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July - Duke Energy Employee Advocate

Deregulation - July 2000

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

California Officials, Specialists Discuss Regulating Electricity Industry
San Jose Mercury News - By Steve Johnson - July 28, 2000

A little more than two years after California threw open its electricity market to competition, sparking a nationwide energy deregulation movement, state officials are talking about short circuiting the whole experiment. Appalled by the blackouts that hit the Bay Area in June and more recently by the doubling of electricity prices in San Diego, lawmakers, consumer advocates and other energy specialists are now suggesting that the system needs to be "re-regulated."

Legislators are scheduling hearings for as soon as next week. The proposals they are expected to address range from imposing more government control over energy prices to having utility companies buy back the very power plants they've been forced to sell off over the last few years. But some say any effort to re-regulate the industry would be like trying put the genie back in the bottle -- power plants have been sold, contracts for electricity signed and a massive marketing effort has already sold the idea to millions of Californians.

Moreover, re-regulation could discourage companies that generate and sell electricity from doing business in California. That could result in even worse power shortages and future price hikes in the Bay Area, which is temporarily shielded from the kind of rate fluctuations that San Diego has experienced.

"Deregulation was a mistake," said California Public Utilities Commissioner Carl Wood, who had opposed the plan long before his appointment to that body last year. Nonetheless, he added, remaking the system wouldn't be easy. "There are things that were done which are going to be very difficult to reverse. You're putting Humpty Dumpty back together again." Although Gov. Gray Davis has little direct authority to alter the course of deregulation, many observers have urged him to become more involved in the issue.

On Thursday, Davis sent letters to various governmental agencies asking them to investigate the price hikes and to seek federal approval to continue or expand certain price controls that are already in place in the state. "The combination of uncertain reliability and unconscionable customer rates has provoked justifiable public outrage," Davis said. "These conditions demonstrate that a competitive wholesale market for electricity supply has not yet developed sufficiently to provide California with reliable electric service at reasonable rates."

The original decision to deregulate the business of producing and selling electricity in California stemmed from precisely the same factors that are now prompting calls for re-regulation -- a shortage of electricity and unpalatably high prices.

In the past, the electricity business was almost entirely controlled by the major utilities, such as Pacific Gas & Electric Co., which owned a network of nuclear, fossil fuel and other power plants. But in recent years, even as more and more people moved into the state, power-plant construction stalled, mainly for economic and environmental reasons. As a result, energy supplies tightened and prices soared, especially compared to what was being charged elsewhere. So on March 31, 1998, the Legislature ordered the utilities to get rid of most of their old plants and opened up the sale of electricity to competition, hoping to stimulate new plant construction by private firms and, thus, drive down prices. That idea seemed like such a good one that a number of other states have since deregulated their electricity markets, too.

To temporarily stabilize California's market as competition developed, the Legislature cut consumers' electricity bills by 10 percent and then froze them at that level through March 2002. But it also permitted the freeze to be lifted sooner if the utilities were able to pay off their old power plant debts before March 2002.

The assumption was that prices would drop once the freeze was lifted. That's not how it's turned out.

Few people complained initially, after San Diego Gas & Electric Co. paid off its plant debts and its rates were unfrozen last year. That summer was relatively cool and electricity supplies were sufficient to keep prices down. But this year it got hot. And as power use shot up across the state, supplies shriveled and prices spiked. In July, the average San Diego resident's bill hit $103, almost double that of a year ago.

Fearing the same thing could happen in the Bay Area and other parts of California once the freeze in those areas is lifted, consumer advocates, public officials and others have begun demanding that the state's newly competitive system be restrained.

"The market is not functioning properly," said Michael Shames, executive director of the San Diego-based Utility Consumers' Action Network, who believes lawmakers will have little choice but to impose new regulations on energy sales. After all, he said, "what politician is going to allow the rest of the state to be San Diegoed?"

Some officials want the Public Utilities Commission to reimpose San Diego's rate freeze when the commission meets to discuss the situation there on Thursday. But beyond that, others say, broader reforms may be in order.

Several key lawmakers, including Sen. Steve Peace, D-El Cajon, who chaired the hearings that led to the state's deregulated market, wants the federal government to impose price caps on electricity suppliers throughout the Western States. If that effort fails, he said, he favors extending the freeze now in effect for the customers of PG&E beyond March 2002, or until sufficient new power plants are built in California to meet the demand.

He also proposes renovating many older power plants that are forbidden from operating at full capacity because of pollution concerns.

"We can develop a very focused plan on an emergency basis to clean up the environment and expand our electric generating capacity," he said. Others want to go even further. One idea being floated is to have the utilities or even a group of government agencies buy back the power plants that the utilities sold off under deregulation. Another is to seek government sanctions against companies that are seen as profiting unreasonably from the high price of electricity.

All this talk of tinkering with competition worries many of the firms that generate power. If some of these ideas are approved, they say, it could discourage them from building new plants or even selling electricity in California.

"The market needs to function freely," said Richard Wheatley, of the Houston-based Reliant Energy, which owns five power plants in California. "There has to be an economic incentive to build those new generating plants." But Nettie Hoge, of the San Francisco organization The Utility Reform Network, believes more regulation -- not less -- is essential and dismisses the notion that companies might abandon California.

"I think the public is being extorted and intimidated by threats of withdrawal," she said. "I think the state's leadership should say, `OK, call them on their bluff.' "

Even some energy entrepreneurs say enough is enough, including Rick Kohl of in San Jose, which began selling electricity in the state after deregulation.

"It's outright gouging," Kohl said of the electricity prices. He said the problem is that there are too few electricity suppliers in California for the market to be fully competitive, "so it becomes easily manipulated and controlled."

Sen. Debra Bowen, D-Redondo Beach, who chairs the Senate's Energy, Utilities and Communications Committee, thinks officials in California and other Western states could form an electricity-buying coalition to get better rates as a group than they could individually. She also thinks the state could encourage more energy conservation. But beyond that, Bowen is nervous about trying to re-regulate the business.

"I think of what happens when you pull into a parking space and there are these metal spikes and signs saying, `Warning, do not back up,' " she said. "Whatever we do, we have to be careful."

San Diego rate hikes illustrate problems with deregulation
Associated Press - July 27, 2000

Deregulating utilities and creating competition in the power market was supposed to be a boon for California consumers.

Nora Whitcotton, one of about 1.2 million customers of San Diego Gas & Electric, the first utility in the state to deregulate, said it's meant just the opposite. She's among the utility's customers whose monthly bills have skyrocketed this summer.

While a power-supply crunch coupled with increased demand are partly to blame for rising bills, customers and critics of the utility said their plight should serve as a warning to other states wrestling with deregulation.

Whitcotton, who lives on a fixed monthly income of $712, saw her July energy bill jump from $46 a year ago to $117.

``I'd like to see it go back to being regulated,'' she said. ``I don't mind conserving energy and using less, but I really believe we were sold a bill of goods with deregulation.''

Gov. Gray Davis entered the fray Thursday, calling on federal and state regulators to lower price caps on the state's electric rates and refund $100 million to San Diego ratepayers.

Davis called the San Diego rates ``unjust and totally unacceptable.'' A 1996 state law ordered restructuring of the electric services market to break utilities' monopoly power and introduce competition, a scenario that is playing out nationwide.

Under deregulation, power generators are supposed to compete to offer energy to distributors, who then compete to deliver that energy to consumers. Competition was supposed to lower bills by 20 percent.

In the San Diego area, however, competition among distributors is largely nonexistent because there are too few companies, and rates have soared since San Diego Gas deregulated a year ago.

``San Diego should charge tuition for this class, 'Botched Deregulation 101,''' said Michael Shames, executive director of the Utility Consumers Action Network. ``Other states would be stupid to not look at us and then let this situation repeat itself.''

Utility officials acknowledge that deregulation isn't working. ``Some things need to be fixed both on the supply side and the buy side of the process,'' said Gary Cotton, a senior vice president at the company. A lack of new power plants and the absence of a policy to manage distribution when power lines are congested are major barriers to successful deregulation, he added.

As a short-term solution, San Diego-area consumer groups have called for a rate freeze, and government disaster assistance. A long-term fix, some advocates said, would be re-regulating the industry.

In California, deregulation is expected to expand in 2002, after a rate freeze for customers is lifted for a number of publicly owned utilities.

Lobbyists Get into Debate over Deregulating North Carolina’s Electric Industry
High Point Enterprise - by Paul B. Johnson - July 26, 2000

The debate over deregulating the state's $8 billion electric industry has caused a power surge among key lobbyists in Raleigh, according to a report released this week by a research center.

"Electric deregulation was one of the most contentious issues in the 1999-2000 legislative session, and lobbyists who worked on this issue are among the most influential ...," reports the N.C. Center for Public Policy Research of Raleigh. Lobbyists working on behalf of all of the key players in the debate over deregulating the sale of electricity rank among the 50 most influential lobbyists in the Legislature, reports the center, a non-partisan, non-profit group that studies public policy issues in the state.

Long-time lobbyists have represented the two major utility companies, Duke Energy Corp. and Carolina Power & Light Co., as well as the municipal trade group ElectriCities and the N.C. Association of Electric Cooperatives. The 29-member Study Commission on the Future of Electric Service in N.C., which includes 18 legislators, has been debating the issue for nearly three years. 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 General Assembly will have the final say on the matter.

The commission should resume its meetings next month and wants to continue studying the issue before the General Assembly opens its 2001-2002 session in January.

The commission hasn't come up with a specific plan to address the $5.5 billion in municipal power debt, an issue of concern to High Point. The city of High Point has municipal power debts of approximately $430 million, the fourth-highest amount among the 51 towns and cities in the state that run their own electric distribution systems.

Towns and cities such as High Point that run electric distribution systems would have to sell their distribution systems or put up an amount equivalent to their value toward a debt relief plan, according to several proposals taken up by the commission.

For most of this century, electricity sales in North Carolina have been regulated through a monopoly system where utilities are granted exclusive rights in territories. If the sale of electricity is deregulated, customers would be able to buy power in a competitive market similar to the way that they purchase long-distance service.

Deregulation a failed experiment?
Orange County Register - July 23, 2000

Soaring energy bills jolted South Orange County this month, shocking consumers who were promised sharply lower rates by lawmakers who deregulated electricity. Architects of the restructured market assured consumers they would save money when the state relinquished control over prices in 1996. New power suppliers would come on line, bringing more choices and lower prices. Instead, no new power plants were built, a booming economy heated up demand and some residential bills doubled or tripled to more than $250 per month. Higher rates loom for the rest of California.

The deregulated system -- which powers 75 percent of businesses and homes in the state -- appears imperiled. Blackouts rolled through San Francisco on June 15, nearly knocking out power to 10 Western states. Wednesday, strained supplies prompted the agency controlling the state's power grid to ask customers to unplug, the fifth such alert this summer.

Those who watched deregulation unfold say this was inevitable. Lawmakers, they say, cobbled together electricity restructuring in a series of late-night meetings, a process that lacked independent analysis of how deregulation could affect prices. In the end, lawmakers made concessions that benefited everyone but residential customers, energy experts and consumer advocates say.

Lawmakers and regulators ignored subsequent warnings that deregulation could send prices surging and prompt economically devastating blackouts. They stripped the system of accountability, creating three separate agencies that monitor the industry. None has final authority. That lack of oversight continues today: One of the three boards failed to meet at all last year. "It's not going to be pretty. There are no short-term fixes," said Michael Shames, executive director of Utility Consumers Action Network in San Diego in an interview last week. "This is a harbinger of things to come for the rest of Southern California."

Residential customers find they have nowhere to turn for help. The utilities say they don't set rates. Regulators say they no longer regulate. Lawmakers say it may be too late to go back.

South Orange County's pain could soon spread to the rest of the state. The majority of the state's residential customers remain insulated from hikes because their rates are frozen until 2002. Then they, too, could see bills jump. Lawmakers, regulators and industry officials are looking for ways to adjust the system. Yet even those demanding change don't agree whether the problems are a short-term growing pain or a structural flaw.

The Public Utilities Commission meets Aug. 3 and may consider a petition from consumer advocates to roll back and freeze San Diego Gas & Electric rates. How that would work financially would have to be worked out. SDG&E wants permission to buy power at fixed rates outside the California system. Average prices might be higher, but hot weather-induced spikes could be avoided. Energy sellers and economists say the market needs to be opened more fully to encourage competition.

Lawmakers return to Sacramento in August and likely will revisit the deregulation issue, though it's unclear whether they'll consider minor charges or a major overhaul.

Sen. Steve Peace, D-Chula Vista, deregulation's designer, believes eventually there may be a return of some government control over residential customers. Pressure is building for the PUC to intervene and there is talk about pressuring the federal energy regulatory commission to adopt changes.

"We've unraveled the system and really nobody knows how to put it back together," said Harry Snyder, a senior advocate for Consumers Union, a nonprofit advocacy group. "I never thought deregulation would come down so badly."

Nearly everyone agrees that legislators rushed restructuring into law in the summer of 1996, as the state emerged from a recession. Big businesses lobbied lawmakers, who deregulated the industry in a way that favored corporations and industry.

The conference committee that wrote the bill was famous for its marathon stretch of public hearings to hammer it out. In the end, the issue was so complicated, most in the Legislature didn't understand it.

"You had a lot of people being asked to vote on something that was very complicated who didn't have anything more than a rudimentary understanding of how this operates," said Assemblywoman Debra Bowen, a Torrance Democrat who voted for the bill when she served in the lower house. Bowen and many others relied on Peace and other conference committee members for direction. Many of the details were worked out in private meetings brokered by Peace, who headed the six-member conference committee.

One by one, lawmakers persuaded opponents to agree.

They appeased environmentalists with $540 million to help fund environmentally friendly energy. They secured labor union support by granting protections for meter readers and nuclear plant workers. Utilities won permission to bill ratepayers $28.5 billion to pay off debt and compensate for income they'd lose in a competitive market.

Residential consumers received almost nothing.

Deregulation froze rates, but at what amounted to artificially high levels for most of the year.

That guaranteed rate allowed utilities to collect that $28.5 billion. San Diego Gas & Electric Co. repaid that debt early; its rate cap was unfrozen and it was free to charge customers free-market rates beginning in June. SDG&E customers - including 100,000 in south Orange County - now pay market prices. Those rates soared as temperatures climbed.

Peace said this week that the situation would be a lot worse if the state had not deregulated. Although he acknowledged growing pains, he said it is too early to declare deregulation a mistake.

"I'm absolutely ready to defend the quality of the work product," said Peace, whose constituents are among the hardest hit. "If we stayed regulated, we would be looking at blackouts. We'd be in terrible trouble."

But Assemblyman Bill Leonard, R-Upland, who served on the conference committee, said he's not surprised at the current situation. "It was always a risk," Leonard said. "If there was more electricity being produced, the rates would be lower."

Consumer groups admit they failed to protect the small ratepayer.

"(We) certainly took a wishy-washy position at the time that we've come to regret since then," said Bob Finkelstein, staff attorney for The Utility Reform Network, a San Francisco-based consumer advocacy group. "I've been kicking myself since then."

TURN chose to neither support nor oppose the law. The group dropped its initial opposition to get a few concessions, such as funding to assist low-income ratepayers. Snyder said his Consumers Union was too busy focusing on another bill, the creation of the California Earthquake Authority.

One of the lone naysayers, economist Eugene Coyle, said he warned lawmakers and regulators they'd see skyrocketing prices and electricity shortages on hot summer days.

"I told the (Public Utilities) Commissioners something that they didn't want to hear, that they'd be back fixing this," Coyle said. "I think a lot of this could have been foreseen." Consumer groups tried to undo parts of deregulation with Proposition 9 on the November 1998 ballot. Utilities and big businesses spent $40 million in advertising to defeat the measure.

Lawmakers counted on the open market to result in lower prices. But the market is only partially deregulated, with just electricity generation open to competition. The much larger distribution end isn't. Deregulation advocates also expected that investors would step in and invest in new power plants, which average $500 million dollars and take at least three years to build.

That new power supply hasn't yet come to market. The California Energy Commission has licensed five new plants and seven more applications have been submitted. But it's unclear whether any of those plants will be built, said Daniel Nix, deputy director of the Energy Commission.

Research done by the Energy Commission shows that until prices spiked this summer, new generators wouldn't have been able to make enough profit to pay for the cost of their investment in new generating plants, Nix said.

In the meantime, demand for electricity has surged. The state has added new jobs and homes at a dizzying pace.

That demand has strained supplies. On five days this summer, electricity supplies ran so short that the agency that controls the electrical grid asked customers to shut off power. On June 15, they cut power to parts of San Francisco to prevent the grid from failing.

Reports issued two years ago forecast such conditions. Lawmakers asked the Energy Commission to study how deregulation would affect prices and reliability. The commission's report, issued in July 1998, warned about higher prices and possible blackouts. That report was mostly disregarded. "Unfortunately, what we predicted has come to pass," Nix said.

There still isn't much government oversight of the state's electricity market. The three-member Electricity Oversight Board formed by the deregulation legislation didn't meet last year because only one person was on the board. Gov. Gray Davis failed to fill two vacancies until this year. The third position remains vacant. Of the six scheduled meetings this year, three have been cancelled.

Two nonprofit boards set up under deregulation are dominated by energy providers, utilities and business representatives. They have almost no consumer representatives.

Of the 25 members serving on the Power Exchange Board - which sets the rules that can affect the prices customers pay - only two represent residential customers. The same holds true for the Independent System Operator Board, which controls the power grid and can buy energy from big companies such as Enron when needed. It has two residential consumer representatives.

Consumer advocates, regulators and lawmakers agree something will change, but no one can agree what the change will be or how quickly it will arrive. "The (Public Utilities Commission) has to act," Utilities Consumer Action Network Director Shames said. "If they don't, the Legislature will."

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