The Washington Times

LOS ANGELES – A rising anger among consumers over California’s electric power crunch threatens to boil over into a 2002 ballot initiative that would order the state government to buy most power plants and power lines.

The anger stems from government and corporate promises of cheaper deregulated power – followed by today’s reality of three large utility companies that say they will go bankrupt without rate increases of between 10 percent and 30 percent.

The power crisis puts California’s Democratic Gov. Gray Davis on a tightrope, trying to balance the interests of consumers against those of utility companies that have contributed more than $600,000 to his campaigns.

California’s three big privately owned electric companies – San Diego Gas & Electric Co., Pacific Gas & Electric Co. and Southern California Edison Co. – saw their credit ratings drop almost to junk-bond status in the past month as they were forced to pay hundreds of times more for power supplies than they had planned.

Edison warned this week that it faces bankruptcy this month unless it gets rate relief. Yesterday, its parent company informed the Securities and Exchange Commission that it wants a 30 percent rate increase, effective Jan. 4, with the possibility of further rate increases of 10 percent per year.

It’s all the consequence of a deregulation plan adopted in 1996 by overwhelming margins in the Democratic-dominated state legislature. That plan withstood a 1998 rollback attempt from the ballot initiative Proposition 9.

The same utilities that now deplore the 1996 plan put more than $90 million into the campaign against Proposition 9, convinced they would reap big profits from deregulation.

They did – at first.

The plan they helped write and pass into law with almost no public hearings in the dying days of the 1996 state legislative session called for an initial two-year rate decrease funded by a $6 billion bond issue to be paid off by customers.

A rate freeze until mid-2002 was to follow, unless utilities could sell off the majority of their generating plants before then. Another part of the plan involved a ratepayer bailout of more than $18 billion the utilities owed for nuclear power plants at Diablo Canyon and Humboldt Bay, which never performed to planned levels.

Deregulation envisioned a host of new owners for old hydroelectric and oil-fired power plants competing to sell electricity to the big utilities, so many that competition would lead to long-term rate cuts. Those new owners also would have a cap on the price they could charge the California utilities for power until mid-2002.

But new owners have been scarce – only about a half-dozen.

The deregulation law has no provision to prevent those new owners – companies such as Houston-based Reliant Energy and North Carolina-based Duke Energy – from selling the California plants’ output in other states.

San Diego Gas & Electric (SDG&E) last summer became the first big utility to sell enough of its power plants to end the rate.

Customers’ bills spiked more than 200 percent in August, as SDG&E found itself unable to buy enough power from its old plants. Much of that power was going out of state, forcing the utility to pay premium prices for electricity generated in nearby states such as Arizona and Oregon.

Mr. Davis tried to smooth this over by pushing a payment-averaging plan through the state legislature in September, letting the San Diego utility’s customers spread the peak payments they were charged in August and September over two years.

But the crisis worsened in November and December, when Southern California Edison and Pacific Gas & Electric (PG&E) found themselves almost unable to pay for the energy supplies they were forced to obtain from the Pacific Northwest to make up for supplies no longer available from their former plants.

Charges surfaced of collusion among the new power plant owners, as fully 25 percent of the state’s generating capacity was off line for maintenance at the time of threatened blackouts.

Meanwhile, deregulation prevented the state from verifying whether the shutdowns were justified or mere price manipulation.

At the same time, a cold snap in the Northwest made power providers there reluctant to sell electricity to California in mid-December, and only an emergency order from Energy Secretary Bill Richardson requiring sales to California has kept lights on in the nation’s most populous state over the last few weeks.

Now, because neither Edison nor PG&E has yet sold off enough of its old power plants to become eligible for free-floating prices, the companies have appealed to the state Public Utilities Commission for emergency rate increases.

Even before Edison‘s filing, PG&E has said it also needs a 30 percent increase. The companies together serve more than 21 million customers.

The situation has led consumer activist Harvey Rosenfield, a close Ralph Nader associate who wrote a 1988 ballot initiative rolling back California insurance rates, to propose a new measure demanding a state buyout of the California power grid.

“Our Proposition 9, which would have prevented all this, was buried by the utilities’ money in 1998,” he said. “People were confused by all the ads they put on, when they outspent our side by 950-to-1. But there will be no confusion this time. We’ll win if there’s any rate increase.”

The Davis-controlled utilities commission already has indicated it will grant rate increases at its Jan. 4 meeting, but with the precise amount still unknown.

Mr. Rosenfield charges those price increases will be another form of collusion, the result of private meetings among Mr. Davis, Mr. Richardson and the utilities, with consumer groups excluded.

“The governor seems to have engaged in unconditional surrender to the utility companies,” said Mr. Rosenfield, head of the Foundation for Taxpayer and Consumer Rights. “It’s an amazing betrayal of the public. . . . We reject the notion that the ratepayers have to pay one penny for this. It wasn’t our fault. We’re the innocent victims.”

But utilities point out that the hybrid nature of the power system, with a regulated retail market and a deregulated wholesale market, squeezes them in the middle.

“The California energy marketplace has reached full-blown crisis, and things continue to deteriorate,” says Edison Chairman John Bryson, a utilities commission chairman under Gov. Jerry Brown in the 1970s.

“On the one hand, Edison is forced to pay out-of-control power costs, which the federal government has failed to restrain,” Mr. Bryson said. “On the other hand, we have frozen rates for customers, which state authorities have not yet lifted.”

His company is paying more than 15 times as much for power from out of state as it once paid when it owned all its own plants.

In addition, because the new power plant owners paid several times the book value for the generating facilities, in order to make a profit they had to charge the California utilities higher rates than the utilities had charged themselves when they owned the plants.

The result, he says, is that Edison accumulated debt at the rate of $1 million per hour during much of December, and now owes more than $3 billion to power suppliers, including the new owners of the plants it had sold off.

PG&E said its debt is even higher, and the utility cut its dividend to stockholders for the first time since the 1970s. Edison eliminated its dividend on Friday.

But consumer activists vow to fight any rate increase in court, if need be, claiming the 1996 deregulation law makes it illegal for Edison and PG&E to raise prices.

“The idea of passing the failures of deregulation on to the consumers is an absolute atrocity,” said Nettie Hoge, executive director of the Utility Reform Network.

Meanwhile, angry consumers are blaming the utilities.

“We’re paying two or three times what we did last year for the same electricity,” said Peter Rappoport, an SDG&E customer in Carlsbad, just north of San Diego.

“There can’t be any real shortage. There was no shortage a year ago, not even close, and the state hasn’t grown all that much in the meantime,” he said. “All that’s changed is the ownership of the power plants. So there’s no doubt this is a corporate-created energy crunch, not a real one.”

“It’s ridiculous,” said Patricia Rodriguez, an Edison customer in the Los Angeles suburb of Alhambra. “They never should have done deregulation in the first place. We just end up paying the price for their greed.”

Many state legislators who hastily voted for the deregulation plan now rue the day.

Said Democratic state Sen. Liz Figueroa, then a member of the state Assembly, “I didn’t know anything about this when I voted for it, but the leadership said it was a good thing, so I went along. It was not one of my better votes. I wish there had been more hearings so I could have learned more about it.”

Even Mr. Davis has used words like “greed” and “piracy” to describe the new power plant owners. But he has been unable to stop them from selling California-generated power out of state.

So far, he has only warned them of a voter blacklash. Mr. Rosenfield agrees with him on this.

“We’ll solve this crisis just like we did the skyrocketing property tax problems of the 1970s with Proposition 13 and the insurance rate ripoffs of the ’80s with Proposition 108 in 1988,” he said.

“Edison and PG&E exposed themselves to risk, and now that the market has turned on them, their executives are saying they want to crawl back into the womb of government protection,” he said.