most outrage over the rate rises.

The utility sold off its plants and now buys all the power its customers use out of a state-sanctioned auction, passing those market costs directly through to its customers.

Steve Baum, Sempra Energy chairman, said FERC's action is a warning to generators "that the prices they've been receiving are now at risk." He expects FERC to eventually issue a ruling that California's market isn't competitive, setting the stage for a possible return to cost-based rates in periods of high demand. Prior to deregulation in 1998, the rates utilities charged for electricity were based on their underlying cost. Deregulation allowed them to charge whatever the market would bear.

Mr. Clinton said the the FERC investigation would allow Washington to "better understand" what is happening in the California market so the government can protect consumers there and in other deregulated states. While politicians and regulators seek solutions, wholesale power prices in California are becoming more aberrant.

Even on days when consumption and prices normally drop, such as Sundays, prices have been stubbornly high this summer. For example, the auction price of electricity to be consumed at 10 p.m. last Sunday was $125.48 per megawatt, or more than four times the price such power commanded on the third Sunday of August in 1999. The markup is especially noteworthy because actual demand on that day was 12% lower than on the comparable day a year earlier.

"A number of people are looking at the high prices trying to figure out what's going on," says Jesus Arredondo, spokesman for the state-sanctioned entity that runs the state's day-ahead energy auction, the California Power Exchange in Pasadena, Calif.

These prices have remained high despite the best efforts of public officials. For instance, the organization that runs the state's electric grid and is responsible for keeping consumers constantly supplied with electricity has reduced the maximum price it will pay for electricity this summer to $250 per megawatt hour from $750. While this action has capped peak prices, it has also caused an increase in the overall number of hours in which prices are abnormally high.

Take yesterday for instance. Prices for power in California never dropped below $108 per megawatt hour, even for power contracted for delivery in the dead of night, and the hourly price was at or above $200 in 13 of 24 hours despite only moderately high demand.

California's problems are likely to step up pressure on Congress to pass omnibus legislation which would provide uniform national rules for deregulated state energy markets and make more efficient the interstate power-transmission system, Mr. Clinton said yesterday.

The administration has pushed for such a measure but the House Commerce Committee, which has jurisdiction over the legislation, still appears deadlocked on the details. It plans to hold a hearing in California on electricity-market conditions there next month.

Electricity Audit
Associated Press - August 22, 2000

Two agencies created by the 1996 electricity deregulation law to run California's power market will be audited by the state.

The Joint Legislative Audit Committee approved an audit request Tuesday by Sen. Steve Peace, D-El Cajon, one of the backers of the deregulation law.

That law created the California Power Exchange in Pasadena and the Independent System Operator in Folsom to run the state's $20 billion electrical power industry. Both are nonprofit corporations.

The Power Exchange auctions blocks of power and the ISO runs the state's power grid, transferring the power from where it is generated to where it is needed. Deregulation is being questioned because of huge rate hikes and continuing power shortages that have been hitting the state this summer, particularly in the San Diego area.

Deregulation, which is being phased in from south to north in California, was supposed to lower prices through increased competition. However, demand has outstripped electricity supplies due to population increases and the high-tech economy.

The audit will examine whether the wholesale electricity prices being produced through the Power Exchange and the ISO are competitive and whether the two agencies should continue separately or be merged, Peace said.

ISO general counsel Charles Robinson said the agency does not oppose the audit but noted that it is already being investigated by the Public Utilities Commission, the attorney general and the Federal Energy Regulatory Commission.

``This is not an investigation; it's an audit,'' said Peace. He said it would look at the mechanics of the two agencies and make recommendations for changes, if needed.

``It's not going in to try to find out if somebody did something wrong,'' he added.

Asked when the audit should be finished, Peace joked, ``Friday would be good.'' State Auditor Elaine Howle said it would probably take until February.

L. A. Times - August 14, 2000

Green Party presidential candidate Ralph Nader calls deregulation in California a "bipartisan Sacramento boondoggle" in a commentary published in the Los Angeles Times.

He criticizes officials with the Democratic National Committee for dining with Sempra Energy officials last night while San Diego residents pay dramatically high electricity rates. Nader writes: "The Democratic Party of yore would have stood up for the strapped ratepayer rather than with utility executives, but the modern corporate Democrats promoted the 1996 measure and are now dining out with the energy barons."

He also claims a free market has never materialized in the state "because the handful of energy companies that control the power supply have no incentive to alter their price-gouging behavior." He adds: "These companies maximize their profits by restraining the supply of electricity. This is the economics of virtual cartels"

Orange County Register - August 8, 2000

A consumer-advocacy organization intent on helping consumers who are struggling to pay skyrocketing electric bills have launched a TV advertising campaign in the San Diego area featuring a local politician urging a "payment slowdown", the Orange County Register reports.

The 30-second ad, featuring Republican Dianne Jacob, chairman of the San Diego County Board of Supervisors, exhorts San Diego Gas & Electric customers to take part in the protest. The ad, created and paid for by the Utility Consumers Reform Network, comes after state regulators refused a reduction in electricity rates in the San Diego area. The group is encouraging customers to pay only what they paid last year -- about 3 cents a kilowatt-hour

California deregulation experience worries N.C. Legislators
Associated Press - August 6, 2000

The controversy that has zapped California over higher electric rates this summer in the wake of electric deregulation could influence the debate on the issue in North Carolina.

California consumers are rebelling over rapidly increasing electricity rates during a sweltering summer in the West. The state's utility regulators are hearing complaints from consumers whose bills have doubled and even tripled. The complaints are reaching the ears of North Carolina lawmakers responsible for sorting out the possible deregulation of power sales.

Members of the Study Commission on the Future of Electric Service want to see how deregulation has affected rates and service in other states where it's being phased in, said state Sen. David Hoyle, D-Gaston, the commission's co-chairman. ``We're going to be very, very careful,'' Hoyle said.

About two dozen states have either instituted or are in the process of implementing some form of electric deregulation. The study commission, which resumes meeting Sept. 14 after taking a break during the 2000 legislative session, will get an update on the situation in California, Hoyle said. In April, the commission approved recommendations that include deregulating the sale of electricity statewide in 2006, and allowing some customers to begin choosing their electricity provider as early as 2005.

The commission hasn't crafted specific legislation for the General Assembly, which will have the final say on the matter.

Rep. Mary Jarrell, D-Guilford, another commission member, said North Carolina officials should learn from the troubles in California.

``This may make the commission even more mindful of keeping the cost of electrical service as low as possible,'' Jarrell said.

What's happened in California ``will be uppermost in the minds of members of the commission,'' she said.

The study commission hasn't come up with a specific plan to address the $5.5 billion in municipal power debt slowing plans to deregulate the power industry. Fifty-one North Carolina cities and towns took on the debt to help finance nuclear power plants built by the parent companies of Duke Power and Carolina Power & Light.

``The events in California are going to cause the public and the legislature to go a little slower and consider the ramifications of deregulation,'' said Mike Rulison of Raleigh, president of the North Carolina Consumers Council. The Wall Street Journal reported that there's growing evidence that some power companies are finding ways to exploit the change from heavy regulation to open competition at the expense of consumers.

The tactics include manipulating wholesale electricity auctions, taking juice from transmission systems when suppliers aren't supposed to and denying weaker competitors access to transmission lines.

Joseph Maher, a spokesman for Duke Energy Corp., said he remains confident about the way the study commission is approaching deregulation.

``We have an opportunity to learn from what they have done (in California), and we have a good process going on here,'' Maher said.

Deregulation - July - 2000