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Imbalance of Power 

Competitors say delay in electric deregulation helps PG&E, other utility monopolies

Wednesday, Dec 31 1997
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Last week's postponement of the day Californians get to choose their electricity provider may strengthen the position of monopoly utilities, including PG&E, and reduce the benefits consumers receive from competition, utility executives say.

Outside energy companies have spent billions recently attempting to position themselves as challengers to the California monopoly utilities -- Pacific Gas & Electric, Southern California Edison Co., and San Diego Gas and Electric.

The new competitors -- Houston-based Enron Corp., Tucson Electric Power Co., and New England's Green Mountain Energy Resources, among others -- have bought West Coast electrical generating facilities, paid for millions of dollars in direct mail advertising, and expended millions more signing up industrial and retail electricity customers.

The market should open to competition by March 31 after computer problems forced a delay from the original Jan. 1 start date, officials said Monday.

Now that restructuring has been postponed, these companies must alter their advertising campaigns so they point toward the new start-up date. They must pay interest on loans used to launch California subsidiaries -- without the income stream they had hoped would begin covering those costs. And they must hope the delay doesn't discourage consumers already skeptical of the term "deregulation."

The competitors' fear: Californians, frustrated by the delay, will choose to ignore competition and stay with their old providers.

"We're extremely disappointed with the decision that was handed down," says Gary Foster, a spokesman for Enron. "We've signed up thousands of customers who expect us to be their provider Jan. 1. We're having to communicate to them that we're not going to be providing to them. Then there's the loss of revenue. It's not a good message to be sending out to the market in general."

Adds Nancy Day, senior vice president of New Energy Ventures, a half-owned subsidiary of Tucson Electric: "We're spending millions of dollars a month. Every day [that] we're not generating sales, we're not generating revenue."

The delay could also cost ratepayers tens of millions of dollars in financing charges.

Last week the two California agencies chartered to manage electricity competition said computer glitches made it impossible for them to meet their Jan. 1 start-up deadline. Because these agencies took out loans to fund start-up costs, the delay will cost ratepayers a combined $45 million, executives said.

Officials say they will use a month of the delay to identify and correct software problems, another month to perform tests, two weeks for a dry run, and the final two weeks to bring market participants up to speed.

Some competitors say they accept the agencies' rationale for the delay. "One ounce of prevention is worth a pound of cure," says Julie Blunden, regional director for Green Mountain Energy Resources, another competitor hoping to enter the California market. "We would rather take a near term hit on this and that, than suffer a pretty major meltdown."

But the competitors also complain that the start-up delay is yet another example of how the power deregulation process has been stacked against those who want to com-pete with the state's established electric monopolies. For the past year or so, electric-industry lobbyists have been jousting before lawmakers, hoping to obtain competitive advantage in California's nascent power market.

Under the rules that emerged from this battle, monopoly utilities were forced to relinquish control of their transmission lines to the Independent System Operator, a Folsom-based entity char-tered by the state to run California's network of power lines. They must also divide themselves into separate subsidiaries, so that retail electricity-sales operations cannot be subsidized by utilities' other divisions.

But the monopoly utilities won more than they lost in the run-up to deregulation, critics say. For one thing, consumers will be forced to pay for utilities' "stranded costs" -- that is, the huge amounts of money some utilities still are obligated to pay for infrastructure they constructed while they were regulated by the state. Those stranded costs include the debt payments for some nuclear power plants and other unprofitable investments.

The electric monopolies also will be allowed to retain their old names and thereby benefit from consumer familiar-ity. (PG&E's new retail electricity subsidiary, for example, is called PG&E Energy Services.)

The whole system is faulty, critics say, and the recent delay in deregulation is proof. Earlier this month, for example, a state audit showed PG&E used $33.7 million of ratepayers' money to improperly subsidize its sister companies, in violation of one of deregulation's most basic tenets.

In a truly free electricity market, state-chartered bureaucracies would be unnecessary to maintain for free and fair competition, critics contend.

For example, the state has chartered the Power Exchange to act as an electricity trading floor.

But critics say that electric companies are perfectly capable of setting up their own trading floors, without the help of the state.

And, these critics say, the Independent System Operator would be unnecessary if regulators performed properly and forced utilities to move their electricity-selling arms into completely independent subsidiaries. In this perfect, market-driven world, PG&E's electricity-transmission division would lease power lines to the Enrons and New Energy Ventures of the world at the same rate it charges to PG&E Energy Services.

"There's no need for this couple of hundred million dollar [state-supported] effort. This is basically duplicative of the marketplace," Foster says of the new state-chartered agencies. "We have been predicting that after a year or two, it would be done away with."

But Barbara Barkovich, who represents industrial electricity customers on the Independent System Operator's board of directors, says California business is not a perfect world, and a level playing field needs independ-ent referees.

"The Independent System Operator acts as an equitable traffic cop for the electric system," Barkovich says. "I think that there's a belief that, without an independent operator, you could never convince people you could be fair. The reality is that you have to deal with a perception issue.

"As far as the Power Exchange goes, I think you need some sort of transparent price development, and the Exchange provides that."

And that perception problem is why regulators were privately dismayed when they realized that they weren't going to be able to meet their deadline, Barkovich says.

"Sure, I'm worried," Barkovich says. "We really didn't want to have a delay. But we also want the thing to work, and work well.

About The Author

Matt Smith

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