Energy rate boost could spark conservation

The Associated Press
Wednesday March 07, 2001

SACRAMENTO — California’s scramble to insulate consumers from the soaring price of electricity may add to the state’s power problems this summer, Wall Street analysts said Tuesday. 

Gov. Gray Davis’ emphasis on buying utilities’ transmission lines and negotiating long-term power contracts to help ease their debts skirts the deep imbalance between wholesale and market rates that led to the state’s power problems in the first place, they said. 

“In the long run, it doesn’t solve anything,” said Michael Worms, an industry analyst for Gerard Klauer Mattison & Co. “In the long run you need to send the right price signals to consumers, which will create its own conservation signals. Unfortunately, customers were shielded from that in California.” Davis said Monday that the state’s first contracts to buy electricity for two financially struggling utilities will provide only about two-thirds of the power needed on a typical summer day, forcing Californians to cut power use at least 10 percent to avoid blackouts. 

Since early January, the state has been buying one-third of the power Southern California Edison and Pacific Gas and Electric Co. customers need. 

The two utilities, denied credit by suppliers, say they have lost nearly $14 billion due to soaring wholesale electricity prices that the state’s industry deregulation law says they cannot pass onto consumers. 

The keepers of the state power grid had enough electricity Tuesday to avoid declaring an electricity alert, but have faced an almost-daily scramble for weeks due to a tight supply and high wholesale prices. 

Several wholesale and retail rate proposals are circulating. Among them: 

— Free-market advocates such as Worms want an immediate end to the deregulation-imposed retail rate freeze on Edison and PG&E that will expire next year. 

— Davis wants a Western price cap of $100 per megawatt hour on power generators he says have been profiteering from California’s short energy supply. The Bush Administration and Federal Energy Regulatory Commission are cool to that idea. 

— In December, FERC imposed a “soft cap” of $150 per megawatt hour on wholesale rates in the state and required suppliers to justify charging higher prices. 

— Consumer groups such as The Utility Reform Network (TURN) want regulated rates for residential and small business customers, but free-market rates for large industrial customers which sought deregulation in the first place. 

— TURN also advocates a tiered rate structure, with higher rates for consumers who use more than a reasonable amount of electricity each month. 

— Assembly Republicans say electricity and natural gas prices will fall naturally if the state increases supply, mainly by making it easier to build plants and pipelines. 

“Right now, you’re sort of sitting partially with regulation and part with the free market,” said Paul Fremont, an analyst with Jefferies & Co. “Both these systems work. It’s sort of that in-between system that you have in California that doesn’t appear to be working.” 

The system discourages generators from building new power plants because they aren’t guaranteed a profit, and doesn’t do enough to discourage power use by consumers because the price they pay doesn’t reflect the true cost of power, Fremont said. 

“I don’t think people here have much faith in the market, and why should they?” countered TURN’s Mindy Spatt. “I think there are probably better ways of encouraging consumers to conserve than by gouging them.” 

The governor is continuing to lobby FERC, other Western governors, California’s congressional delegation, and Energy Secretary Spencer Abraham for region-wide action on the power shortage facing Western states, Davis spokesman Steve Maviglio said. 

Davis insists the crisis can be resolved without raising rates for Edison and PG&E customers beyond “the existing rate structure,” though Maviglio said that will be more easily done with Edison than with PG&E because Edison’s rates already are higher. 

In January, state regulators imposed temporary rate hikes of 7 to 15 percent on Edison and PG&E customers. 

The Legislature and Davis extended the increases for up to a decade to help pay back the estimated $10 billion in power-buying the state expects to do for Edison and PG&E over the next several years, and finance its purchase of the power lines owned by the two companies and San Diego Gas & Electric. 

Rates were already scheduled to increase next year for Edison and PG&E customers. Under the 1996 deregulation law, the pair’s ratepayers saw a 10 percent rate reduction, but only until early 2002. 

That rate cut will likely expire as planned, Mavliglio has said. 

Davis wants those rates to cover not only the traditional cost of generating, transporting and distributing power, but the added cost of paying off the two utilities’ massive debt and buying their transmission lines, said Assemblyman Fred Keeley, D-Boulder Creek, the Assembly’s chief power negotiator. 

Yet Davis has indirectly addressed the rate imbalance by signing legislation that will let regulators raise consumer rates if necessary, Keeley said. 

The governor and lawmakers are in effect spreading out rate increases over a decade by using long-term revenue bonds to buy power for the nearly bankrupt utilities, said Severin Borenstein, director of the University of California Energy Institute. 

“At some point we have to deal with the reality that all of the power that we buy has to be paid for by somebody — it’s either going to come from taxpayers or it’s going to come from ratepayers,” Borenstein said. “Raising rates now would get us a lot of conservation.” 

Davis also wants financial incentives for conservation and power plant construction in time to make a difference this summer. 

“Our mouths were agape” at the rapid timetable, Keeley said. 

Legislators are rushing to pass those incentives within by month’s end, he said, allowing three months for consumers and suppliers to act before the heat of summer. 

Among bills considered Tuesday, the Senate energy committee approved legislation to accelerate the siting of power plants. It delayed action on a proposal to restructure rates for generators that use renewable energy to provide about 30 percent of the state’s electricity. 


On the Net: 

Read the bills, SB28x on plant siting and SB47x on renewable-energy rates, at www.sen.ca.gov