Investor-owned utilities have history of charging higher rates

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Associated Press

With utility bills on the rise, a radio station in the Sierra foothills produced a song that struck a chord with angry ratepayers.

PG&E, they’re piggin’ out on me; PG&E, quit piggin’ out on me,” was an immediate hit with the listeners of KNCO-AM in Grass Valley.

The year was 1982, 14 years before the state deregulated its utilities and began a process that has led to today’s power crisis.

“What prompted it was a rapid rise in prices that started about 1979,” said station news director Jim Kerr, who resurrected the nearly three-minute song during the current power crisis. “It got to the point where a local market started a petition drive to ask PG&E to knock off the price rises.”

Rising ratepayer bills, threatened blackouts and warnings of bankruptcy from Southern California Edison and Pacific Gas and Electric, the state’s two largest utilities, have prompted calls to reregulate the state’s utility industry.

But that sounds like a surefire fix only to those with short memories.

Sometimes lost in the current debate is the reason California deregulated its electricity market in the first place: ratepayer anger over high prices.

When deregulation took effect in 1996, Edison and PG&E were charging rates that averaged about 10.3 cents per kilowatt hour in California. The national average at the time was 8.3 cents per kilowatt hour.

The rate structures prompted periodic consumer outcry similar to the one in Grass Valley and led some cities to consider switching to public power suppliers, just as they are today.

The lesson, say consumer advocates, is that a reregulated system might not work any better than what California had before 1996.

“There is no panacea,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights. “The question is what is better, having our energy system inside the hands of a cart of profit maximizers or state officials who are often captives of the industries they are supposed to regulate?”

In his State of the State address, Gov. Gray Davis threatened to take over power plants and establish a government-run power authority to ensure stability of prices and supplies.

Davis also has said he favors the state entering long-term contracts with power wholesalers to stabilize prices.

Energy experts, however, said long-term contracts at expensive fixed rates contributed to the historically higher electricity prices in the state, which led to the 1996 deregulation effort.

PG&E and Edison rates historically have been about 15 percent to 20 percent higher than those charged by public utilities, said John Fistolera, legislative director of the Northern California Power Agency, an organization representing municipal utilities in Northern California.

Long-term contracts that locked in prices as high as 15 cents per kilowatt hour contributed to the higher prices charged by the utilities before deregulation, said Carl Blumstein of the UC Energy Institute at the University of California, Berkeley.

“Long-term contracts are a kind of reregulation,” Blumstein said. “Though utilities no longer own power plants, they would own the output of the power plants.”

California ratepayers once again could find themselves paying higher electricity prices than other parts of the country if the long-term contracts lock-in rates at inflated prices, said consumer advocate Rosenfield.

Arthur Lyons, a longtime Palm Springs resident, remembers the days before deregulation and does not want to see them return.

“We had SoCal Edison because we didn’t have much choice,” said Lyons, a former City Council member. “Down here in Palm Springs we have to use air conditioning. It’s a fact of life, not a luxury. We get creamed here in the summertime, and we’re gonna get creamed again with Edison seeking a rate increase.”

Before deregulation, Lyons said he had monthly electricity bills as high as $450 a month during summer. This past summer, his monthly bills were about $260 thanks to competition made possible because of deregulation.

Palm Springs invited New West Energy, a Tempe, Ariz.-based energy provider, to compete with Edison for customers. Until recently, it worked.

New West Energy formed Palm Springs Energy Services to deliver electricity to 1,358 Palm Springs residents at rates 2 percent less than those offered by Edison.

The current electricity crisis, however, prompted New West Energy last week to suspend its operations in California.

Edison and PG&E rates were frozen under deregulation, sending the utilities spiraling toward bankruptcy as wholesale energy prices rose but insulating customers from the effects of those rising prices. Edison and PG&E recently won approval to raise rates for homes and businesses.

By contrast, Palm Springs Energy Services would have to pass the costs of rising wholesale prices to its customers, meaning it no longer could offer rates below Edison‘s. The company opted to leave the market instead.

In an ironic twist, a transition is under way to return Palms Springs Energy Services customers to Edison.

“I saw this thing wasn’t going to work way back when,” Lyons said. “It was geared toward the utilities. … The whole deregulation scheme was set up for anti-competition so the utilities would get a windfall and the citizens would get a shortfall.”

Despite efforts to introduce new controls, it will be impossible to recreate the system before deregulation, said Gerald Keenan, lead partner in Chicago-based Energy Strategy Consulting.

“You’ll never see the days of a vertically integrated, regulated monopoly again,” Keenan said. “It’s a model that didn’t work and just because what’s followed hasn’t worked very well, at least in California, that isn’t reason enough to go back to something that was clearly flawed.”

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