California, Pennsylvania deregulation falls into legal limbo

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Electric Light & Power Magazine

The headlines have been screaming for over a year about the pros and cons of deregulation, and no two states have held more symbolic positions in that debate than Pennsylvania and California — the alpha and omega of electric restructuring.

To examine the current status of deregulation, EL&P has chosen to take a closer look at how the great failure, California, and the great success, Pennsylvania, are faring. It looks like both are meeting somewhere in a court-laden middle.

Everyone knows the trouble they’ve seen.

A little over a year ago, deregulation in California was a mess of rolling blackouts and finger-pointing. There were issues with high electric bills, hard cap vs. soft cap debates, ISO structure problems and an angry governor, legislature and populous. It was a harsh environment for restructuring.

The Foundation for Taxpayer and Consumer Rights declared deregulation “an unmitigated failure,” and Governor Gray Davis threatened to “dismantle” the California Independent System Operator (ISO). Finally, on January 17, 2001, the Golden State slid that last inch into mandatory rolling blackouts.

But blackouts weren’t California’s only power problems. The state’s largest utilities were on the fiscal ropes. The governor pushed through an emergency bailout of Pacific Gas & Electric (PG&E) to the tune of $ 400 million, but it wasn’t enough. PG&E filed bankruptcy on April 6, 2001, and that bankruptcy has been at the forefront of California’s restructuring problems since.

Davis lambasted PG&E for their filing, saying the company had “dishonored itself,” but PG&E pushed on. The company had officially filed its reorganization plan by late September, much to the concern of California Attorney General Bill Lockyer. He released a statement with the opinion that PG&E was “seeking to evade further scrutiny by the California Public Utility Commission (CPUC).”

In January 2002, Lockyer took that concern a step further and charged PG&E with “illegal, unfair and fraudulent businesses practices,” filing a civil suit in San Francisco Superior Court to have PG&E pay between $ 600 million and $ 4 billion in monetary penalties for the alleged violations.

PG&E agreed more than five years ago, as a condition of approval to form a massive holding company, to protect California ratepayers and ensure the healthy operation of its California-regulated utility,” Lockyer stated. “Instead of keeping its promise, PG&E Corporation drained the assets of its California utility and put billions of dollars into unregulated affiliates in order to achieve its ultimate objective of becoming one of the largest unregulated power generating companies in the nation.”

CPUC president Loretta Lynch supported Lockyer’s action, stating that the case “will enable the question to be determined by a California state court of whether PG&E Corporation is taking advantage of PG&E‘s financial distress to acquire its assets at fire sale prices.”

PG&E, on the other hand, is happy with neither Lockyer nor the CPUC. Right before Lockyer’s civil suit announcement, the CPUC filed a motion in bankruptcy court objecting to the extension of PG&E‘s exclusivity period. They even offered an alternate plan. PG&E was quick to respond.

In a statement released to the press, the company labeled the CPUC announcement “simply the latest in a series of efforts to delay PG&E‘s emergence from bankruptcy.”

They stated that their reorganization plan resolved creditor claims while preventing a raise in rates and allowing the state to “get out of the energy business.”

They also noted that their plan was supported by the official creditors’ committee. However, it isn’t supported by consumer groups like The Utility Reform Network (TURN). TURN’s executive director, Nettie Hoge, commented that the CPUC’s actions pointed out the obvious.

“A company with at least $ 4.9 billion in cash on hand doesn’t need or deserve to be further fattened at the public expense,” she said, calling the company’s bankruptcy plan “bloated.”

But not all is dark on the California front. While PG&E may be awash in legal problems, the state has had plenty of the one item they were so lacking in January 2001: power.

This time last year, the ISO was struggling to keep the electricity flowing, and chief ISO scheduler Tracey Bibb was desperate to find 4,000 to 6,000 MW on an hourly basis. Compared to that, this winter is a cakewalk.

“This year, I only have to come up with a couple of hundred MW in real time,” Bibb stated. “The key is we have excess generation with few power plant outages and electricity imports are running ahead.”

The ISO cited additional generation to the tune of 2,231 MW, along with fewer outages and long-term contracts, as the main reasons for the lack of a power scramble this year. The end of the drought in the Pacific Northwest and lower gas prices also helped.

And, along with that surge in power, Californians should be happy they aren’t facing two utility bankruptcies, as the beleaguered Southern California Edison (SCE) managed to dodge that bullet in October 2001 through a settlement that allows the to recover more than $ 3 billion through customer rate charges.

It looks as if deregulation has become the stuff of legalities in the Golden State, although the public’s memory of those rolling blackouts last year may still be fresh. A Sempra Energy Solutions December 2001 survey stated that about two-thirds of the California businesses they polled had a “generally negative” feeling about deregulation in the state.

So, while the blackouts may be a thing of the past, the feeling that California is a restructuring failure lingers. They remain the omega symbol on deregulation’s sliding scale.

Keystone set to crumble?

Pennsylvania was the bright and shining deregulation example. With the Pennsylvania-New Jersey-Maryland (PJM) Interconnection in its pocket, the state sat on the alpha throne of restructuring, but now it’s beginning to lose a bit of that shine.

Rising fuel costs were the first problem, which hit last winter, but they were quickly followed by the belly-up death of alternate supplier in March 2000, which initiated a complaint by the Office of Consumer Advocate. They went in search of refunds, which have been trickling in at an unsteady pace since: $ 70,000 here, $ 50,000 there. The last round went out in December to approximately 800 former customers in the PECO, PPL, GPU and UGI Electric service territories.

The Keystone State took one on the chin with, but it wasn’t out. In April 2000, Pennsylvania reached its high point with customers participating in the open market: 787,846.

Unfortunately, that number had slipped to 591,596 by July, and the Office noted that nearly half that number represented former PECO customers buying power at below market cost as part of the state’s discount power program.

By October 2000, that number had slipped further, to 580,154 with 242,236 residential customers assigned to competitive discount service. Commercial customers had slid from 91,551 in January of that year to a mere 15, 467 in October. The number of industrial customers served by an alternate supplier in October waffled at 408, down from 3,089 that January.

The shopping statistics for January 2002 doesn’t show much of a significant change since October, although the numbers are still sliding for residential, they have actually rebounded a bit for commercial and industrial. Commercial is up to 20,045 and industrial rests at 592. However, the overall number is approximate 30,000 below October, resting at 551,106.

“It is true that the level of retail competition has decreased from its year 2000 levels,” stated Sonny Popowsky, the consumer advocate of Pennsylvania. “This is substantially a result of increased wholesale electric energy and capacity prices that make it hard for competitors to beat our utilities’ capped retail prices and still make a profit.”

“Our policy goal should be to stay the course and continue to provide protections for consumers while we see how competitive markets develop,” he added.

However, a flat retail market isn’t the only issue with Pennsylvania’s restructuring. Last fall, the Federal Energy Regulatory Commission (FERC) took a close hard look at Exelon’s hand in the PJM marketplace. On October 3, FERC issued an order requiring Exelon to show cause that it did not violate the Federal Power Act and FERC’s standard of conduct. FERC alleged that PECO Energy, Exelon’s electric transmission and distribution business in southeastern Pennsylvania, may have operated its transmission system in an unduly preferential manner so as to benefit Exelon’s “power team,” the company’s wholesale trading arm.

In late November, 2001, the Pennsylvania Public Utility Commission (PUC) added to the fire by opening an investigation into the wholesale electricity markets. The Commission took this action based on a report filed by PJM which found that, during the period from January through March 2001, market power was exerted by a company — referred to only as “entity 1” but later revealed to be PPL EnergyPlus — to influence the availability and price of installed capacity.

“The PUC takes our market-monitoring responsibilities very seriously,” stated chairman Glen Thomas. “All parties must have confidence that electric markets at the wholesale level are working fairly.”

NewPower Company, who had filed a complaint with FERC in July 2000 claiming that “prices in the PJM capacity markets are unjust and unreasonable,” supported the investigation. In comments to the PUC, the company claimed it had been “victimized by the market manipulation that is today possible in the PJM ICAP [installed capacity] markets.”

The company went on to say that it was “unable to make attractive offers to Pennsylvania’s residential and small commercial electricity consumers.”

NewPower also stated that it did not agree with the conclusion of the report which initiated the PUC‘s official investigation. Apparently, the “Report to the Pennsylvania Public Utility Commission” by PJM’s market monitoring unit suggested an increase in excess capacity within PJM and two changes to the ICAP market. NewPower stated that these adjustments would not eliminate the ability of “entity 1” to exercise market power.

While the PUC investigation was still open at press time, the FERC investigation had been terminated in December. They stated that they had found no proof of improper manipulation. FERC did ask PJM to require generators to plan outages in advance in the future, among other suggested changes.

“We at Exelon are delighted that FERC accepted our evidence refuting its allegations,” said Elizabeth Moler, Exelon’s senior vice president of government affairs and policy.

“We also support PJM’s new procedures to make the market more open and transparent,” she added.

Overall, Pennsylvania has been overcome by legal issues and investigations very much like those in the Golden State, but Consumer advocate Popowsky believes in Pennsylvania’s restructuring process, even if it has hit a snag.

“Pennsylvania electric consumers have fared well under the 1996 electric restructuring legislation. Today, the reliability and supply of electricity are adequate and structures are in place to provide effective price protection,” he stated.

He asked, however, that the Pennsylvania House keep an eye on requests to raise retail rates to speed the state toward a competitive market.

“There is no question in my mind that our energy policy will have failed if we provide an abundance of choices to some consumers but leave our poorest consumers quite literally out in the cold,” he said.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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