How State's Consumers Lost With Electricity Deregulation

December 9, 2000
Los Angeles Times
Nancy Vogel

SACRAMENTO — It has become one of the most expensive public policy miscalculations in California history:

A 1996 state deregulation plan that was supposed to make electricity cheaper instead shifted billions of dollars from utilities and consumers to energy companies and electricity brokers.

California businesses and residents paid $10.9 billion more for electricity last summer than the year before, with much of the money flowing to out-of-state energy firms. One of them, Houston-based Reliant Energy, saw its wholesale energy profits jump 600% during that time, with about $100 million coming from California.

The dramatic increases are the result of critical misjudgments by the California Public Utilities Commission and the state Legislature, the two main architects of the plan to open the market.

Most serious were:

* A gross underestimation of demand as the state's economy came to life after years of recession and California's burgeoning computer-based businesses ate up electricity at rates unheard of in the old economy.

* A failure to anticipate that energy companies could easily exploit a mechanism designed to ensure the even flow of electricity. By holding back electricity and selling when the system was desperate, they could earn double the going rate.

* A faulty assumption that deregulation would prompt more competition right away: Hundreds of companies were expected to serve homeowners, but they didn't materialize. At times, a few power plant owners can effectively control the price of electricity.

In their attempt to foster competition, the designers of deregulation traded a monopoly in which government set rates for a new marketplace in which prices can fluctuate.

The first place to suffer the consequences was San Diego, where prices doubled and tripled. By July, the monthly electric bill for William Scerni's coin laundry in a poor neighborhood in Oceanside jumped from $1,100 to $2,600. He raised the cost of a wash on his 30 most popular washing machines by 25 cents--which generated only $800 more a month.

This week, the panic spread. Officials begged customers to keep holiday lights off and warned of blackouts in a season when power demands are relatively low. To avoid blackouts, they bought power at astronomical prices that will be passed on to debt-burdened utilities.

A few cities--including Los Angeles, Glendale, Burbank, Riverside, Anaheim and Sacramento--are unaffected, because they own their power systems and are exempt from deregulation. But rate shock looms for 24 million Californians served by the state's two largest utilities, Southern California Edison and Pacific Gas & Electric Co.

For the moment, those consumers are protected by a rate freeze. But the utilities, which serve 5.6 million people in Los Angeles County and millions more in surrounding areas, have paid $6 billion more for electricity than they can legally charge customers, and assert that they will be crippled unless regulators allow them to recover those costs.

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