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PG&E Presses to End Freeze That Keeps Power Costs Low in Northern California By Rebecca Smith 09/15/2000 The Wall Street Journal Page A3 (Copyright © 2000, Dow Jones & Company, Inc.) California's largest utility is pushing to end a four-year-old retail rate freeze that has insulated millions of Northern Californians from the volatile wholesale electricity prices that have rocked San Diego this summer. PG&E Corp., parent of Pacific Gas & Electric Co. in San Francisco, said it wants to end the freeze imposed in 1996 by the state legislature as soon as possible, because it is losing money under the arrangement. In a filing with the Securities and Exchange Commission, PG&E said it has collected $2.2 billion less from customers this summer than it has shelled out to buy bulk power for them from the state-sanctioned California Power Exchange, a central auction. PG&E's disclosure sets the stage for a major confrontation between the utility and regulators. It will be up to the California Public Utilities Commission to balance conflicting needs: the utility's desire to protect its shareholders from potentially huge losses, and the commission's own duty, as regulator, to protect the public from a flawed market that appears incapable of delivering the "just and reasonable" rates required by law. Legislators now say they fear the state could be tipped into a recession if electricity prices don't drop soon. Under the state's 1996 deregulation law, all California investor-owned utilities were allowed to freeze rates at what seemed like high levels. Utilities were permitted to use surplus revenues to pay down generation-related debts that regulators said would render them uncompetitive in a deregulated world. It worked well until this summer. PG&E charged customers, on average, $54 for each megawatt hour of electricity supplied even though it paid only $26 and $31 a megawatt hour, respectively, for that power in 1998 and 1999. By June 30, it had collected enough surplus money to cancel $6.2 billion of debts. But the situation went haywire this summer as wholesale power prices lurched upward. The utility paid an average price of $163 a megawatt hour for electricity in June, $110 in July and $187 in August. Prices may be higher yet this month. The average price of power to be consumed today, for example, is $200 a megawatt hour, or nearly four times the amount that PG&E can bill its customers. Until recently, it was assumed that the utility would be able to recapture, in times of weaker demand, any shortfall that occurred in high-priced summer months. But that is looking less and less certain. Power prices projected for coming months look higher than the $54 a megawatt hour that PG&E now charges, particularly with natural-gas prices roughly triple the price of two to three years ago. The latter pushes up generating costs at natural gas-fired plants. Another problem is that there is less power available to be imported from outside California. In fact, the Pacific Northwest is expected to run short of power this winter, with less water available than in recent years for hydroelectric generation, putting pressure on California's market right when plants normally are taken out of service for maintenance. PG&E's chief financial officer now says he sees no reason to prolong the pain. He wants the freeze ended or he wants protection from high wholesale prices. "People did not envision the situation we have today," says Peter Darbee. Yesterday, Moody's Investors Service Inc. issued a negative outlook on PG&E, Edison International and their big utilities, citing the "increased supply risk" assumed by the utilities and "the unsettled state of electric deregulation in California." But state officials are loath to let consumers feel today's market volatility. Knowing that, PG&E may seek to strike a bargain in which it would continue some sort of rate freeze in exchange for permission to recoup some of the money it has lost. But there is no provision for that under current state law. The law simply says that when the utilities have paid down certain categories of costs, the freeze ends. If they haven't paid down these debts by March 31, 2002, it ends anyway, and they have to swallow any loss. The wild card is what will happen with PG&E's 4,000-megawatt hydroelectric network, the biggest such system in North America. The utility has offered to shave $2.8 billion from the tally of debts billed to ratepayers, if it is allowed to move its powerhouses and dams into the hands of an unregulated affilate. Such a move would end the rate freeze since the proceeds would be more than enough to offset the amount PG&E says it is otherwise entitled to collect from ratepayers, some $1.6 billion. But so long as power prices are volatile, nobody really wants the freeze to end but PG&E. In its SEC filing, the company said that it has no reason to believe, at the current time, that it will be able to recover lost monies and said it may be "required to write off the unrecoverable portion as a one-time charge against earnings" -- potentially amounting to billions of dollars. The same scenario exists for Edison International's Southern California Edison Co. unit, which serves most of the lower third of the state and has run a deficit of roughly $1 billion this summer. Observers say both utilities are wary of inciting consumer anger, should they be too aggressive in lobbying for an end to the freeze. A case in point: In hearings before federal energy regulators on Tuesday, Steve Baum, chairman of Sempra Energy, owner of San Diego 's utility, said the company's utility trucks are being defaced and workers are being intimidated by customers who are furious about power bills that have doubled and tripled since June. San Diego Gas & Electric Co. is the only utility, thus far, to end its rate freeze and pass wholesale power costs directly through to customers. State Sen. Debra Bowen, chairwoman of the California Senate utilities committee, said the legislature is reluctant to become involved. She said the legislature "feels like somebody who's fallen into poison oak enough times that all we have to do is walk past a bush and we break out in a rash. That's the way we react to these energy issues now." Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. Business/Financial Desk; Section C A Dwindling Faith In Deregulation New Ways to Harness Electricity By NEELA BANERJEE 09/15/2000 The New York Times Page 1, Column 2 c. 2000 New York Times Company Over a few sultry days in the summer of 1997, the state of Wisconsin got an early taste of the electricity shortages that now threaten several other regions of the country. An unusually large number of nuclear plants that supply the northern Midwest were closed for maintenance just as an unexpected heat wave drifted into the area. Wisconsin Electric, which serves Milwaukee, shut off electricity to 80 businesses; every few hours, it beseeched consumers to limit their energy use. Wisconsin Electric averted blackouts, but the scare profoundly changed the state's approach to deregulating the power industry, a process it had begun to explore only a year earlier. Like many other utilities, Wisconsin Electric initially pushed for what it and others called the Big Bang: state regulators giving up control over the production and pricing of electricity almost immediately. But after the 1997 power shortage, Wisconsin Electric, along with most local businesses and consumer advocacy groups, began to support a go-slow approach to deregulation, first building in an extra margin of reliable power before encouraging the state to remove its decades-old grip on the electricity industry. Lately, the rest of the country has been drawing the same conclusion. Just like Wisconsin, several other states have lost their early faith in the instantaneous, smooth creation of a free and fair electricity market. Deregulation has faltered as surging consumer demand outstrips the supply of electricity, and regulators and utilities scramble to cope with successive summers of price volatility and power failures. More than a year ago, the wholesale price of electricity charged by power plants in the Midwest surged to $6,000 a megawatt-hour, compared with average costs of $21 to $22 for the same amount of power. Con Ed customers in New York paid 43 percent more for electricity this June than last year. Prices have spiked elsewhere as well. And when rolling blackouts rippled through Silicon Valley and electricity bills doubled in San Diego over several weeks this summer, California's pioneering approach to deregulation came to embody what many see as the failings of the process. Despite the second thoughts about deregulation, few experts expect a return to the days of strict government control. A world in which various power generators compete openly to provide electricity at market prices still offers the prospect of both lower costs for business and consumers and higher profits for utilities than is possible under the traditional, more inefficient system in which monopoly suppliers are supervised by government regulators. ''California is an indication to the rest of us that we need to do our homework to make deregulation work,'' said Dick Olson, legal counsel with the Wisconsin Industrial Energy Group, an association of large companies. ''Some people want to stop the process, but the genie is out of the bottle.'' But getting from here to there is proving far more difficult than expected. Lacking a clear federal approach, states are finding their own way and, in the process, casting doubt on some early promises. ''Deregulation was definitely oversold to consumers by many people,'' said Severin Borenstein, director of the Energy Institute at the University of California at Berkeley. ''To economists and a few others, deregulation was a calculated experiment, and we knew it would have its costs.'' Historically, a regional electric utility, which was owned by investors and regulated by the state, generated power, transmitted it over high-voltage lines and then distributed it in low-voltage form into homes and businesses. In broad terms, deregulation calls for separating generation, transmission and distribution into distinct businesses. Deregulation advocates argued that if power plants were sold to private owners, they would compete among themselves to sell power to transmission and distribution companies at cheaper prices, driving down the cost of electricity. But that outcome was predicated on the realities of the mid-1990's, when power plants had spare capacity. But with few power plants coming on line recently, particularly in California and the Northeast, deregulation was introduced in the late 1990's at the worst possible time. In the thriving economy, businesses demanded more electricity, and people built bigger homes and bought more gadgets, sharply narrowing the gap between available supplies of electricity and peak demand. Fuel for generation has also become more expensive, especially natural gas, whose price has doubled even as it has grown increasingly popular because it is cleaner than other fuels. ''I think that the expectation that deregulation will always give you lower prices is unrealistic,'' said John B. Ramil, president of the Tampa Electric Company, a unit of TECO Energy Inc. ''Consumers think that competition will lead to lower prices automatically, when actually they will be paying market prices for power.'' Advocates rallied support for electricity deregulation by asserting that it would deliver the choice and the low prices that deregulation of telecommunications has brought. But they forgot that the restructuring of the telephone industry, like power deregulation now, angered consumers early on, when local calling rates rose and the proliferation of choices baffled many people. Lawmakers and regulators took years to iron out the process, which is still going on. And because electricity is even more vital than telephones, there is far less tolerance for interruptions in service and volatile prices. ''You can't assume that you can deregulate in one year and sit back and watch how things work,'' said Barry Abramson, senior utility analyst with PaineWebber. ''Regulators and utility officials have to come back frequently and correct problems they never expected until the system gets it right.'' Seeing an Example In Pennsylvania So far, 24 states have tried some form of deregulation, but regulators and utilities in other regions say changes in their local electricity industry are inevitable, too. Among states where deregulation has occurred, Pennsylvania has emerged so far as the place where the promises of competition and lower prices are being met most successfully. The state began to draw up a deregulation blueprint in 1996, around the same time California did, driven by electric rates in Philadelphia and other major cities double the average in the United States. But Pennsylvania opted for a plan that calls for substantial government involvement in the market at every step. The state protected the utilities against losses from their older plants; in return utilities had to agree to freeze rates until 2006 at 1997 levels to protect consumers. The state aggressively advertised a choice of new electricity providers. More important, it set the benchmark generation rates for traditional utilities at a fairly high level, which made some outside competitors' prices look favorable in comparison and which spurred consumers to choose new power providers. As a result, more than 528,000 residential and business users, about 10 percent of the total, have switched to other providers that sell them power at a fixed price over long periods. A recent study by the State of Pennsylvania estimated that consumers have saved about $2.84 billion in energy costs over the last three years. As consumers sought new power providers, those same companies began to build new plants in and near Pennsylvania, shoring up electricity reliability in the area. About 19,000 megawatts of power, adding 50 percent more capacity, are expected to come on line in Pennsylvania in the next five years. Pennsylvania also cobbled together the independent system operator PJM from a network of neighboring states that could transmit power easily to one another, creating a grid third in size behind the entire transmission systems of France and of Japan. Trying Rate Caps In California Yet the lurching progress of deregulation in the country as a whole and the loss of old certainties like reliable power at steady prices have ignited a popular backlash in many areas, most vividly in California. There, the state has decided to cap rates in San Diego at 1999 levels for the next two years. Other Californians have urged a rollback of deregulation, demanding that power plants sold to private owners be placed under government control again. The widespread short supply of electricity and the peculiarities of the commodity itself have given generation companies enormous leverage in the marketplace. Unlike most other goods, electricity cannot be stored to be used when there is a shortage. Nor is it something consumers can do without, which means the companies that supply people with electricity will pay just about any price to keep the lights on. Most analysts say that the exercise of such influence is not illegal --nor unexpected -- since companies can be expected to try to maximize their profits. But California's complex power buying mechanism has created a situation in which relatively small players have extraordinary influence. On June 14, for example, the temperature in San Francisco hit 103 degrees and heat records were broken all over the Bay Area. The state's Independent System Operator, which coordinates transmission of electricity, predicted that during peak use on that weekday afternoon, California would need 43,000 megawatts. But reports from the power plants working that day showed only 36,000 megawatts available. As a result, the California I.S.O. paid $1,500 a megawatt to various plants that were not running; some of those plants had bet on a shortage and delayed generation until the price of power reached the cap. ''The world knows we'll make up that energy shortfall somewhere,'' said Spence Gerber, director of settlements at the I.S.O. ''People go in and make their bids knowing we're not going to shut the lights off. We have no choice.'' In California, rate freezes have prevented most utilities from passing on much of the higher price of power to consumers. In San Diego , however, the rate freezes were lifted just as the city strained under a heat wave. That led to the doubling of customers' bills in the span of a month. One part of any long-term solution, experts say, is to increase the supply of electricity, through building new power plants and transmission lines. But few communities want power plants or transmission towers on their turf, adding to delays. So far, states have relied on caps on the wholesale price of power to keep costs down. In California, the price cap, until recently, was $750 a megawatt, and in Pennsylvania, it is $1,000. But California officials concede that power plants sometimes get $1,500 a megawatt-hour -- $750 for being on standby and $750 for the power itself. Caps, if set too low, may dissuade companies from producing electricity and from building new power plants. ''If you fix caps at $250, you have to realize that if in a neighboring state someone is offering $251 for power, you will have a serious shortage,'' said Richard Priory, chairman of Duke Energy, a nationwide power generation and trading company. Given the complexities, deregulation, with its connotation of a laissez-faire management of an industry, seems a misnomer. The focus is now on reorganizing the electricity industry, rather than cutting it loose, and of using sophisticated forms of regulation to foster competition and efficiency. ''What we're looking at is re-regulation, regulation in a different manner than we had before,'' said Douglas Hale, senior economist with the Energy Information Administration in Washington. ''Electricity is not one of those commodities that you can walk away from and let take care of itself. You need a central authority to make sure it doesn't all come crashing down.'' In Wisconsin, rather than having the legislature adopt an overall plan, the central state authority has moved to revamp the transmission sector before tackling generation, the reverse of what most other states have done. The Midwest price spikes in 1998 revealed that while neighboring states were willing to provide power, there were not enough transmission lines in Wisconsin to bring it in. As a result, the Wisconsin government has compelled the state's four major utilities to surrender operation of their transmission lines to the Midwest Independent System Operator, which covers several states, to make sure all companies have equal access to power lines. ''The problem with the big bang in an industry like ours is that you take a large risk,'' said Larry Salustro, senior vice president of Wisconsin Electric. ''Maybe in three years, the market will be better. But in those three years, people will go through difficult personal and financial times.'' The transmission company will be responsible for building new lines to improve the importing of power, and though they own shares in the concern, no single utility controls it. Wisconsin plans to double transmission capacity in the next four or five years, by which time the state would be ready to deregulate generation. ''You won't have low prices unless you create an effective market structure,'' said Lee Cullen, counsel for Customers First, a Wisconsin consumer advocacy group. ''Everybody can support competition as a superior system, but we're not rushing headlong into it.'' Building safeguards against the volatility deregulation brings will clearly take years, as more generation -- mostly in small natural-gas-fired power plants -- starts up, as more power lines are built to move electricity to where it is needed most and as business and consumers respond to higher prices by finding ways to conserve power and limit use during peak periods. Some businesses and the occasional residential customer have set up links with their utilities to respond to electricity prices in real time, by turning down lights or allowing air- conditioning to shut down briefly when a computer message informs them of price spikes. So far, however, such operations are rare. ''Until consumers can see and respond to real-time prices, price caps will remain a necessary evil,'' Mr. Borenstein said. ''The dirty secret of restructuring is that it is replacing old forms of regulation with new ones.'' Photos: Lee Cullen is a lawyer for Customers First, a Wisconsin consumer advocacy group. He stands outside the switching station and coal yard of Madison Gas and Electric in Madison, Wis. (Andy Manis for The New York Times)(pg. C4); Individual states are trying to find answers to the problem of deregulating the electricity industry. Power lines in Wisconsin, left, are symbols of a state that is trying to revamp the transmission sector. In Pennsylvania, where a power plant is being built in Lebanon, below, the government is involved with the market at every step. (John Zeedick for The New York Times); (John Saller for The New York Times)(pg. C1) Chart/Graph: ''Shocks to The System'' In deregulated electricity markets, prices have been far more volatile than expected, at times jumping to extraordinary levels during shortages. *Volume-weighted wholesale spot prices for on-peak, next-day delivery of a megawatt-hour of electricity. (Source: Bloomberg Financial Markets; Cambridge Energy Research Associates)(pg. C1) ''Approaching Electricity Deregulation More Cautiously'' As some states struggle with tight supplies and high prices, others are moving more slowly on deregulation. Graph tracks supply and demand since 1980. Map tracks Deregulation by state. (Sources: Edison Electric Institute; North American Electric Reliability Council; Energy Information Administration)(pg. C4) Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. Metro; Letters Desk Bidding Rules Costly for Electric Rates 09/15/2000 Los Angeles Times Home Edition Page B-8 Copyright 2000 / The Times Mirror Company * Re "Davis Walks a Political Tightrope on Energy Prices," Sept. 12: The deregulation of the California utilities didn't include a change in the strangling bidding rules to which these utilities, unfortunately, are bound. They are required to buy their power through a state-sponsored day-ahead market, rather than being allowed to bid on longer-range contracts on the free market, which would permit them to lock in lower pricing. The California Legislature wanted to retain controls on pricing, thinking it would result in the lowest costs. Well, the legislators were wrong! The real damage is that the public now believes energy price increases were due to deregulation, but in fact the utilities still aren't deregulated enough to permit freedom of bidding. Take the reins off the bidding prices, and prices will come down. JAN WINNING West Hills * Why do the state taxpayers have to pay to keep San Diego residents' electric bills down to $68 a month? Either the power providers are ripping the people off, or they have had really cheap electricity because San Diego Gas & Electric didn't invest enough in increasing power-generating capacity. They could shut off the air conditioning and probably keep their bill that low. My parents never had any air conditioning, and they lived where it got over 100 degrees every year. In a lot of cases we would be better off without it, just not as comfortable. There is no constitutional right or guarantee that we have to have air conditioning or cheap electricity. It sounds like a good time to start conserving. KEN WALTERS Apple Valley Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.
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