Effort to restore power monopoly falls to pressure

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Los Angeles Business Journal

Major California businesses and independent power producers have won a partial victory in their efforts to hold off a move to reregulate the state’s electricity markets.

In the face of intense lobbying, members of the Senate Energy Committee last week persuaded state Sen. Joseph Dunn, D-Garden Grove, to drop a provision banning competition contained in a bill that essentially would have restored utility monopolies to the state’s energy market. In so doing, it would have prevented large power users from choosing their own providers, a process known as direct access.

“No one has ever been able to develop a program for direct access that avoids having the small users subsidizing the big users who have the economic might to go the direct access route,” Dunne said.

A reworded version of the bill now instructs the state Public Utilities Commission to come up with a compromise that allows for a limited form of direct access. The revision will be heard in the Senate Appropriations Committee in the next couple of weeks. It must then be reconciled with legislation in the Assembly that would also allow direct access.

The Senate bill has attracted the most attention since it is far more sweeping. Besides dealing with direct access, the Dunn bill would require state regulators to set utility rates with guaranteed profit margins, similar to their role prior to deregulation in the late 1990s.

But direct access is its center. Instead of allowing business or residential customers to choose their power provider, as was the case during deregulation, the compromise allows only the largest power users to switch — and they would have to pay a price for that privilege. The exact threshold and “exit price” would be determined by the PUC.

The compromise does not go far enough for business groups that are pushing for unfettered direct access. And it has angered consumer groups that say it destroys the notion of a reliable, regulated market.

“We’re glad the ban was dropped, but we still have problems with the bill,” said Dominic DiMare, a lobbyist with the California Chamber of Commerce. “We don’t want the exit fee to be so exorbitant that it negates all the savings of switching”

Dunn said the chamber’s lobbying effort betrayed the interests of the group’s core membership.

“I have directly and publicly accused the statewide chamber of selling out the interests of the vast majority of its membership –small and medium-sized businesses — for the sake of a handful of very large users who have the economic and political might to go via the direct access route,” he said. “Those large players are the ones who provide most of the funding source for the Organization.”

No piecemeal approach

Consumer advocates argued that any shred of direct access must be wiped away entirely.

“Direct access must be ended, not mended,” said Doug Heller, senior consumer advocate for the Foundation for Taxpayer and Consumer Rights. “You shouldn’t be able to create a scheme in which some can go searching for a better deal and force others to subsidize this.”

Direct access was the central feature in the state’s failed deregulation law, enacted in 1996. Tens of thousands of large businesses left the utility power grid and signed up with third party power providers at greatly reduced rates, only to rush back to the utilities when the huge spike in power prices hit in late 2000.

Subsequent investigations revealed that independent power marketers like Enron Corp. manipulated the state’s power market and contributed to the run-up in prices. These revelations have lent steam to the effort to reregulate the state’s power market.

The PUC suspended direct access in late 2001, after the state stepped in to buy power for the insolvent utilities. Since then, the agency has been debating whether to restore it and, if so, how much businesses should be charged for the privilege of choosing another power provider.

Meanwhile, the state’s power market has evolved into a mish-mash of policies. Most businesses and residents are still required to buy their power from the state’s three investor-owned utilities — Southern California Edison, Pacific Gas & Electric Co. and San Diego Gas & Electric — at very high rates set by the state. But it wasn’t until earlier this year that the utilities were allowed to resume their traditional role of buying power.

About 50,000 businesses have been allowed to retain contracts with independent power providers that were signed before the current ban went into effect. These businesses enjoy much lower power rates.

Restoring order

On top of this, about one-third of the power consumed in the state comes from long-term contracts the administration of Gov. Gray Davis signed with independent power producers, again at high prices. Davis and other state officials are now trying to get these contracts rescinded and $ 9 billion returned to state coffers.

Dunn’s bill is an attempt to set up a structure for the state’s fractured power market.

Initially, the bill tried to restore the monopoly power of utilities that existed before deregulation began. State regulators would set rates for the utilities, requiring them to serve all residents and businesses in their service area and realize a set profit margin. Utilities would be required to ensure that they have enough power plants and transmission capacity to serve all these customers.

“Californians were the lab rats for a deregulation experiment that went horribly wrong,” said Heller. “They want a regulated energy system that can be counted on to provide reliable and affordable electricity.”

But pressure from business was intense.

“Direct access is essential and beneficial to our members,” said Bill Dombrowski, president of the California Retailers Association. “The old market didn’t benefit us at all: we were paying rates 50 percent higher than the national average. With direct access, our members can negotiate better prices and save millions of dollars.”

However, if the exit fees are set too high, all the benefits could be wiped out, according to Les Spahnn, a lobbyist for the Building Owners and Managers Association.

“Take your typical multi-tenant commercial office building,” Spahnn said. “Even if a building owner is allowed to switch, he or she will be subject to huge exit fees, which they will then pass on to the tenants.”

Business and consumer groups aren’t the only parties to have problems with the Dunn bill. Southern California Edison officials say that direct access would create too much uncertainty in the marketplace, making it difficult to predict just how many customers they would have to serve.

Consumer Watchdog
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