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California is electric industry test case By Deborah Adamson, CBS.MarketWatch.com Last Update: 3:03 PM ET Aug 23, 2000 NewsWatch Latest headlines SAN DIEGO (CBS.MW) -- The federal government will provide grants and loans to help local residents and businesses pay for soaring electricity bills, President Clinton said Wednesday. Clinton said $2.6 million will be earmarked to help low-income families and seniors pay for electricity bills that have more than doubled. He urged the Small Business Administration to provide loans to companies that are struggling to pay power bills. He also called for expediting the investigation of wholesale power markets by the Federal Energy Regulatory Commission. "We'll do what we can to help you," the president said during a televised news conference at the White House in Washington. Test case yields public outcry The San Diego area is a test case for the rest of the country over the feasibility of electric industry deregulation. The region -- which also encompasses South Orange County, north of San Diego -- is the first in the nation to have its power market completely deregulated. New York, New England and mid-Atlantic states are following suit, and they're watching California carefully. Thus far, the San Diego test has turned out to be a shambles. Electricity supply that hasn't increased in 10 years failed this summer to meet strong demand resulting from a growing state. With market forces in play for the first time, strong demand led to much higher wholesale rates that was passed along to residents. After a public outcry, the California Public Utilities Commission on Monday approved a plan that would cap customers' electric bills for normal use, but they'll pay market rates for anything extra. Utility companies also can collect on any shortfalls later. Today on CBS MarketWatch Nasdaq inches higher; Dow lags Oil inventories at 24-year low Commentary: Garzarelli sees stock rally in fourth quarter Amazon.com enters car market California is electric industry test case More top stories... CBS MarketWatch Columns Updated: 8/23/2000 3:02:08 PM?ET In other words, if the electric company can't pass along the entire cost of buying the energy for now, they'll be able to pass it along months later. Therefore, people who are used to seeing lower electricity bills for the cooler months in fall and winter won't see much of a drop-off. "It's a shameful pay-now-or-pay-later plan," said Bob Finkelstein, staff attorney for the Utility Reform Network, a consumer advocacy group. "California jumped off the deregulation cliff." State legislators, which have the power to expand on the commission's ruling, shelved a plan to roll back rates to mid-1999 levels and cap them for customers of San Diego Gas & Electric, a Sempra Energy (SRE: news, msgs) subsidiary. They faced opposition from Gov. Gray Davis, a Democrat, and from Republican lawmakers. Davis prefers a plan that would cut rates by 60 percent immediately but that would stipulate customers pay the full amount of what they owe later. Republican lawmakers want the state to use taxpayers' money to help pay electric bills for consumers while businesses get tax credits. San Diego fiasco The Southern California fiasco came about as a result of a deregulated electricity market that began two years ago. The effects of deregulation are being felt first in the San Diego area because it was the first to end its rate freeze -- last summer. The rest of California should follow, region after region, by 2002. The idea sounded good: Deregulate the electric industry and let the market set the prices. With competition, rates should come down and service should improve. When the long-distance phone market was deregulated, it did bring about low prices and greater competition. But things got messed up along the way. For one, the hope that consumers and businesses could one day shop for electricity as they shop for better deals among long-distance carriers was dashed, at least for now. Initially, hundreds of companies had signed up to offer power but most have gone out of business or left the market. Of the remaining companies, most serve the more lucrative corporate market, said Linda Sherry, a spokeswoman at Consumer Action. Also, the strategy of letting housing developments form power cooperatives and negotiate better rates "didn't pan out," Sherry said. Demand far outstrips supply Demand for power in California surged as businesses and the population grew. But supply didn't grow with it because no new electric generation plants have been built in the state for 10 years. Last year, the state approved five applications to build new plants, but they're years away from becoming operational. Under the deregulated market, electric utility companies were mandated to sell their power generation plants. By separating the provider of electricity and the generator of electricity, the idea is to usher in a more competitive market. Today, San Diego Gas & Electric buys from electric generators through an auction market. But the auction market rules as set up actually make the situation in San Diego worse. According to the Federal Energy Regulatory Commission, when electric utilities accept bids from generators at various prices, they are required to pay to everyone the rate of the highest bid. But in a situation where the electric company needs all the power available, it has to accept all the bids and apply the highest price to every deal -- inflating the cost. Electric generators were taking advantage of the situation by charging more, Sherry said. FERC is investigating and plans to issue a report later this year. But for now, price caps have been set. Utility company buffeted Ed Van Herik, a Sempra spokesman, said the auction rules are putting the squeeze on utility companies, already buffeted from all sides by public outcry and political pressure. But Utility Reform Network's Finkelstein said San Diego Gas & Electric isn't totally blameless because it could have done a better job of hedging high costs. "They could have entered into (futures) contracts to hedge these risks," which would have allowed the utility to buy electricity at prices under normal conditions, the attorney said.?
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