Editorials

Q: What is happening with California’s deregulated electricity market? 

A: For months, two investor-owned utilities serving 25 million people have been paying dramatically increased costs for wholesale electricity. The utilities, Pacific Gas and Electric Co., and Southern California Edison Co., have been paying nearly 20 cents to 30 cents per kilowatt hour for power, sometimes more. But they can’t recoup those costs: A rate freeze — part of the state’s deregulation law — caps what they can charge their customers at far less, roughly 6 cents a kilowatt hour. Since June, PG&E and SoCal Edison have lost about $9 billion. Wall Street has downgraded their credit worthiness, wholesalers are reluctant to deal with them and the utilities say they expect insolvency within weeks if things don’t change. 

Q: Where did all the money go? 

A: According to state officials, most of it has gone to Texas-based providers of wholesale electricity. 

Q: Why was deregulation put into effect, and when? 

A: Traditionally, California has had higher electricity costs. In the mid-1990s, the large industrial ratepayers wanted a break in their energy bills and said if competition was introduced into the electricity market, rates would fall through natural market forces. The industrial ratepayers were joined by the utilities, who wanted out from under regulation, and free-market theorists. Consumer groups — who now are the most vocal critics of deregulation — were neutral on the plan, which was approved without a dissenting vote by the Legislature and signed by former Gov. Pete Wilson in 1996. The effective date of the law was 1998. 

Q: What was deregulation supposed to do? 

A: The idea was to require utilities to buy power on the open market, presumably at lower, competitive costs and pass those savings on to consumers. The law — and the PUC’s rules accompanying it – froze rates at a level that was much higher than the actual cost of electricity at the time. The goal was to make sure the monopoly utilities had enough cash coming in as they divested themselves of their power-generating assets. After the divestiture was completed, no later than March 2002, the utilities could operate without a rate freeze, passing on to their customers the cost of electricity. The law required the utilities to sell any power they generate into a market pool – the same pool from which they are required to buy power. The law was directed at the state’s large investor-owned utilities – PG&E, SoCal Edison and San Diego Gas and Electric Co. The law also set up a private nonprofit body to manage the state’s grid, the Independent System Operator, and a similar group to conduct the market transactions, the California Power Exchange.  

SDG&E finished its transition last year, and its rate freeze was removed. When wholesale prices rose this year, SDG&E passed those costs on to ratepayers, prompting an outcry and raising fears that the rest of the state would be similarly affected. 

Q: What happened? 

A: When deregulation was approved, the state enjoyed excess electricity capacity. But in recent years, the state’s grid has become stressed. That’s because demand has increased, more power plants are aging and down for maintenance and repairs, imports are down because other western states are vying for power, and wholesalers have spotted flaws in California’s market and are able to exert maximum leverage. Wholesale electricity prices have increased roughly fivefold since the summer. 

Q: What happens next? 

A: One question is whether the Federal Energy Regulatory Commission will curb wholesale electricity prices. Another is whether the PUC will boost rates again, and a third is whether Wall Street will downgrade the utilities still further.  

The utilities say some wholesalers already want to sell only on a cash-and-carry basis, which means the utilities may order power rationing if they can’t buy enough electricity. 

Q: What will the governor do? 

A: The governor has urged conservation, favors financial incentives for those who build power plants, signed a law speeding up the licensing of new plants and has demanded that FERC take action. He has described deregulation as a “colossal” failure, but has not said whether he wants to deregulate the market, or how.