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July - Duke Energy Employee Advocate

Deregulation - September 2000

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

Power Deregulation Stumbles in Infancy
San Jose Mercury News - September 27, 2000

With its residents reeling from surging summertime electricity bills, this coastal state's deregulated energy market has triggered bitter accusations, legislative hearings and a push to re-regulate the whole system.

Sound familiar? Except this isn't California. It's New York, one of 23 other states that are ending what has been for decades one of government's key functions -- keeping tight control on the price of power. The great national experiment to open the sale of electricity to competition, which California has been largely credited with pioneering, was supposed to lower prices by freeing consumers from the monopolistic grip of government regulated utilities. Indeed, energy officials in many states retain hope that it eventually will do that.

But throughout the country, a sense of foreboding has overtaken people like Susan Peckman, who manages Peckman's Liquor Store in Pearl River, N.Y. Hers is the only state outside California so far where consumers have been exposed to the discomfiting impact of fully deregulated prices. And she doesn't feel liberated.

"There's nothing we can do about it," said Peckman, who estimated that her store's electricity bill has jumped about 20 percent this summer over last year's. Faced with the option of paying it or closing down, she added, "you're between a rock and a hard place."

It has been four years since California became one of the first states to pass an energy deregulation law. Yet the movement to revamp the way power is sold in this country remains mired in a "prolonged and muddled transition," according to a study published this month by Cambridge Energy Research Associates and the Arthur Andersen consulting firm.

It's unclear when or even if that transition will ever be completed. In many parts of the country, public officials are terrified of plunging ahead with deregulation, given the high prices and other problems in California and New York. Some even harbor suspicions that California has led the nation astray by promoting an idea that is inherently flawed.

California Public Utilities Commissioner Henry Duque said he encountered that attitude during a summer meeting of the National Association of Regulatory Utility Commissioners in Los Angeles.

"I had other commissioners coming up to me saying, `What the hell is going on here,' " Duque said. "They were concerned. I think their thought was, did we in California see something that was wrong with deregulation but weren't going to level with them now that they had started down the path?" Actually, the federal government bears much of the responsibility for initiating the drive to ease public control of electricity markets.

Hoping to encourage new sources of electricity, Congress passed laws in 1978 and 1992 that forced utility companies to buy increasing amounts of the power they use from other, unregulated energy suppliers. In 1996, the Federal Energy Regulatory Commission also made it possible for other firms to ship their power over the high-voltage lines the utilities owned.

Rhode Island and Massachusetts were first to give residents the ability to choose which company sold them their electricity. But because of its size and much publicized deliberations about its plan to deregulate during the 1990s, California was labeled the national leader on the issue. In many ways, however, deregulation in the state has been a flop -- at least, so far.

Californians have had the right to pick their energy supplier since March 31,1998, when the electricity market was officially unfettered. That ability to choose was seen as an essential way to spur competition and, ultimately, lower energy prices.

But as of Aug. 15, less than 2 percent of California's homeowners, businesses and others had seen fit to drop their local utility for some other supplier.

In San Diego, the first place in California to have its state-mandated cap on utility rates lifted under deregulation, electricity bills for many consumers this summer doubled, while power blackouts also rolled through Northern California. New York's experience wasn't quite as bad. But in the few counties there that were exposed to fully deregulated electricity rates this summer, the average residential bill rose 22 percent.

Investigations are under way in California and New York to determine what happened. Nonetheless, the problems in both states have been largely blamed on an insufficient supply of power plants to meet their demand for electricity, which has forced consumers to pay just about whatever power-producing firms want to charge.

Others are growing nervous, however. This summer's difficulties have spurred calls to significantly stall or even reverse deregulation in North Carolina, Nevada, New Mexico, Minnesota, Oregon and Alabama, among other states.

A Wisconsin consumer advocate recently chuckled over the phone as she read aloud a story about California's energy crisis, noting that such news made her opposition to deregulation much easier.

"I am absolutely convinced that we are on an inexorable march toward the choice model," said Ken Malloy, president of the Center for the Advancement of Energy Markets. But he acknowledged that the experience in San Diego and New York "is undeniably a bad thing that has happened to this movement, and it will set us back."

Refunds From California Power Sellers?
Dow Jones - September 27, 2000

California utility holding companies PG&E Corp (PCG) and Edison International (EIX) are trying to assure Wall Street that they are doing everything feasible to get paid for the expensive electricity they have been buying.

Lobbying, certainly, is the core competency of most utilities, and some of the tactics by PG&E and SCE could well pay off. But when they say they are trying to get refunds from companies that sold them power this summer, they stretch the bounds of credulity.

In a Sept. 22 pleading with the U.S. Federal Energy Regulatory Commission, PG&E asks the Commission to "order refunds if the investigation reveals that unjust and unreasonable rates were charged."

Yet nearly everyone involved thinks that the idea of refunds for purchases already made would be unfair, illegal and impossible to enforce.

"We expect to be paid the market rate for the electricity under the rules that were established for the market," said Chuck Griffin, a spokesman for Southern Co. (SO), which owns power plants in California. Every day, the two utilities buy about half the power they need for daylight hours through the California Power Exchange and California Independent System Operator. Sellers into those systems include independent power generators in California, utilities outside of California and power marketers.

To start with power marketers, some have made a lot of profit this year buying power before prices went up and selling it during the salad days of this summer. But it would be unusual for a trader simply to have bought forward monthly contracts last fall or winter, held onto the position and sold it daily into the PX and ISO. Traders constantly buy and sell in the hopes of maximizing price volatility.

So from whom will PG&E and SCE ask for a refund? The last trader who owned a contract and sold it daily for an average of $160 a megawatt-hour in August? Maybe the trader bought the supply for $155/MWh in late July. Would he have to pay a refund bigger than his profit, or would the PX and ISO try to get part of the refund from the penultimate owner and continue down the line, which could include 10 or 20 temporary owners for just one 25-MW contract?

"Power is bought and sold many, many times over before it reaches the consumer," said Tom Williams, a spokesman for Duke Energy Corp., which owns power plants in California. "We sell the majority of our power in the forward market."

PG&E and Sempra Energy, which owns California's other investor-owned utility San Diego Gas & Electric, both have substantial unregulated power marketing subsidiaries that have benefited from the California market and from the price spikes in the Midwest and Northeast in the summers of 1998 and 1998. Are those subsidiaries volunteering to refund their profits to Cinergy Corp. (CIN), which lost about $125 million the past two summers?

As for out-of-state utilities, is California going to take the largest seller - provincial utility British Columbia Hydro - to international court? Next on the list of big sellers are municipal utility Los Angeles Dept. of Water & Power and the U.S. government's Bonneville Power Administration. But, to be fair, California's investor-owned utilities would need to pay those entities a bonus for the cheap power they bought during the mild weather of 1999, when the California utilities were able to pay off billions in stranded debt.

Western investor-owned utilities like Arizona Public Service, which is a subsidiary of Pinnacle West Capital Corp. (PNW), and the Public Service of New Mexico (PNM) have done well this summer selling to California. But PG&E and SCE will have to move fast before those companies send out dividend checks. Having to go after those shareholders might prove complicated.

No. PG&E and SCE will try to focus on independent generators in California - companies like Southern, Duke, Dynegy Inc. (DYN), Reliant Energy Inc. (REI) and AES Corp. (AES) that bought the generating stations that PG&E and SCE sold two years ago.

The utilities and some regulators have charged continuously this summer that the independent generators "manipulated" the market. If true, PG&E and SCE might have a case.

But none of the many investigations so far have turned up any collusion. Nor will they, it seems, as there is nothing illegal in selling your product at the best available price.

Deregulation Not The Answer In North Carolina
Wilmington Star-News - September 26, 2000

We are hearing more and more talk about deregulation, but we look at what is happening in several other states where deregulation came into being. We read that ``this summer's sky rocketing power prices in deregulated states such as Montana and California have had a chilling effect on the campaign to overhaul North Carolina's electric industry.''

The debt is there to the tune of $5.5 billion. There is no doubt about that fact. And 51 North Carolina cities owe that money.

State Treasurer Harlan Boyles has proposed that the distribution systems in the 51 electricities be sold to the highest bidder and the money used to help pay off the debt. Then for the balance of that debt, he proposes that the state take over and assume it.

This is an answer, but it is not one that is meeting with any enthusiasm that we can detect. The 51 cities will never give up the distribution system because the profits earned from electric power help keep the tax rate lower than otherwise would be the case.

Now somewhere along the line, some action of some sort is bound to take place, and we suspect that when it takes place, somebody is going to be hurt. We cannot continue staring the picture in the face and doing nothing to solve the problem. A debt of $5.5 billion is not to be postponed indefinitely. There is bound to be a day of reckoning.

Insofar as we know, Boyle's answer is the only one on the table. We need to realize that North Carolina's deregulation efforts and the cities' debts are twins and we cannot discuss one without discussing the other. Some two decades ago Carolina Power and Light and Duke Power build expensive power plants and cities went heavily into debt.

Now if deregulation should be the order of the day, with expected rising electric rates, the future might well find customers seeking cheaper power. If that should happen, then the electricities might be in a tragic position.

The next session of the legislature surely will have this problem before it. If answers which can be enacted later cannot be found now, then we cannot expect the legislature to do the impossible.

Again, we're in a big mess and we must find some solution somewhere along the way. As we see it, somebody or some cities are bound to be hurt.

It hardly appears that deregulation is the answer.

Commission indicates it's in no hurry to open electricity market
Associated Press - September 14, 2000

It could be a while before North Carolina consumers get to pick their power company the same way they pick their telephone company, a legislative study commission indicated Thursday.

``Would it not be reasonable to think that most people in North Carolina just want to be left alone?'' Sen. Fountain Odom, D-Mecklenburg, asked a consultant.

``They want reliable electric service, but they're not so much interested in the lowest price in town.''

Alan F. Destribats, the consultant, said studies indicate North Carolina residents generally are happy with Duke Power, Carolina Power & Light and North Carolina, the state's three major utilities.

Destribats outlined for the study commission what has happened in 25 other states that already have deregulated electric sales.

In some cases, residential rates have been reduced, but in California, residential customers have been faced with power shortages and increasing rates this summer.

Charles McKeller, who heads the N.C. Coalition for Customer Choice in Electricity, said the state should use successful states as models for deregulating North Carolina's electric service.

The coalition includes large industrial operations that want to buy power from the cheapest source, and not be required to use the local electric company, as they are now.

North Carolina Residents Debate Deregulation of Electricity
High Point Enterprise - By Paul B. Johnson - September 5, 2000

Donald Ratliffe doesn't know the intimate details over the complex debate over whether to deregulate the sale of electricity to millions of customers in North Carolina.

But the 57-year-old mechanic from Kernersville said he does know enough to boil the issue down to a proverbial phrase ? if it ain't broke, don't fix it.

"Anytime they've seemed to deregulate something, it becomes a big mess," Ratliffe said, referring to the deregulation of fields such as the airline and telephone industries. Change can be good, but it's not always good."

Answering questions recently as part of an informal survey of men and women in the Triad, Ratliffe said the current monopoly system for electric service suits him.

"When you think about what you get for your money, it's still a great buy," he said.

Ratliffe was one of the people interviewed recently by the High Point Enterprise on their thoughts about whether the state should reform the $8-billion-a-year electric industry. Members of the Study Commission on the Future of Electric Service in N.C. have spent the past three years dealing with analysts, lobbyists and industry representatives on how to approach the intricate issue. In April, the 29-member commission approved recommendations that include deregulating the sale of electricity starting in 2005, with full implementation in 2006. The commission will resume its meetings in Raleigh Sept. 14, with the goal of coming up with legislation that could be proposed for the 2001 General Assembly session.

State legislators will have the final say on whether to deregulate an industry that has functioned under a monopoly system for virtually a century. The response of people answering questions posed by the Enterprise was similar to the opinions expressed two years ago when eight public hearings were held across the state on electric deregulation. Approximately 1,850 people attended the meetings, according to a report prepared for the commission.

"Many people expressed serious concerns about restructuring, without expressing a definite opinion either `for' or `against' it," reported the consultant that prepared the commission's report on the information gathered at the hearings.

The debate over deregulation carries special significance for High Point because of the monumental level of municipal power debts.

The study commission hasn't come up with a specific plan to address the $5.5 billion debt. 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.

Several proposals considered by the commission would compel the 51 cities and towns to sell their power distribution systems, with the revenue going toward debt relief.

For Avis Murphy of High Point, the topic of deregulation prompts her to envision potential benefits and pitfalls.

The 25-year-old retail manager said having more options to pick her family's power provider should lead to better service and prices because of competition.

But she can also see people being taken advantage of if the government doesn't have some oversight to prevent price gouging. Murphy suggested having what would amount to a social safety net if deregulation takes place, such as putting a cap on how much rates can go up during a certain period of time among companies providing service.

Many men and women interviewed by the Enterprise said they didn't want a deregulated electric industry to become a day-to-day telemarketing and sales pitch drudgery.

Lou Damron of High Point and her friend enjoying lunch rolled their eyes when asked if they would mind getting telemarketing calls from power companies as they do now from telecommunication companies.

"Whenever they do something like this, it always gets more complicated," said 59-year-old retiree. "I like the way it is now ? I don't have to worry about it."

Retiree Johnnie Alexander of High Point said that she wouldn't want deregulation to interfere with her ability to have an equalized payment plan, which allows her to keep her payments the same through the year.

"I like the way it is now," the 67year-old woman said.

Some people expressed an interest in deregulation if it would lead to better prices.

Competition could be an improvement because companies would offer lower rates to lure customers, said 69-year-old retiree John Cochran of High Point. Also, a competitive market may compel more companies to build new power plants to meet the demand of a growing base of customers, Cochran said.

"It always a better when there's an open marketplace," said 26-yearold financial specialist Phillip Carter of Advance, who works in High Point. "I'm a firm believer in capitalism and the free market."

One challenge that officials face in reforming the electric industry is the wide disparity in the customer base and amount of electricity used per customer in North Carolina.

Of the approximately 4 million electric customers in the state, 87 percent are residential customers. About 12 percent are commercial customers, meaning owners of shopping centers and office buildings, with about 1 percent industrial customers, such as manufacturers.

However, the vast majority of electricity is used by the least number of customers.

For example, for Carolina Power & Light Co., less than 1 percent of its customers use 25 percent of the power that the utility generates. Put another way, of CP&L's 1.2 million customers, the top 50 ? virtually all industries ? use 25 percent of the utility's energy, CP&L reports.

The disparity in the scope of customers and in how much electricity various types of customers use make it challenging to come up with a competitive rate structure where all types of customers benefit, said Charles Harman, a Duke University mechanical engineering professor.

"What's going to happen with deregulation is that people with market clout are going to be able to negotiate better deals than people without market clout," said Harman, who has an expertise in electric industry issues.

That means ordinary people may find that deregulation won't have any noticeable effect on what they pay each month to a utility, Harman said.

Deregulation - August - 2000