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July - Duke Energy Employee Advocate

Deregulation - October, 2000

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

Electric deregulation could be threatened by Ameritech snafus
Messenger-Inquirer - October 31, 2000

Ameritech Indiana's service delays, combined with rising gasoline and natural gas prices, are hampering efforts to advance deregulation plans for the state's electric utilities.

Before the Ameritech problems came up, electric deregulation already faced a tough path. Rising fuel prices had made politicians hesitant to deregulate the industry for fear that might affect the cost of another energy source.

Add the service-quality controversy at Ameritech, which has operated under a relaxed form of regulation since 1994, and electric deregulation faces virtually no chance in the 2001 session of the Indiana General Assembly, lawmakers said.

``A lot of wind has gone out of that sail,'' said House Speaker John Gregg, D-Sandborn.

Added Gov. Frank O'Bannon, who is running for re-election: ``I don't see the big demand by consumers (for electric deregulation).''

The industry's lobbying group, the Indiana Electric Association, has drafted legislation to deregulate the state's electric utilities. But it won't be read by lawmakers, much less acted on, any time soon. ``As long as we don't see an opportunity for it to be considered by the legislature, we're going to keep it in the saddlebag for now,'' said Edwin Simcox, the association's president. ``If we thought we had an opportunity to present a bill, we'd be out there with the legislation, engaging people to analyze it.'' Simcox declined to discuss the legislative proposals in detail.

Deregulation is supposed to be the electric industry's future. For decades, electric utilities had monopolies for specific geographic regions. Under deregulation, utilities would be allowed to sell electricity just about anywhere they want and consumers would choose their electric power supplier. Under deregulation, competition among utilities is supposed to hold down prices. The problem is that scenario hasn't worked out in states, such as California, that have tried deregulation. In San Diego, rates have skyrocketed 60 percent compared with a year ago. That has spurred California regulators to impose caps on consumer electric bills.

The San Diego situation and rising prices for other forms of energy meant that electric deregulation already faced tough going in the 2001 legislature. The service problems at Ameritech this year dimmed any lingering hopes among deregulation supporters.

During the summer and early fall, some Ameritech customers went weeks without service and had to find alternatives such as cellular telephones. The company, a unit of SBC Communications of San Antonio, is reducing its backlog of repair and installation orders.

But the memory of those problems is creating a mood where legislators may want to put more teeth into utility regulation, not deregulate utilities further.

William D. McCarty, chairman of the Indiana Utility Regulatory Commission, has urged the legislature to enact broader authority for the commission to fine utilities. Some legislators have already contacted McCarty for research assistance in crafting such legislation, though the chairman won't identify them.

Megawatt Laundering
San Jose Mercury News - October 30, 2000

While investigating this summer's stunning spike in electricity prices, state authorities have heard stories about a curious phenomenon:

On days when the weather is hot, batches of power generated in California are sold to other states.

A little later in the day, similar amounts of power are sold back to California -- but at much higher prices.

The question is, is it the same power? If so, that could be "megawatt laundering" -- a multi-company conspiracy to evade California's wholesale price cap, which covers power generated in California but not power sold into California from elsewhere.

Worried that such transactions could be costing consumers millions of dollars, several energy specialists raised concerns about megawatt laundering during a Federal Energy Regulatory Commission hearing a month ago in San Diego. And earlier this month, state Sen. Steve Peace, D-La Mesa -- who helped lead the push to deregulate electricity sales in California -- formally asked the commission to investigate the practice, which he termed "potentially illegal market coordination."

But an unconfirmed news report last week said the federal agency had concluded that generators had not abused the market. And others say concerns about megawatt laundering are exaggerated.

Among them is Jan Smutny-Jones, executive director of the Independent Energy Producers Association, a power-firm trade group, and chairman of the Independent System Operator, which oversees most of California's power grid.

While acknowledging that such laundering is possible, Smutny-Jones said there is no evidence it is actually occurring or is widespread.

"This is one of those things that's turning into an urban legend," he said. "I don't want to characterize this as a significant problem."

Even some critics of the way power is purchased in California concede that most of what has been labeled megawatt laundering probably reflects nothing more sinister than the ability of some entrepreneurs to take advantage of a good deal when they see one.

Nonetheless, they see evidence that at least some California-produced power is being sold out of and back into the state at a higher price. And they blame that on loopholes in the system that they say ought to be closed because the transactions are helping to drive up the cost of power.

The Independent System Operator "invites this type of activity," said Frank Wolak, a Stanford economist who chairs the non-profit corporation's market surveillance committee, which has warned of the potential for megawatt laundering in at least two reports this year. "The thing that makes all these problems go is the fact that the ISO has said, `We'll pay whatever it takes to keep the lights on,' and that's screwing consumers big time."

In 1998, when the state's energy markets were deregulated, it was generally assumed that opening up the sale of electricity to competition would make power less expensive. As a precaution, however, officials at the Independent System Operator instituted wholesale price caps, which they lowered twice this summer to help keep a lid on costs. On July 1 this year, they reduced the cap from $750 per megawatt per hour to $500, one megawatt being sufficient power for 1,000 homes. Then, on Aug. 7, they cut it to $250.

Unfortunately, things haven't worked out the way officials had hoped. Wholesale prices rose dramatically this year. And while a freeze on retail utility rates has temporarily shielded Pacific Gas & Electric Co. customers from those soaring costs, home electricity prices have tripled in San Diego, where a similar freeze already has come off.

In the process, some generators learned that all it takes to get around the state's wholesale price caps is a basic understanding of how the market works. One of the best ways to get top dollar, they learned, was to hold off selling their electricity until the Independent System Operator issues what is known as an out-of-market call for energy, which amounts to an emergency request for electricity.

From May through September this year, the overall price of power in the state averaged less than $125 per megawatt hour, according to authorities. But over the same period, power sold in response to out-of-market calls averaged more than $430.

During the summer, when energy use is at a maximum, California typically imports about one-fourth of the power it uses from other states. Since power generated by firms in other states isn't limited by California's price cap, those companies generally are in a better position than California firms to make a killing on out-of-market sales. But by cutting a deal with a collaborator in another state, energy specialists say, California generators also can profit handsomely -- despite the cap.

Here's how:

Say a California generator has 100 megawatts. Instead of selling it in California, where the firm can receive no more than $250 per megawatt hour under the current cap, it finds a utility, an electricity broker or a corporate affiliate with an equal amount of power in another state, such as Arizona. Then -- just before an expected heat wave in California, which is likely to result in an out-of-market call for power here -- it convinces the other firm to do a trade.

Under the deal, the California generator sends its 100 megawatts for one hour to the company in Arizona, where there is no price cap, and earns $300 or more per megawatt -- for a total of $300,000. In return, the Arizona firm ships its 100 megawatts for one hour here. Since that power isn't subject to California's cap, it earns perhaps $400 per megawatt -- for a total of $400,000.

Presumably, energy specialists say, the two firms then split the $100,000 difference.

The potential profit from such deals is considerable. Generators in and out of California received more than $110 million from out-of-market sales this summer, according to the Independent System Operator. But determining if megawatt laundering is really happening, how often and who might be benefiting, is difficult.

One California investigator said authorities first suspected that megawatt laundering was occurring when they noticed that precisely the same amount of power was being sold to another state and then sold back into California minutes later. But other experts said the evidence has rarely been that clear. While hundreds of megawatts is sold into and out of the state on any given day, they said, the suspicion that firms were conspiring to sell the same power back and forth has stemmed largely from unfounded speculation.

One big problem for investigators trying to learn if the system has been abused is that confidentiality rules keep many of the details about these electricity transactions private.

"Entities like us and others who may be suffering from the consequences of this laundering don't necessarily have the documents" to prove it, said Gary Stern, director of market monitoring for Southern California Edison, one of the state's three main utilities. "We can only speculate based on things we've heard from others about the practice....It's our hope that's one of the things that's being examined" by the various federal and state agencies investigating this summer's extraordinary rise in California power prices.

Indeed, while some people say megawatt laundering can be substantially limited by ending the practice of paying more than the wholesale cap for out-of-state power, others argue that it's just as important to eliminate the secrecy surrounding electricity transactions.

"I'd like to see more information" made public, said Jim Bushnell, a researcher at the University of California Energy Institute in Berkeley, who specializes in analyzing the state's energy markets. "There are a lot of rumors circulating around this," he said of megawatt laundering, "and it would help clarify if this is a serious problem."

California Adopts Variable Pricing, Raising Ire of Generators, Traders
The Wall Street Journal - October 28, 2000

In the latest attempt to fix California's troubled deregulated energy market, officials adopted a unique variable-pricing plan that already is being criticized by power generators and traders as unworkable and praised by utilities and consumers as much needed protection against gouging.

Under the plan, adopted late last week by the governing board of the California Independent System Operator, or ISO, a quasipublic agency responsible for maintaining electricity reliability in the state, the cap on wholesale power will be reset hourly from about $65 per megawatt hour at low-demand times to no more than $250 an hour at periods of high demand. It was the third time this year that officials effectively lowered the price cap on wholesale electricity in a bid to contain -- so far unsuccessfully -- soaring total power costs.

The move underscores the chaotic atmosphere prevailing in California's power market after a two-year-old experiment in deregulation has come undone. In other deregulated markets such as New York and New England, prices are capped at $1000 per megawatt hour, which are intended to be low enough to prevent market abuse but high enough to give generators incentive to build new plants. California's system was supposed to work the same way. But because utilities in California divested themselves of the bulk of their plants but weren't allowed to lock in fixed-price supply contracts, unlike in the other markets, merchant generators have had much greater sway over prices here on the spot market, where most power trades.

During the first nine months of the year, the average price of wholesale electricity was $90 per megawatt hour in California, triple the price of a year earlier. Even on cool days in October, the price generally has remained above $100 per megawatt hour. California utilities have lost money on those power purchases because their customers' rates are frozen at $54 to $65 per megawatt hour, far lower than the average price utilities have had to pay for that power. The deficits exceeded $5 billion in the June-to-September period.

Some ISO members say they had no choice but to support the measure to ratchet down price caps. "We're going after the windfall profits," said S. David Freeman, general manager of the Los Angeles Department of Water and Power, who voted for the measure. "What we've got now is a market accustomed to ripping off the consumer. This can't be allowed to go on." But other experts said the hasty measure may make California's problems even worse. "The short-term regulatory fix is always to fix prices," said Pam Prairie, director of the Institute of Public Utilities at Michigan State University in East Lansing. "But there's a real danger you'll set prices too low and make your supply problems even worse."

Other economists agreed. "At best, this is poorly administered cost-based regulation," said Frank Wolak, an economics professor at Stanford University who sits on an independent market-monitoring committee at the ISO. "At worst, it creates all sorts of perverse market incentives."

For example, it may increase the problem of "megawatt laundering" on hot days in which in-state generators sell power to out-of-state customers who then sell it back into the state, effectively bypassing the cap. Likewise, it could encourage generators to build new plants outside of California, rather than where they are needed near its major cities, also to avoid the cap. In the end, it could increase stresses to the state's already overburdened transmission system.

In fact, the decision already has brought to a halt the state's forward electricity market, which allows wholesale customers to sign contracts for power they will use in the future. The market had been trading as much as 1,000 contracts a week. On Friday, there was practically no activity.

"This decision shows the height of lunacy," said Rick Shapiro, a managing director at Enron Corp., the giant Houston-based energy trader. Mr. Shapiro said Enron and other generators will file appeals at the Federal Energy Regulatory Commission asking that the new pricing formula be rescinded.

It is possible the FERC may throw out the pricing formula anyway. It is expected to issue a major order on Nov. 1 directing changes in California's market structure. That order will include its determination of the effectiveness of price caps. It also is expected to judge the merits of the governance structure at the ISO, which has lately been marked by infighting. Recently, consumer groups have charged that the ISO board has put the business interests of its members ahead of members' fiduciary duty to California residents.

The most recent price-cap measure was approved over the objections of executives at the ISO whose job it will be to implement the formula. ISO Chief Executive Terry Winter said the measure is flawed because it doesn't take into account the amount of power available to the California market. Mr. Winter fears the caps will place the state at a disadvantage relative to neighboring states with no price caps. About 11 states are electrically interconnected in the West, meaning power can be moved between them and chase the highest prices.

"We keep getting accused of making our market too complicated," Mr. Winter said. "Then along comes this proposal" with caps that would adjust repeatedly throughout the day, depending on demand.

Energy Plan Finds a Range of Supporters
Saint Paul Pioneer Press - October 28, 2000

In an alliance that is rarely seen, consumer and business groups are applauding a proposed state energy plan, saying its emphasis on maintaining affordable and reliable electricity for Minnesotans is a necessary "first step" to help spare the state from possible energy shortfalls by 2006.

But the two sides part company when it comes to the plan's recommendation that, at least for now, Minnesota not embrace electric deregulation.

The Minnesota Department of Commerce's energy plan came after more than 10 public hearings across the state on the proposal.

"We are finding support in many different corners," department spokesman Bruce Gordon said. "Most people think it (the plan) is well reasoned and gradual."

The department recently said the Midwest region, including Minnesota, could face an energy shortfall of 5,000 megawatts by 2006 -- the amount of electricity needed to keep the lights on at any given moment for 5 million homes. In response, the agency is recommending Minnesota create a state-wide energy resource plan, encourage new technologies and conservation and simplify the regulatory process for utilities to win approval for generation and transmission projects.

But the plan doesn't urge Minnesota to restructure the state's electric industry and open the doors to full retail competition. The department has contended there has been little pressure for Minnesota to deregulate, given that the state's electric rates are the 16th lowest in the country and ninth lowest for natural gas rates.

Consumer and environmental groups -- from the Minnesota Energy CENTS coalition to the Clean Water Action Alliance -- feel the department's energy plan should go further to promote energy conservation. They said the state should require public utilities to double or triple their spending on energy preservation beyond the current annual level of about $44 million.

Still, the consumer and environmental groups generally like the plan and several have recently formed an alliance called People Organizing for Workers, the Environment and Ratepayers to promote its viewpoint.

"We think it ( the energy plan) moves the state in the right direction with increased emphasis on energy efficiency, development of alternative energy sources and reforming the state's process in planning for future energy needs," said Bill Grant, executive director of the Midwest chapter of the Izaak Walton League.

Consumer advocates also are pleased the proposal doesn't recommend electric deregulation. They fear deregulating the state's retail electric industry in the face of potential energy shortfalls could lead to a seller's market and drive up electricity rates to unacceptable levels.

"Residential customers should breathe a big sigh of relief," said Pam Marshall, executive director of Energy CENTS, an advocate for low- and fixed-income consumers.

Business groups such as the Minnesota Chamber of Commerce and Minnesota Energy Consumers are finding common ground with consumer and environmental leaders on the Commerce Department's call for reliable and affordable energy. The department's energy plan assures that the issue will be the on the state Legislature's agenda for the 2001 session, business leaders said.

Consumer Refunds from California Energy Industry?
North County Times - By Dan McSwain - October 27, 2000

Beginning Tuesday, power generators and trading companies faced the threat of federally ordered refunds of any profits that are deemed by the government to be excessive.

California policy-makers and state utility executives have high hopes that the Federal Energy Regulatory Commission will order multi-billion-dollar refunds, or at least do something to dramatically lower electricity prices that remain at record highs.

For consumers, federal action to lower wholesale prices promises to stem the swelling IOU that has resulted from a cap on bills that is below the utilities' cost of buying electricity. A refund would go a long way toward paying down the $300 million that San Diego Gas & Electric Co. says its 1.2 million customers will owe by the end of November. That works out to about $250 per customer.

Refunds also hold much appeal for customers of Pacific Gas & Electric and Southern California Edison, which cover most of the rest of the state. Small consumers have been protected by retail rate caps, but the giant utilities say the last four months have cost them a combined $5.5 billion, and the companies are scrambling to pass those costs along to consumers. Consumer advocates say the damage could amount to $200 per residential customer.

But inside the close-knit electricity industry, almost nobody believes that refunds will ever be ordered. In fact, the idea of tracing transactions through a labyrinth of deals made by power traders is mind-boggling to analysts. The idea of opening up deals that have already been closed makes generators hopping mad.

"We have sold most of our plants (generating capacity) ahead of time in the forward markets," said Tom Williams, a spokesman for Duke Energy Corp., the owner of several California plants, including South Bay plant in Chula Vista.

"By the time our power reaches the market, it may have changed hands eight or nine times," Williams said. "And when our plant goes down for maintenance, we have to pay to replace that power. We have lost $1 million an hour when a plant went down, and we had to buy replacement power. Who's offering to pay that for us?"

Others say that, however unlikely, the threat of refunds gives the federal commission a lot of muscle to bring power marketers to their senses and lower their prices before political pressure builds to roll back deregulation entirely.

On Aug. 23, the Federal Energy Regulatory Commission issued an order that put generators on a 60-day notice that they faced refunds if a federal investigation found that electricity prices were not "just and reasonable." That federal order denied a request by SDG&E for retroactive refunds.

Pacific Gas & Electric, in a Sept. 22 legal pleading with the commission, asked for a rehearing of the issue, and asked that the effective date for refunds be changed to include any time that sellers of electricity overcharged for power. Southern California Edison has filed a similar request.

"That's literally a multi-billion-dollar question," said Frank Wolak, a Stanford economist and the chairman of the market surveillance committee for the California Independent System Operator. The agency manages 75 percent of the state's power transmission system.

If the commission finds that prices were too high, an important first step to extracting a refund, analysts say, would be deciding precisely who did the overcharging.

The independent companies that generate electricity in California are an easy target, because the system operator keeps track of their production and regulators can look at their bids to sell power.

All three big California utilities have asked the commission to order a return to prices that are set according to the cost of producing power. So once that "cost of service" determination had been made for each power plant in the state, there is a simple matter of lopping off the difference between high prices in the market and the true cost, plus a modest profit.

That's the way power was priced in California from 1916 to 1996, when the state's landmark deregulation law was passed.

But California imports 20 percent to 30 percent of its daily needs, and on its freewheeling power markets, the state takes almost anybody who wants to sell electricity.

Some utilities such as Arizona Public Service Co., Public Service Co. of New Mexico and Idaho Power, all located out of state ---- with surplus power to sell and profits from California ---- would come under scrutiny, as would British Columbia Hydro, the giant Canadian entity that sells power onto the Western grid. And then there is the federal government itself. Power marketers, owned by the government, sell electricity from the West's vast network of hydroelectric dams.

All have made hundreds of millions this year selling their surplus to California, but the Canadian and federal projects are outside the jurisdiction of the federal commission.

Complicating matters are the power traders who survive by buying the rights to electricity generation before it is needed, in hopes of selling that power at a big profit on the day that it's required.

"I don't know what you'd do with marketers," said Eric Hildenbrandt, the system operator's manager of market monitoring. "You may have simultaneous buy-and-sell trades."

For fast-moving power traders, any one individual company could have traded the same block of power hundreds of times on the way up as prices increased.

In contrast, some power generators in California have sold all of the power production for years in advance; in one case, 20 years in advance.

"I'm a very intrepid economist, and I would hate to have to do that calculation," Wolak said of tracing the activities of power traders.

U.S. Rep. Brian Bilbray, R-Imperial Beach, has proposed a federal tax on windfall profits. His approach is simple: if somebody made too much money in the federal estimation, tax it.

"The power exchange tracks who sold what to whom," Bilbray said. "It gives the ability to audit who walks off with the cash."

Stephen Baum, the chairman of SDG&E's parent corporation, Sempra Energy, said last month that the threat of refunds could corral the pricing behavior of the sellers of wholesale electricity.

So far, prices haven't budged: On the California Power Exchange, trading Tuesday for today's power settled at about $100 per megawatt hour, more than double the price charged on the same day last year. But refunds could prove to be a powerful weapon if the federal commission decides next week to get tough with marketers.

James Hoecker, the chairman of the commission, said at a recent congressional hearing that revisions to the Federal Power Act should include increasing his ability to penalize market participants who abuse market power.

Some insiders think that the federal commission will stop short of ordering radical changes to California's market structure or crack down heavily on generators and marketers. Indeed, Hoecker has sent signals that the commission is in favor of a master settlement that will include utilities, generators, traders and consumers all chipping in to pay the bill for the last four months.

"The only way that will get much legs is if the FERC says that refunds are still on the table," Wolak said. In fact, the federal commission carries two big sticks: the desire of utilities to return to cost-based rate-making and the federal threat of refunds.

"That would scare the bejesus out of them," Wolak said. "Makes the generators come to the table with serious offers."

Officials Scrutinize Energy Firms' Record Profits
San Jose Mercury News - By John Woolfolk - October 27, 2000

As Calpine Corp. and other energy firms in California's deregulated electricity market announced record profits this week, they face growing scrutiny from authorities who threaten to seize the windfall if allegations of market manipulation are proven.

San Jose's Calpine reported record third-quarter net income Thursday of $147 million, a 242-percent increase over the same quarter last year, and far more than the company's entire 1999 net income of $99 million.

"This exceeds any past quarter hands-down," said Rick Barraza, Calpine's vice president of investor relations. "It was truly an excellent quarter."

At least two other firms reported gains of more than 300 percent. But the profits came during a summer of blackouts and soaring bills, prompting several federal and state investigations into alleged anti-competitive behavior by energy firms. Authorities have threatened to seek refunds of any excessive profits.

Answers may come by next Wednesday, when the Federal Energy Regulatory Commission plans to disclose the results of its two-month investigation into California's energy market.

The California Public Utilities Commission and the state attorney general's office also are investigating, but have not indicated when they will release their findings.

Market experts, however, give slim odds that authorities will recover the cash.

"I think there's almost no chance we're going to get any of the money back," said Severin Borenstein, director of the University of California Energy Institute and professor at the Haas School of Business. "I don't think they're going to find any evidence that these guys did anything illegal," Borenstein said. "The market just didn't work very well. You can't say, `We didn't like that outcome, give it back.' What you can do is go forward and change the way things work."

Energy firms say they have nothing to hide. If they made a killing here, they say, it's only because there aren't enough power plants to meet demand -- something they're working to fix by building more of them. "We were pricing according to market rules and market conditions," said Chuck Griffin, spokesman for Atlanta-based Southern Energy, Inc., a recent spinoff of Southern Company and a top player in the California market. "There's a great need for additional generation out there."

Other energy company officials say their profits reflect strong markets nationally and internationally, not just in California.

Duke Energy spokesman Paul Mason said earnings for his corporation, which operates the Moss Landing power plant and is a major player in the state, reflect strong performance on both coasts.

"It would be misleading to suggest that the majority of earnings were due to trading and marketing activities in California," Mason said.

Still, Calpine's Barraza said "California by far was our best market this quarter."

But spokesman Bill Highlander said those gains didn't come from the "spot market" where prices soared this summer. Instead, most of Calpine's power is sold in long-term contracts on the "forward market."

The state's major utilities have been clamoring for relief, pressing regulators for a refund of more than $5 billion in debt they say they've accumulated from buying electricity for more than they can bill ratepayers. In a complaint filed this week with the California Public Utilities Commission, Southern California Edison Co. urged the agency to "join the California utilities in aggressively seeking refunds of the outrageously high wholesale energy prices that are being charged in the California electric markets."

Earlier this summer in a special report to the governor, the state utilities commission and Electricity Oversight Board said they found nothing to justify the summer's high energy prices.

Yet proving illegal market behavior may be difficult. Authorities would not say which companies they are

looking at, but said some have balked at disclosing deals, citing trade secrets.

"We sent a ton of subpoenas," said Loretta Lynch, chairwoman of the utilities commission. "We are experiencing significant resistance from some energy companies."

The power market also is enormously complex. Some companies lease their power plants to energy marketing firms, and power contracts can change hands several times between generator and buyer. And energy firms are just part of the picture, accounting for about 40 percent of the state's electricity generation.

About a fourth of the power is produced by municipal utilities. Some of them made profits while others lost money this year, said Jerry Jordan, executive director of the California Municipal Utilities Association.

California also imports a fourth of its power from dams and utilities outside the state, some of which also have profited from the market. The Public Service Company of New Mexico, for instance, more than doubled net earnings compared to last year.

And even if some energy firms "gamed" the market, waiting to sell until they could get the best prices, authorities still would have to find collusion for the behavior to be illegal, Borenstein said.

"Firms are allowed to exercise market power," Borenstein said. "It's not terribly competitive behavior, but it doesn't break the law. What's illegal is if they start talking to one another about it."

Utility Experts Advise More Power Plants for California
The Press-Enterprise - October 27, 2000

California must fix its deregulated electricity market system, build more power plants and transmission facilities and work on reducing demand, a panel of utility experts said Thursday.

"The market is broken," said Edwin A. Guiles, a group president with Sempra Energy's San Diego Gas & Electric and Southern California Gas. "Our customers are paying commodity prices three or four times as high as in the past."

SDG&E is the only one of the three investor-owned utilities that has completed the transition to full deregulation. As a result, its customers were exposed to the full brunt of this summer's skyrocketing power rates.

Customers of Southern California Edison and Pacific Gas and Electric remain under a rate freeze until the utilities have fully recovered their previous costs for all non-nuclear generating assets. While customers of Edison and PG&E aren't paying those higher prices now, the utilities are. Both utilities have already made proposals to the state Public Utilities Commission to recoup those costs -- now totaling more than $5 billion -- from rate payers.

And while the high summer electricity prices are gone, the market still isn't competitive, said Thomas R. Higgins, senior vice president of corporate relations for Edison International.

"I would say the problem still persists today," he said. "Even in this cooler weather, the prices reflect a market that is not working and that is dysfunctional."

Left unfixed, the problem could harm California's utilities and future business development, Higgins said. Federal regulators must first reform the market system to bring prices down, Guiles said. The Federal Energy Regulatory Commission has received several proposals from the utilities, the state Public Utilities Commission and others on how to reform California's deregulated system.

On Wednesday, Edison and PG&E also submitted proposals to the PUC on how to resolve the state's electricity woes. The steps include allowing the utilities to do more long-term contracting for power at fixed prices, Higgins said.

The plans also include what utilities term a "modest" rate increase of less than 10 percent, which would allow the utilities to recoup wholesale power costs they've paid this summer but haven't been able to pass on to ratepayers because of the rate freeze.

Consumer groups have sharply criticized the plans and say the costs should be paid from the profits the utilities have made on selling electricity produced from their remaining generating plants. But Higgins said that kind of analysis is flawed. "Their belief is that somehow the profits we make from generation float to the bottom line, and that's not the case," he said.

He added later, "We (the utilities) never took the risk for, in effect, subsidized electricity. That's an operating cost."

State Assemblyman Roderick D. Wright, D-South Los Angeles, said a major policy question that must be answered is whether the goal should be the lowest possible electricity price or the lowest price available in a longer-term stable market.

"If we are pursuing the lowest price, we expose ourselves to market volatility," said Wright, who also is chairman of the Assembly Utilities and Commerce Committee. "Electricity is the most volatile commodity market in the world."

Power Firm Subsidiary Proposal
Chicago Tribune - October 27, 2000

A plan by ComEd's parent corporation to fold nuclear power plants into a new unregulated subsidiary and stick Illinois consumers with the bill is becoming a test case for what a power company can do in the brave new world of deregulation.

Exelon Corp., the company created when ComEd's parent, Unicom Corp., merged with Philadelphia-based PECO Energy Co., had planned to transfer the reactors to the unregulated subsidiary so it could sell power in the rapidly deregulating national power market. It planned to have Illinois ratepayers, alone among all its customers in all the states it serves, foot the $726 million bill for this process.

But the plan hit a snag when consumer advocates objected, and this week a hearing officer for the Illinois Commerce Commission ruled that there was no legal basis for Exelon's proposal.

"The ruling is an important one," said Marty Cohen, executive director of the Citizens Utility Board, "because it established the precedent that captive customers cannot be forced to subsidize these plants if they are being used to sell power over the market."

Added Howard Learner, executive director of the Environmental Law and Policy Center: "Nobody's forcing ComEd to transfer the plants. Why should northern Illinois consumers be forced to continue to pay decommissioning costs to subsidize ComEd plants sales in Tennessee and Ohio?"

Don Kirchoffner, an Exelon spokesman, said that Exelon would fight the ruling, which still must be approved by an ICC vote. "We think it is an erroneous legal interpretation," Kirchoffner said. "We think our proposal was very prudent and within the bounds of our rights to collect decommissioning costs." As a regulated utility, ComEd had been granted the right to charge consumers a separate fee to cover environmental costs related to the inevitable closure of the utility's 13 reactors.

The average ComEd customer now pays 65 cents a month towards the cost of retiring the reactors. ComEd's proposal would tack on 27 more cents a month.

These charges would reap $121 million a year for each of the six years ComEd proposes charging them. Over the six-year period , the average customer would pay $19.44, Kirchoffner said.

An analyst who follows Exelon's stock -- Joan Goodman of the Pershing/Division of Donaldson Lufkin Jenrette -- said that if the ICC ruling prevailed and Exelon proceeded with the transfer at its own cost, it likely would have a negative impact on earnings, and consequently on Exelon's stock price.

Utility Solution Must Be a Joint Effort
L. A. Times - October 25, 2000

The Greenlining Institute, a coalition of minority and low-income groups, defended the deregulation of electric utilities two years ago, when some other consumer groups tried to pass an initiative repealing it. No more. "We made a mistake," said the institute's policy director, Robert L. Gnaizda, as a parade of witnesses he organized called on the state's Public Utilities Commission to impose a freeze on all energy prices for at least two years and a permanent freeze for senior citizens and low-income families. The institute also proposes "a freeze on all utility campaign contributions until the energy crisis is resolved."

Such contributions eased the way for the Legislature's unanimous adoption of deregulation in 1996. Utility money also crushed the initiative campaign to roll back deregulation led by Harvey Rosenfield in 1998.

The Greenlining Institute's proposals face a steep uphill climb. Although the Legislature may consider tax credits for poor people paying high prices for electricity and natural gas, if prices rise, I imagine most consumers will end up paying the bills.

At the PUC last week, it was evident that deregulation, at least in electricity, has become a dirty word, and not only with consumers.

Efforts are underway to keep it from becoming a nasty political issue that could endanger the utilities' future, not to mention the reelection bid of Gov. Gray Davis in 2002, and no one is more in the forefront of these than Edison.

Bob Foster, Edison's senior VP for government relations, laid out the utility's desires last week. First, he said, it's necessary to "fix the market," to control the high prices charged by the generating companies and marketers, who the backers of deregulation once told us would, through competition, actually lower prices.

Second, Foster said, Edison hopes for stable rates, avoiding the sudden sharp increases that set off a political firestorm in San Diego after the freeze of San Diego Gas and Electric rates was lifted. Foster suggested the best way to do this is for the PUC, the utilities and the consumer groups "to get together by the end of the year to agree on a new framework for developing a reasonable and predictable price" for electricity.

Doing this so neatly, leaving it to the experts, rather than to the unruly world of state politics, may be too much to hope for, especially because, like King Canute, we cannot hold back the tide. World energy price increases may overwhelm us.

But there may be hope in the Federal Energy Regulatory Commission, which seems likely to act in some way to restrain wholesale electricity prices by New Year's.

It sounds wonderful. The consumers, the utilities, the governor, are all trying to control the marketers that deregulation foisted on us all.

& Tom Williams of Duke Energy North America, a generator, warns, "There is already a supply problem throughout the West. We think if there are price caps, they need to be temporary. With any price cap there must be adequate incentives for new generation, to fix the supply problem. Otherwise, things will run off the tracks."

Virginia Takes Plunge into Deregulated Electricity Market
Virginian-Pilot - October 23, 2000

Taking bigrisks in hopes of even bigger rewards has been a California hallmark since the days of the Gold Rush.

So when the Golden State took the plunge of deregulating its energy markets for all types of customers in March 1999, officials initially hailed it as a triumph of free-market ingenuity over clunky and meddlesome government.

Reality took a fearsome bite this summer, however: Residents of San Diego--the first to be exposed to fully unregulated electricity prices _ saw their electric bills double in June. Other Californians were protected by retail power rate caps set to expire by Dec. 31, 2001.

In addition, energy supply bottlenecks and greed ran up the wholesale price of electricity and spawned "unprecedented" blackouts in the San Francisco Bay Area, according to California's Public Utilities Commission.

The missteps, said the commission in a recently published report, show that "the new system is not working for California."

As Virginia eases into a similar deregulated, competitive power market, consumers here may wonder if we'll fall victim to the same dysfunction.

Virginia's deregulation law left many messy details to be tended later--details that could affect the affordability of power in a few years.

For instance, it's not clear yet whether the State Corporation Commission, the consumer's advocate on matters concerning utilities, will have a say in the price of so-called default service, which refers to the power company consumers automatically get if they don't choose a competing utility. Since default service will most likely be that used by the poor or by people who aren't savvy to competition, it's important that it be affordable.

While consumers worry about jacked-up prices under deregulation, electric industry experts say there's at least equal cause to fret over the nation's aging power lines and transmission towers.

Rickety infrastructure and immature technology for orchestrating the complex swaps of power and money in a competitive market pose a big threat to reliability of the grid, several experts say.

Most retail electric consumers, including residential and small business customers, are still beholden to buy power from the electric utility monopoly in their area. In Virginia, the two biggest electric monopolies are Dominion Virginia Power and American Electric Power-Virginia.

"Significant increases in the demand on electric transmission are putting stress on a network that was not originally designed to accommodate large power flows across regions," warned Larry Makovich, senior director-North American Power for Cambridge Energy Research Associates.

"This imbalance between system capacity and supply and demand has contributed to well-documented problems in California and other parts of the country," Makovich said &

Muhammad Ali Boxes Duke Energy
Chicago Sun-Times - October 22, 2000

Boxing legend Muhammad Ali once boasted, "I done wrassled with an alligator, I done tussled with a whale." Now he and his wife are wrassling with Duke Energy Corp. and tussling with Indeck Energy Services Inc.

Ali, who retired from boxing in 1981, and his wife, Lonnie, have helped form and fund the Southwest Michigan Preservation Association, which is fighting the construction of three power plants planned for the area surrounding the Alis' home.

Duke Energy wants to build a 640-megawatt plant on a 20-acre site in Berrien County; Indeck wants to build an 1,100-megawatt plant in Niles, Mich., and CME International wants to build a plant near Benton Harbor. One megawatt can light 1,000 average U.S. homes.

Each proposed plant would be about eight miles from the Alis' home on the St. Joseph River in Berrien Springs, Mich., near the Indiana border. The rustic area, which attracts vacationers from Chicago, is unsuited for large power plants, Lonnie Ali said.

"It's happened so fast and furious, it's like people shooting at you from all around," Ali said of the plans for the plants all surfacing at once. "There are so many coming in at once, it's like which direction do you go in next?"

Ali, who has lived in the area with her husband for 14 years, has become a well-known critic of the plants, speaking against them at public meetings, said Nelson Slavik of the Coalition for Advocates of Research and Education, a group opposing the Indeck plant.

Muhammad Ali, who suffers from Parkinson's disease, rarely grants interviews, Lonnie Ali said. The former boxer wasn't available to be interviewed.

James Thompson, senior vice president of business development for Buffalo Grove-based Indeck, said his company is early in the approval process for the Niles plant. He said he is aware of the Alis' opposition to the project.

"We've tried to talk to them because we think it's a good time to talk to people who are against you," he said. "But we've had a hard time."

Lonnie Ali says she has no interest in talking to Indeck and the other companies proposing plants. Rather, she is interested in talking to local residents to let them know about the companies' plans. Thompson said the Alis' opposition isn't representative of the wishes of the community as a whole. "There's a small group in the city of Niles that are opposed," he said. "Most people are for it." Lonnie Ali argues that the companies are trying to bring heavy industry to an area known for farms and tourism.

Furthermore, she says, much of the power generated by the plants won't even stay in-state. "I'm not averse to a power plant to service the needs of southwest Michigan," said Lonnie Ali, who is vice president of her husband's licensing company, Greatest Of All Time Inc. "I am extremely averse to the idea that we're going to be the home of power plants to service the rest of the United States, or wherever they're selling it to."

Kate Perez, a spokeswoman for Duke Energy North America, a unit of Charlotte-based Duke Energy, said her company wants to build a plant in Berrien County because "Michigan, like some other states, is in need of new generation capacity. So that's why we're looking up there."

Perez said Duke, like closely held Indeck, is early in the permitting process.

Officials at CME International couldn't be reached to comment.

Montana: Some Seek To Repeal Deregulation
The Wall Street Journal - October 17, 2000

In July 2002, some 285,000 households and businesses in Western Montana are scheduled to enter the open market to buy their electricity. Industry analysts predict that because of tight supplies -- caused both by the growth in demand for electricity and decades of not building new generation facilities -- those customers could face stiff increases in the Northwest's volatile wholesale market, where prices this summer jumped past $700 a megawatt hour, compared with the normal $25.

"In 2002, you are going to hear a howl out of this state when customers open their bills," says Ken Toole a Helena Democratic candidate for the state senate. "I think we need to look at re-regulation."

Mr. Toole is among a handful of politicians -- both Democrat and Republican -- trying now to lessen the impact of, or even repeal, Montana's deregulation. The Montana Legislature meets every other year, so January's 90-day session presents "our last chance" to make changes before the law takes effect, he says.

Sen. Al Bishop, a Billings Republican, is drafting a bill that would re-regulate the electric lines, poles and generating plants in Montana. "We can't just let this thing happen," he says. "We're sitting ducks and our electricity prices are going to double or triple, like they did in Southern California this year, if we don't act." The problem, say experts, is that Montana may have gone so far down the road of deregulation that it can't pull back.

"I'm not sure we can put this genie back in the bottle," says Bob Anderson, a commissioner on Montana's utility regulatory agency, the Public Service Commission in Helena.

In 1997, the Montana Legislature crafted an electric-deregulation bill that put large industrial customers on the open market in 1998, and set 2002 as the date for residential and small-business customers. On the heels of that bill, Butte-based Montana Power Co., the state's largest investor-owned utility, last December sold its generating assets for $758 million to PPL Global Inc., a unit of PPL Resources Inc., the parent of Pennsylvania Power & Light Co., based in Allentown. The sale included 11 hydroelectric dams and four coal-fired generators that serve 280,000 customers in central and western Montana -- more than half the state's population. This month, the company announced an agreement with Northwestern Corp. of Sioux Falls, S.D., to sell its transmission-and-distribution systems, leaving Montana with precious little to re-regulate.

"Once the generation-and-distribution systems have been sold to out-of-state [entities], it's hard to imagine how we can gain rates based on cost again," says Patrick Judge, energy policy director for the Montana Environmental Information Center in Helena, referring to the way power prices are set by a regulated system. "There are a number of ideas floating around about what we can do, but I'm not sure any of them can ward off a big rate increase for consumers in 2002."

Among the legislators who want to try is Democratic Sen. Mike Halligan of Missoula.

PPL agreed in its purchase of Montana's generators to keep selling power to Montana Power's old customers at regulated rates only until July 2002. Mr. Halligan says he will introduce a bill that would extend that deadline for residential and small-business customers until mid-2004. He doesn't think the tactic will prevent increases in customer bills indefinitely, but says it "might buy time for the wholesale-electricity market to come down some." Sen. Bishop thinks the state should do more. "I think we can say that if you are going to do business in Montana, these are the rates we will allow you to charge," he says.

That's not an idea that will work, says Roger Petersen, president and chief executive officer of PPL Montana LLC, a subsidiary based in Billings. "I think a lot of this talk is based on a misunderstanding of the law." PPL is exempt from regulation and has been licensed as a wholesale-power generator by the Federal Energy Regulatory Commission, he says, and the state doesn't have the authority to regulate the price PPL's power can fetch. Mr. Anderson, who says he appreciates the spirit of Mr. Bishop's proposal, figures that the state can't re-regulate its old power plants, either. "This is private property now, and that kind of state action would likely constitute a taking. It's theoretically possible," he says, if the state were to buy back the generating assets it allowed Montana Power to sell. But he doesn't think that's politically possible because it would be so expensive for taxpayers. And the assets aren't even for sale.

Mr. Bishop, meanwhile, has some allies, including Senate Minority Leader Steve Doherty, a Great Falls Democrat. "I'm willing to consider anything because this blind allegiance to the market has put us in an incredibly difficult situation," says Mr. Doherty.

In the long run, both men say that Montana's best option may be to start over, creating a publicly controlled utility and start building new generating plants to serve the state's customers at cost. But such an effort would take much more than two years, they say.

Even staunch advocates of deregulation in 1997 now have second thoughts.

Minnesota Attorney General Seeks to Avoid Any Attempt at Electric Deregulation
Post-Bulletin - By Bob Freund - October 11, 2000

Attorney General Mike Hatch says the Legislature should not consider even opening a crack in the door to deregulation of electricity, if it wants to avoid the soaring prices and consumer fraud evident in other states.

"My feeling is, once you kick the door open, it is going to blow open all the way," he said Thursday at the annual meeting of Southern Minnesota Municipal Power Agency. Hatch, who wrote an August report critical of electric deregulation at the consumer level, warned the utility commissioners from SMMPA's 18 member cities that a legislative fight over deregulation "very clearly" will happen in the upcoming session, beginning in January.

Although full-scale deregulation -- also called "retail wheeling" _ may not succeed, Hatch said proponents are likely to urge a compromise allowing industrial plants and other large user to shop on the open market for power.

Soaring electric bills during summertime peaks doubled bills for consumers in San Diego, Hatch said. In Pennsylvania and other states, scam artists took advantage of consumers trying to buy energy, he argued.

But Hatch also sees a problem with electricity supplies.

Energy use in Minnesota is increasing at a rate of about 2 percent per year, Hatch said.

Although on paper the state's generating plants produce enough electricity for Minnesota users, in practice, the state imports some power from elsewhere, particularly in times of high use.

Building large-scale power plants, or even transmission lines, takes a minimum of five years and few, if any, are under way to serve the state now.

Before allowing deregulation, lawmakers should assure that enough new production of electricity is available, he said.

At peak times, "If you don't have enough electricity, you don't have competition; you have an (unregulated) monopoly," Hatch said.

Hatch also noted that the other states that have deregulated are typically high-cost states, looking for cheaper power. Minnesota is a low-cost state.

The Legislature also should assure that sufficient consumer protection laws are in place, Hatch said. At Thursday's appearance, Hatch was effectively preaching to the choir. Rochester-based SMMPA publicly is advocating a "go-slow" approach to any deregulation.

The attorney general urged the city utilities to lobby their legislators before the November elections. "Afterwards, the only people that are going to be talking are the lobbyists," he said.

Group appeals state electric deregulation plan
Insight - October 11, 2000

An advocacy group has appealed New Hampshire's electric deregulation plan, saying that when the state ended Public Service Company of New Hampshire's monopoly on generating power, it gave up its own authority to regulate rates.

The Campaign for Ratepayers' Rights is challenging the portion of the agreement that caused the most controversy during negotiations, the right of the utility to recover so-called ``stranded costs.'' Stranded costs are past investments in power plants and contracts the utility probably could not recover in a competitive market.

In a lawsuit filed with the state Supreme Court, the group says allowing Public Service to recover stranded costs is unconstitutional.

Last month, the Public Utilities Commission approved a deregulation settlement that allows the company to refinance up to $800 million of its debt at a lower interest rate and requires consumers to repay the debt, plus interest, over 12 to 14 years.

In exchange, Public Service promises to absorb $450 million of its $2.3 billion in stranded costs. The campaign says that's not enough.

``For many of us with long memories, it's just irrefutable that the so-called stranded costs arose out of decisions by PSNH management in which the ratepayers had no right and no voice to dispute what they did,'' lawyer Robert Backus said. ``The biggest mistake, of course, was Seabrook.''

The nuclear power plant was billions of dollars over its original budget and years behind schedule when it began operating a decade ago.

The group poses 10 questions, all revolving around the stranded-cost charge. They include whether the commission had authority to grant any recovery of stranded costs.

Under the legislation the commission endorsed, most homeowners would save about $13 off a typical monthly electric bill. Rates went down 5 percent this month and are to drop another 12 percent when competition begins in Public Service's territory.

The state, the utility and an array of business groups supports the compromise, as does state Consumer Advocate Michael Holmes.

Under the plan, the total rate cut when competition begins would average 15.5 percent for all Public Service customers. Residential rates would drop about 17 percent. Deeper cuts would occur in years to come as ratepayers pay off stranded costs.

Lawmakers skeptical of electric deregulation plan
Insight - October 11, 2000

State lawmakers want additional assurances that West Virginia's electric deregulation plan is good for consumers before it is approved.

During legislative meetings Tuesday, several lawmakers questioned Public Service Chairwoman Charlotte Lane on whether deregulation makes sense since West Virginia's electric rates are the ninth lowest in the nation.

``There's a lot of people who say, 'What's the reason for giving that away,''' said Senate Education Chairman Lloyd Jackson, D-Lincoln. ``I think it's critical for you all to make that case if you expect us to pass that resolution.''

Earlier this year, lawmakers approved a measure to allow the PSC to develop a deregulation plan. The law requires lawmakers to approve a resolution next year before deregulation could occur. Lane said West Virginia's plan takes into consideration problems encountered in other states such as California. ``We are smarter than California,'' she said.

The California plan failed to set caps on rate increases and required utilities to sell power stations, she said.

West Virginia's plan would freeze electric rates for four years and place a cap on rate hikes for another nine, she said.

Delegate John Doyle, D-Jefferson, said he would like to invite environmentalists to future meetings to discuss their objections to deregulation.

Lane said environmentalists want to require that a percentage of electricity generated in the state comes from non-coal sources, including solar and wind.

``Mandating that a certain amount of power be green power is entirely opposite the free-market system,'' Lane said.

Florida Commission to Examine Issue of Electric-Utility Deregulation
The Florida Times-Union - October 10, 2000

Rolling blackouts and a doubling of electricity rates for customers in California. Power shortages in Wisconsin.

Electric utility deregulation isn't receiving much good press these days as a Florida commission appointed by Gov. Jeb Bush begins to examine the best way to restructure the industry in the Sunshine State. In general, deregulation calls for splitting power generation, transmission and distribution into distinct businesses and allowing generation companies to compete on the retail level. The theory is competition would drive down prices.

Already, 24 states have enacted some form of deregulation, more often called restructuring now because the focus has shifted from cutting the industry loose to reorganizing the way it is regulated. Florida has lagged, largely because of relatively low electricity prices, which have seemed to be the driving force in other states, said Sen. Tom Lee, R-Brandon, of the Senate Regulated Industries Committee.

But Lee said another reason for the delay has been powerful electric companies, which he said oppose deregulation and essentially killed his effort to begin studying the issue two years ago. "For something that was just a study, to engender that kind of controversy was unprecedented," said Lee, referring to lobbyists who packed his committee hearings. "I'd never seen so many billable hours in my life."

Utility companies such as Florida Power Corp. -- one of the state's largest -- say they are not opposed to deregulation, but they are concerned about problems in new systems created elsewhere.

"Our argument is we want the overall issue of restructuring looked at," Florida Power Corp. spokeswoman Melanie Forbrick said. "To do so any other way would be detrimental to the consumers of Florida."

A case in point is California, Forbrick said, which approved deregulation in 1996, creating competition among power generators while maintaining centralized control on distribution lines.

Deregulation came at a time when consumer demand was surging and suppliers were unable to keep up with demand. The eventual result was rolling blackouts in San Francisco and a doubling and tripling of prices in San Diego. Customers in California reacted by campaigning for the state to regain control of utilities sold to private investors.

Since then, states, including Pennsylvania, have taken a modified approach, phasing in consumer choice over three years and including rate freezes through 2006. The result has been a much less volatile market.

Jim Owens, a spokesman for Edison Electric Institute, which represents the nation's investor-owned utilities, said Florida and other states are understandably taking their time on the deregulation issue. "The reality is that it is a complex subject," Owens said. "I think states like Florida are looking at what is going on in other states and asking themselves if this is really in the best interest of our constituents." As with the rest of the nation, industrial and large commercial customers in Florida have been the most vocal advocates for electric restructuring, according to the state's Public Service Commission, which studied the issue.

Their size and business experience would give them the ability to negotiate lower prices or build their own power stations. Also, they would be likely targets for merchants plant and alternative generation suppliers, the report said.

The only pressing issue in Florida is the state's unique peninsular geography. Florida's electrical grid is only tied to other utilities in only one direction -- to the north through the Southern Co. This limits reliability on out-of-state purchases.

Florida has little low-cost hydropower, and all of the state's generating fuels must be transported long distances.

The Florida commission must make a recommendation to Bush on changes to the wholesale industry by February 2001, with a final report due by December 2001, Lee said.

Lee said he was pleased that the commission appointed by Bush did not include any state power companies employees, something that was not assured in the proposal considered by the Legislature. "I have a lot of promise for this commission, the way the governor has structured it," Lee said. "The members will be free from the political structure to make objective decisions." It's still too early to say which course the state will take, he said.

"I have to believe that there will be some changes recommended, the question is how dramatic will they be," Lee said. "What kind of efforts will be made to preserve the integrity of the incumbent providers? It's hard to predict."

An Electricity Crunch May Force the Nation Into Tough Tradeoffs
The Wall Street Journal - By Jim Carlton - October 9, 2000

At the height of California's electricity crunch this summer, PG&E Corp. wanted to anchor a floating power plant in San Francisco Bay to help avert potential brownouts.

Environmentalists objected, arguing that the plant's four jet turbines would spew noxious fumes into the air and could spill fuel into the bay. They threatened to blockade the barge at the Golden Gate Bridge with a flotilla of small boats.

The energy company quickly backed off, diverting the floating rig, which had already passed through the Panama Canal en route from Texas, to a holding port in Oregon. When temperatures soared to the triple digits around here last month, Northern Californians once again cranked up their air conditioners, draining PG&E's electricity reserves anew and forcing it to cut power to 200 business customers. The power shortages afflicting California and other parts of the nation are the product of the long economic boom, the increasing use of energy-guzzling computer devices, population growth and a slowdown in new power-plant construction amid the deregulation of the utility market. And as the shortages threaten to spread eastward over the next few years, more Americans may face a tradeoff they would rather not make in the long-running conflict between energy and the environment: whether to build more power plants or to contend with the economic headaches and inconveniences of inadequate power supplies.

The quandary is already evident as the nation's energy producers, even those proposing to meet the surging demand for electricity with the cleanest types of power plants, find themselves stymied by environmental groups concerned about pollution and damage to natural resources. The two sides are facing off coast to coast: from a proposed wind farm near Los Angeles, thwarted by bird enthusiasts, to a high-tech gas plant slated for New York's Hudson River Valley, under attack as a potential eyesore. Even hydroelectricity -- among the most renewable energy resources -- is under fire along the West Coast, from activists bent on unleashing wild rivers.

"Bottom line," says Sen. Slade Gorton, a Washington Republican who often sides with the power industry, "whatever suggestion you make, they find something wrong with it and bring more lawsuits."

Environmentalists benefit from electricity, too, of course, but they say better conservation, not more power, is the best way to solve the problem of shortages. Consumers and corporate users should be given incentives to use energy more efficiently, they say, by improving home insulation, adjusting their thermostats and modernizing office buildings by, for example, installing more energy-efficient lighting.

"Conservation is the cheapest source of power," says David Bayles, a director of the Pacific Rivers Council environmental group in Eugene, Ore.

Utilities, however, generally are spending less on conservation in today's era of deregulation than they were a decade ago. PG&E's utility unit, Pacific Gas & Electric Co., spends about $120 million annually on conservation programs, such as offering rebates on energy-efficient appliances, compared with about $170 million in 1992.

Industry and environmentalist forces clashed last year in the Tehachapi Mountains north of Los Angeles, where Enron Corp. proposed perhaps the greenest power source of all: electricity generated by the wind. But bird advocates complained that Enron's proposed windmill farm would imperil the nearly extinct California condor, a giant bird that likes to glide low along the steep slopes where the windmills were slated to turn.

"A condor Cuisinart, that's what it'd be," says Dan Beard, senior vice president of the National Audubon Society. Preferring to avoid a showdown with conservationists, Enron, which is based in Houston, agreed to relocate the windmills at considerable delay and expense.

Industry advocates acknowledge conservation is important. Pacific Gas, based in San Francisco, says its public conservation program has allowed it to stretch its capacity by about 1,000 megawatts in California over the past decade, roughly equivalent to San Francisco's electricity demands on a hot day.

But that still isn't enough to satisfy electricity demand in the Golden State, which industry executives say has risen 7% just since last year. Now, peak consumption approaches the state's generating capacity of about 46,000 megawatts.

During a series of heat waves from May through September, the state's operating reserves repeatedly fell below 5% of generating capacity, prompting California's Independent System Operator, a nonprofit corporation chartered by the state to monitor its power supplies, to declare 17 so-called Stage Two alerts. Those alerts required utilities to suspend power to business customers that receive favorable rates in exchange for agreeing to an interruption in their service during power emergencies.

"With the pace at which power consumption is growing, we are going to need all the solutions -- more conservation and more plants," says Leslie Everett, a Pacific Gas vice president.

To get new plants approved, utility executives say producers must jump through more regulatory hoops than ever -- with fewer assurances that environmentalists won't mobilize to quash their plans. In Athens, N.Y., for example, state officials required another PG&E subsidiary to design a proposed natural-gas plant along the Hudson River with a state-of-the-art air-cooling system that minimizes the need for river water.

"We must move forward. . . . Otherwise, the state will face power shortages and higher electric prices," Maureen Helmer, chairwoman of New York's Board on Electric Generation Siting and the Environment, said in approving the 1,080-megawatt facility in June.

But some people think the plant will mar the pastoral landscape near a quaint farmhouse and a state historic site called Olana, the estate of 19th-century American landscape painter Frederick Edwin Church. About 17 environmental, recreation and community groups are opposing the project, putting its planned 2002 start date in jeopardy.

"It's the right plant, but in the wrong place," says Ashok Gupta, an economist for the Natural Resources Defense Council, an environmental group based in New York.

Such opposition leaves the power industry with few alternatives. In the wake of highly publicized nuclear accidents at Three Mile Island and Chernobyl in past decades, nuclear power has proven too controversial for most power companies. Yet new technologies, too, often run into political obstacles as at Athens, and even plans to expand existing plants are setting off fireworks.

Consolidated Edison Co.'s bid to double capacity at its East 14th Street steam and electrical plant in lower Manhattan, for example, is meeting stiff opposition from a coalition of community and environmental activists -- even though most of its opponents agree the new generators would be far cleaner-burning than the two they would join at the complex. Con Edison, whose application for the expansion is still pending with the state, wants the generators to replace an older plant elsewhere in Manhattan that it plans to shut down.

But the activists are demanding that Con Edison first clean up its old generators at the 14th Street plant, which went into service more than 30 years ago. They say carbon monoxide and other toxic emissions from those units have caused asthma and other health problems among the neighborhood's mostly low- to middle-income residents. "We see the need for energy, but we also see the need to reduce the pollution already out there," says Susan Stetzer, vice president of the East River Environmental Coalition, a New York conservation group.

PG&E, Industry Group Want to Return to Regulation
San Jose Mercury News - October 6, 2000

In a move that could have enormous implications for consumers, officials from PG&E and a major utility group are pushing plans that some experts say would essentially re-regulate California's power industry.

Under the proposals by Pacific Gas & Electric Co. and the California Municipal Utilities Association, the price of power would be set the way it used to be. It would be severely limited by regulators who would tell power generators how much profit they could make.

The requests from PG&E and the association -- which represents 30 publicly owned electric companies -- highlights the growing dissatisfaction with deregulation, which many expected to lower the price of power. Instead, power shortages and skyrocketing costs have sparked concerns from consumers and industry.

The plan proposed Thursday by the association, whose members provide electricity to one of every four Californians, also calls for a new government agency to oversee all sales and transmission of power. In legal papers filed with the Federal Energy Regulatory Commission, which could approve the proposals, the group said it hasn't given up on the idea that power producers should be able to charge what the market will bear.

But as it is now, "there is no evidence that markets will ensure just and reasonable rates in the near future," the association said. "The bottom line is that municipal utilities believe a stable environment must be created for the benefit of all consumers."

Officials at PG&E offered a similar price-cap proposal in papers filed Thursday with the Independent System Operator, which now oversees much of the state's power grid. But PG&E spokesman John Nelson said the cap wouldn't have to be permanent.

"We don't view it as a return to regulation. We view it as a necessary short-term step to try to bring prices back in line," Nelson said. Although his company still sells power from its few remaining plants and benefits from high electricity prices somewhat, it buys most of its power from other companies and has gone deeply in debt.

Nelson said it was essential to "rein in these unconscionable prices where people are charging up to 10 times what it costs to produce electricity."

When the sale of electricity was officially opened up to competition in 1998 under the state's energy deregulation law, it was widely assumed that competition would keep prices low. But this summer, after the state-imposed freeze on electricity rates was lifted in San Diego, prices immediately doubled and even tripled in that city. There are concerns that once the freeze is lifted in Northern California, similar price increases could hit.

The Federal Energy Regulatory Commission already is investigating California's energy problems as a prelude to possibly ordering changes. But officials with power-generating firms said returning the system to the way it used to be, when government regulators determined how much profit could be made, is not a reasonable solution. Moreover, such caps could discourage companies from building power plants, according to Jan Smutny-Jones, executive director of the Independent Energy Producers Association. "I think you'd see a great deal of enthusiasm for building power plants in California dry up," he said. "It would create a great deal of uncertainty." That would be counterproductive, he added, because one of the best ways to bring electricity prices down is to increase the amount of electricity supply by building more power plants.

Bill Highlander, a spokesman for the San Jose-based Calpine Corp., which owns numerous power plants in California, also said he believes a deregulated system where competition is allowed to flourish will result in lower prices.

"That's still the best solution," he said, "and when you get enough generation on line, I think you'll see the market reacting differently, and we would hope you'd see the cost going down, just because of supply and demand."

Under the plan by the utilities association, the Independent System Operator, which is a non-profit corporation headed by a board with some ties to power firms, would lose its job. A new governmental agency would oversee the entire power grid.

How the new agency would work isn't clear, but Michael Shames, of the Utility Consumers' Action Network in San Diego, said it might be an improvement, because the Independent System Operator lacks oversight of the part of the grid that serves municipal utilities.

By giving it oversight over all of the grid, "it could strengthen the ability of the state to fend off market power abuses of private generators," he said.

But Terry Winter, the Independent System Operator's president, said he saw no reason to make such a change. "From my point of view, it's headed right back to re-regulation," he said, and is unneeded because, for the most part, his 2-year-old agency "works quite well."

Although Loretta Lynch, president of the California Public Utilities Commission, was non-committal on the proposals, she said, "I certainly welcome any creative solution to the out-of-control wholesale market. . . . We've got to stop these exorbitant prices."

Delay State Deregulation Says Attorney General
The Morning News - October 6, 2000

Electric deregulation can wait a while longer, says Attorney General Mark Pryor.

As a prelude to a full hearing before the Arkansas Public Service Commission, Pryor this week urged that the deregulation process be delayed beyond the start-up date of Jan. 1, 2002.

"After a year of studying the experiences in other states and the electric prices around the nation, and after being involved in taking the steps toward implementation of deregulation here in Arkansas, I think it is time to protect Arkansas families by taking a closer look and slowing the whole process down," Pryor said in written testimony submitted to the PSC.

How his proposal flies remains to be seen. Other interests must be heard from, including all electric utilities and the PSC staff. The commission has scheduled a full hearing for Oct. 26. The process toward deregulation was approved by the General Assembly in 1999.

Deregulation, as established in other states, permits expanded competition for customers among electric-service providers, some of which may not be utilities currently operating in Arkansas. In fact, some of the providers could be operations that simply buy power, lease lines and sell the power at supposed lower rates than utilities operating in the same territory.

One of the issues that has always bothered us about electric deregulation is the performance of other industries that have been "deregulated." Telephone service and airlines come to mind first; and, frankly, those two are often equated with confusion, higher prices and high-powered sales pitches.

Like any other industry, deregulation of the electric industry has to be complex, hence the PSC's hearings on the issue. As part of the phasing-in process, the PSC is looking at a number of issues, not the least of which is rates.

In Pryor's view, that's a big issue. Under provisions of the new act that implements deregulation, the rates for generation of electricity will no longer be regulated by the commission. Instead, he says, any electric-service provider licensed in Arkansas will be allowed to compete for the right to provide generation service to customers.

That has not worked out, according to Pryor, who says he has studied experiences with deregulation, primarily in California. He says that promised benefits depend on a number of "certain assumptions" involving several factors and that "experience has shown these assumptions are not well founded." In short, he says electric rates have gone up, not down.

Because of questions he says have developed since the legislature passed the deregulation act in 1999, Pryor wants the PSC to delay the entire process because it is not in the public interest. "The process needs to be delayed to allow more study over the next two years to determine whether Arkansas wants to go to electric competition at all," Pryor says.

As we noted, other interests are filing written testimony this week, so Pryor's is just one voice. But his warning should not be ignored in view of reports from states where deregulation is in effect. Many of those reports say it is not working as advertised -- that consumers are paying higher rates and not always getting improved service.

Hopefully, the PSC will carefully consider the deregulation experiences in other states before making a decision about Arkansas' future. It is, after all, the PSC's role to protect interests of consumers.

Deregulation - September - 2000