Businesses still pushing for electricity competition in fight with regulators

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The Orange County Register

SANTA ANA, Calif. _ California’s business community is locked in a battle with energy regulators and lawmakers about how deregulation will ultimately pan out _ and whether companies will be stuck paying most of the tab for the state’s electricity crisis.

Business groups want to continue down the road toward deregulation. They are lobbying politicians to pass legislation that would let companies buy electricity directly from power suppliers, bypassing the state’s regulated utilities.

“In our hearts, we still believe we can make this a competitive market and get some cost savings,” said Bill Dombrowski, president of the California Retailers Association, which represents 9,000 stores in the state, including Home Depot, Target and Albertson’s.

But Gov. Gray Davis‘ foray into long-term contracts, agreeing to pay $43 billion over 10 to 20 years for power, could squash that ambition.

The state’s Public Utilities Commission delayed a proposal Thursday to restrict companies from signing so-called “direct access” contracts with power providers. Regulators are expected to rule on the proposal next week.

The debate over direct access is at the heart of a complicated attempt to solve California’s costly power crisis.

It will determine whether businesses, with residential customers, pay for the bulk of the state’s future energy purchases. It also could determine whether Southern California Edison, the state’s cash-strapped No. 2 utility, will avoid bankruptcy _ and whether deregulation will survive in any form.

“The governor got it exactly wrong,” said Peter Navarro, an economics professor at University of California, Irvine, who is running for the San Diego city council. “The long-term contract strategy is a de-facto re-regulation of the market because it eliminates the ability of industrial customers to bargain for a lower price.”

Direct access was a key component of the 1996 deregulation law, designed to break the monopoly of California’s utilities. Under this concept, all customers could directly access an energy provider other than their regulated utility _ just as they pick a long-distance phone company.

Currently, 11,000 businesses and government entities have direct access, as well as about 77,000 residential customers _ but some energy service providers, such as Enron Corp., are dropping their residential customers.

Direct access is at the center of the latest Edison bailout plan, sponsored by Assembly Speaker Pro Tem Fred Keeley. Under the plan, the 3,600 largest businesses would agree to pay $3.1 billion of Edison‘s debts over 15 years. In exchange, businesses would be allowed to secure their own power contracts by 2003.

But energy regulators may not let companies off the hook at such a bargain price.

David Gamson, an energy advisor to PUC Commissioner Geoffrey F. Brown, said regulators are concerned that if businesses flee the system, the state will be stuck with too much electricity under long-term electricity contracts through 2021. That would mean residential ratepayers would be stuck paying the bulk of the $43 billion in future power costs.

Complicating the issue is Wall Street. The state’s bankers, led by J.P Morgan, are nervous about selling as much as $13.4 billion in planned state bonds if businesses _ currently the largest ratepayers in the state, after governments _ find a way out of the system. The bonds are meant to repay the state for $8.2 billion in power-buying costs so far this year and to cover some future costs.

Business and residential electricity customers would repay the bonds through a surcharge on their utility bills. If businesses are allowed to sign on with outside energy providers, that revenue stream would be in jeopardy.

“We have companies now that want to get below-cost power from the state, but when the market turns, they want to leave,” said Lawrence Lingbloom, chief policy adviser on energy to Sen. Debra Bowen. “Remaining customers would be left with those costs and it would create a death spiral for the revenue stream.”

Consumer groups oppose direct access because it would allow businesses to avoid paying most of the costs of the energy crisis.

“Direct access is a policy that should be dead, because it’s a key adjunct to deregulation,” said Doug Heller, of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “But right now, it’s a policy that’s driving all the deals.”

Even as regulators and consumer groups try to snuff out direct access, business groups are lobbying to save it _ with the help of key legislators.

Two bills, one sponsored by Bowen, who heads the Senate energy committee, and a second by Assemblyman Dave Kelley, would rescind language in previous legislation that gave the Public Utilities Commission authority to block direct access.

Both proposals would require businesses to pay the state an “exit fee.” Those fees haven’t yet been determined, but they would include a surcharge or a complicated calculation in which businesses would pay a percentage of future energy purchases.

Companies say they don’t want to pay.

“Direct access has allowed businesses to enter fixed-price contracts to get stable rates,” said Shawn Covell, senior manager for governmental affairs at Qualcomm Inc. in San Diego. “It’s really unfair when you have businesses that have taken their time to protect themselves, to punish them.”

Qualcomm, which makes telecommunications equipment, saw its energy bills double to $6 million last year. The company signed a contract with an energy service provider, Strategic Energy in Carlsbad, and capped its rates. Otherwise, Covell said, its electricity costs would have doubled again this year.

Sweetwater Union High School District in Chula Vista, Calif., is a direct-access customer. The district, with 35,000 students, spends about $2 million a year on energy, said Jim Clark, its energy manager. His district won a “watchdog award” for efficiency from the San Diego County Taxpayers’ Association because it locked-in lower rates.

When Gov. Gray Davis announced in January that the state would begin signing long-term contracts, Clark extended the district’s contract through 2006 at 11 cents-a-kilowatt hour _ enabling it to save $1 million a year, he said.

“As soon as Davis made the announcement, we knew the market was going to move,” he said. “The market only changes when people buy. When the state of California steps to the plate, the price goes to the moon.”

Davis has maintained that the long-term contracts between the state and power suppliers helped bring down high spot market prices in recent weeks by removing demand from that market.

But Clark and others who want to go the direct access route fear the government will force businesses to pay for all the costs of the energy crisis, including rate increases of 38 percent to 49 percent, plus surcharges to pay off $13.4 billion in forthcoming state bonds.

“Businesses will be required to pay for the mistakes that the governor and the Legislature have made,” he said. “Who else is going to pay for it? Ultimately, it will fall on the heads of all consumers.”

Consumer Watchdog
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