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California faces repeat of deregulation debate

Associated Press - April 16, 2004
By Jennifer Coleman

SACRAMENTO (AP) -- California's lights are on and officials say there's no immediate threat of rolling blackouts. The state's largest utility has emerged from bankruptcy and the other two are financially secure. Electricity rates may be among the nation's highest, but they're stable thanks to the long-term energy contracts signed in 2001.

It's the perfect lull in the energy storm for policy-makers to figure out how to shape California's energy market before the long-term contracts begin to expire and a large number of power plants retire. So far, however, most lawmakers are focused on the state's chronic budget problems and the debate over how to fix California's workers' compensation system, the nation's most expensive.

Any attention paid to energy has been centered on various shades of deregulation -- the same sort of proposals, consumer advocates say, that led the Legislature to write a bad deregulation law in 1996 that in turn sparked the 2000-2001 energy crisis.

Californians are saddled with electricity rates 20 percent higher than what they paid before the crisis -- a fact of life that has forced many consumers to change the way they use power.

Randy Rowse, owner of the Paradise Cafe in Santa Barbara, said he can only cut back on labor costs and personnel when rates are high. "It's one of the few things you can do because rent's not going down."

But he's also changed how he runs his business to cut energy use and costs. He bought more efficient refrigeration systems, cut his use of air conditioning and heat and "we use airpods instead of heating elements for coffee," referring to the Thermos-type containers. "It saves a lot of energy, and it keeps the coffee from cooking."

Such conservation measures haven't led to lower electricity rates, but they give the Independent System Operator, manager of most of the state's power grid, more flexibility in what is expected to be a summer with thin power reserves.

"We should be OK this summer," said ISO spokesman Gregg Fishman, adding that he's "cautiously optimistic" about the summer electricity outlook despite last month's Stage 1 power emergency.

A Stage 1 alert is called when the state's power reserves fall below 7 percent. That allows grid managers to access emergency resources to maintain its operating reserves.

Conservation is essential, Fishman said, because, "the less power people use, the easier it is to balance the grid and it's cheaper for consumers."

Millions of Californians reduced their electricity use during the crisis, and while the impact hard to measure, Fishman said many of those conservation measures continue today, contributing to energy security.

Still, there are some parallels between this year and the mid-1990s, when high electricity prices led to a debate on the future of the state's power market.

"The energy crisis is essentially over," said Michael Peevey, a former utility executive and now president of the California Public Utilities Commission. "But it is true that we're saddled with rates about 20 percent higher than they were prior to the crisis."

California's energy crisis began in May 2000, when wholesale prices in the newly deregulated electricity market rose sharply due to a shortage of hydroelectric power, market manipulation by energy traders and a booming economy that demanded more power.

California's utilities then ran up huge debts, because the deregulation scheme barred them from charging customers the true price of power. The unstable market also led to six days of rolling blackouts in 2001, the bankruptcy of Pacific Gas and Electric Co., and billions in state money spent on power purchases.

Since the crisis, the Legislature has toyed with ways to restructure the state's electricity market, but the budget and other crises have pushed their plans aside.

What is being debated now, said Doug Heller of the Foundation for Taxpayer and Consumer Rights, are bills that are "still driven by the idea that we should try to regain a deregulated marketplace." They also contain elements of the flawed 1996 deregulation plan, such as the ability to let large electricity users shop around for their electricity.

So-called "direct access" is in the two major bills at work now. One, by Assemblymen Keith Richman, R-Chatsworth, and Joe Canciamilla, D-Antioch, proposes a "hybrid" system -- allowing large energy users to opt out of utility service for a competitive "direct access" market.

A competing bill by Assembly Speaker Fabian Nunez, D-Los Angeles, would also allow direct access for large customers, but would put more restrictions on when they could jump between a utility and a competitor.

State lawmakers halted direct access, a cornerstone of the deregulation law, in September 2001 to stop customers from fleeing utilities for lower-priced competitors and leaving the remaining customers to repay the billions in energy debt in the form of higher rates for years.

When it comes to building new power plants and finding other energy sources, the state needs to determine "who builds, who buys and for whom," said PUC commissioner Loretta Lynch. "And to be smart about it, we need to determine it this year."

The bulk of the long-term power contracts begin expiring around 2009 -- which is around the time a number of California's aging power plants are set to retire. And while the state has made progress in building new power plants, adding about 10,000 new megawatts since 2001, Peevey said "we need to do more." "That's where we have to sort out what the market looks like in the future," he said. "The uncertainty doesn't serve anyone."

Here is a timeline of key events in California's power deregulation and energy crisis:

1996: Republican Gov. Pete Wilson signs legislation to open California's electricity market to competition.

1998: Utilities begin the process of selling their power plants. Rates they can charge consumers are capped until the utilities complete that task, expected in 2002.

1999: San Diego Gas & Electric becomes first California utility to deregulate, allowing it to lift the price cap. Within a year, customers' bills triple as the utility passes on high wholesale power costs.


May: Wholesale prices continue to soar. San Diego customers see their bills triple as SDG&E passes the costs to its retail customers. Customers of Pacific Gas & Electric and Southern California Edison remain under a price cap, but those two utilities begin accruing large debts.

June 15: Rolling blackouts in San Francisco affect thousands. The blackouts are caused by slim power supplies due to several Northern California power plants shut down for maintenance.

August: Democratic Gov. Gray Davis calls for investigation into possible price manipulation in wholesale electricity market.

September: State regulators approve plan for San Diego customers that caps their rates for three years.

Dec. 7: ISO declares first of dozens of Stage 3 emergencies as power reserves fall below 1.5 percent. Conservation efforts avert rolling blackouts. Days later, U.S. Energy Secretary Bill Richardson orders power suppliers to sell electricity to electricity-strapped California to try to fend off blackouts.

Dec 15: The Federal Energy Regulatory Commission approves a flexible rate cap plan, but allows power suppliers to charge utilities more if they can prove a higher price is warranted.


Jan. 4: State regulators approve emergency rate hikes of 7 percent to 15 percent for customers of Edison and PG&E, who say they have lost billions of dollars because they cannot pass on high wholesale costs to customers. They later warn of bankruptcy and layoffs.

Jan. 17-18: ISO orders the first rolling blackouts of California's electricity crisis. The outages affect several hundred thousand customers in northern and central California. Davis signs emergency order allowing the state Department of Water Resources to buy power as part of a plan to stave off Edison and PG&E bankruptcy and further blackouts.

Jan. 19: Davis signs legislation directing the DWR to spend up to $400 million to buy power for Edison and PG&E. The bill is called a "stopgap" measure until a long-term plan can be put into place to stabilize the volatile electricity market.

Feb. 1: Davis signs a multibillion-dollar power-buying plan that will have the state buy electricity for customers of strapped PG&E, Edison and San Diego Gas & Electric Co. while lawmakers try to resolve the energy crisis. The law lets the state sign long-term contracts -- first estimated at $10 billion over a decade but later projected at four times that amount -- to buy power on the utilities' behalf.

Feb. 6: President Bush allows the expiration of an emergency federal order requiring wholesale electricity companies to sell to California.

March 19-20: Rolling blackouts, brought on by unseasonably warm weather and a shortage of power, hit both northern and southern California.

March 27: The PUC approves record rate increases of up to 46 percent for Edison and PG&E customers.

March 29: Davis asks lawmakers to approve spending another $500 million to buy power for Edison, PG&E and SDG&E, raising state money committed to the power buys to $4.7 billion.

April 6: PG&E files for Chapter 11 bankruptcy protection, saying it is $8.9 billion in debt due to soaring wholesale power costs and hasn't gotten the help it needs from regulators or politicians. Consumer activists say PG&E's parent company, PG&E Corp., has siphoned away money that could have kept the utility out of bankruptcy court.

April 25: The Federal Energy Regulatory Commission orders price mitigation plan for California's wholesale electricity market, setting price controls for power sold into the state.

May 7-8: Third round of statewide rolling blackouts.

June: Davis demands that power generators refund nearly $9 billion in electricity overcharges. Meanwhile, federal regulators continue the price controls they ordered in April. That, combined with the effect of the state's long-term energy contracts, stabilizes the energy market.

September: State lawmakers halt direct access, a cornerstone of deregulation that let customers choose to get electricity from companies other than their utility. Lawmakers say direct access was hurting utilities' ability to repay debts incurred during the energy crisis.

October: The Public Utilities Commission announces an agreement with Southern California Edison to allow the utility to pay its debts by tapping ratepayers.

Dec. 2: After disclosing that previous financial statements were overstated, Enron Corp., a major player in California's energy market, files for bankruptcy.


March: California officials begin renegotiating some of the 56 long-term power contracts it signed a year earlier at the height of the energy crisis. The deals were originally worth $42.5 billion over a decade. The state has since reworked 34 contracts, saving $6.3 billion.

May: Federal regulators release a confidential Enron detailing how traders for the energy company drove up power prices during last year's California power crisis. Written by Enron lawyers, the December 2000 memorandum lists strategies such as "Death Star," "ricochet" and "Fat Boy." The schemes created phantom congestion on energy transmission lines and allowed Enron to sell power out of California and then back into the state to avoid price caps.

October 2002: California begins to sell $11.3 billion in bonds to repay the state general fund for money spent buying power on behalf of the utilities. The bonds will be repaid by utility customers through higher rates over several years.


March: FERC says the state is entitled to refunds, possibly as much as $3.3 billion, for overpriced power during the state's energy crisis. State officials contest that decision, which amounts to about a third of the $9 billion they say the state is owed.

June: PUC announces settlement with PG&E that would allow the utility to emerge from bankruptcy by having customers to pay off much of the debt incurred during the energy crisis.

July 2003: PG&E's unregulated energy trading subsidiary, National Energy Group, once regarded as a gold mine, files for bankruptcy.

August: Customers of Southern California Edison see their rates drop by between 8 percent and 19 percent.

November: Gov. Gray Davis, in the last days of his abbreviated term, issues a proclamation declaring the energy crisis over. This ends the state of emergency Davis declared on Jan. 17, 2001.

December: State regulators at the PUC approve 3-2 a multibillion dollar bailout of PG&E to be paid mostly by the utility's customers. Later that month, PG&E gives more than $84 million in bonuses to 17 executives, including $17.1 million to PG&E's chief executive Robert Glynn. The utility says its shareholders paid for the bonuses.


February: State power regulators authorize PG&E to lower its electricity rates by 8 percent.

April 8: A federal grand jury indicts a subsidiary of Reliant Resources Inc. and four employees of the Houston-based company on criminal charges, alleging that they withheld power to California to drive up prices.

April 12: Pacific Gas and Electric Co. emerges from bankruptcy, three years after it sought protection from its creditors.

Q. How do electricity rates compare now to what they were before the energy crisis? How do they compare to other states?

A. Utility customers in California pay some of the highest electricity rates in the nation. That was true before the state attempted to deregulate the electricity market, and now, with utility customers paying off the billions in debts incurred when wholesales rates hit record-high levels in 2000 and 2001.

Before wholesale rates began their skyward spiral in May 2000, Pacific Gas & Electric Co. customers in Northern and Central California were paying 9.4 cents per kilowatt hour. Customers in the Southern California Edison area, which does not include Los Angeles, paid about 10.3 cents per kilowatt hour. San Diego Gas & Electric customers paid approximately 9.5 cents per kilowatt hour.

Now, PG&E customers pay about 12.8 cents; Edison customers pay about 12.4 cents and SDG&E customers pay around 13.6 cents per kilowatt hour.

Q. Can rates go higher? Why would they be increased?

A. Retail rates are set by the California Public Utilities Commission. If utilities request and can justify higher rates, the PUC could approve them. Lately, though, the trend has been to reduce rates, with Edison customers seeing drops between 8 percent and 19 percent last summer. PG&E customers saw cuts of 4 percent to 8 percent, but those rates are now locked in for nine years as part of the utility's bankruptcy settlement.

The utilities' wholesale costs affect what they charge consumers. If wholesale prices rise, they could ask to pass those costs on to their customers. Wholesale prices in the open market have been hovering around $50 per megawatt hour, far lower than the $300-per-megawatt-hour price California often saw during the energy crisis.

But, much of the utilities' energy still comes from longterm contracts negotiated by the state in 2001. Though high-priced, those contracts costs are locked in at a fairly steady rate. Many of the contracts will expire in 2009, with the last one set to end in 2013.

Q. Are more rolling blackouts possible?

A. Officials for the Independent System Operator say they don't expect blackouts any time soon, but they warn that many of the state's aging power plants will be retiring in the next several years. Those plants could go out of service faster than new ones can be built, the ISO warns, which could lead to a future gap between supply and demand. If that were compounded by hot temperatures and a lower-than-average snow pack, which affects the amount of hydroelectric power, that could then lead to shortages and possibly rolling blackouts.

Q. Does California have enough capacity now? Is the state generating enough electricity for its needs?

A. California still depends on imported electricity to meet its demand. California power plants can produce as much as 56,300 megawatts, but those plants are never operating at full speed and all at the same time. At times of peak demand, the state uses about 56,600 megawatts -- about a third of that from air conditioners.

Because all states west of the Rockies are connected through the electric grid, California's power can come from Canada, Mexico and points between.

Since 2001, 10,000 new megawatts have come online, the ISO says, but 3,500 megawatts were lost when old plants retired.

Q. Is there anything to stop wholesalers from gaming the market again?

A. The ISO has crafted new rules designed to let it react more quickly to suspected market manipulation and impose higher fines. However, the Federal Energy Regulatory Commission has ordered the ISO to change its governing board from the five-member panel appointed by the governor, to an independent board made up of representatives of utilities, generators and consumer advocates. Until the ISO board is changed, FERC will police the ISO trades and enforce the new rules.

FERC has made orders, such as price caps, that have helped California weather the worst of the energy crisis. The federal commission also ordered suppliers to offer California available power if the state's reserves fall.

"We still use that tool today. It guards against physical withholding," says Stephanie McCorkle, ISO spokeswoman.

Many people are still concerned that market manipulation could occur. Public Utilities Commissioner Loretta Lynch says the generators have also learned from California's past mistakes. "I'm worried that we'll never keep up with the gaming."

Q. What's being done to change the state's power system? What's different from before the crisis happened?

A. A complex blend of state and federal laws and regulations governs electricity sales. State regulators oversee the utilities that sell power to the customer. The wholesale market is overseen by FERC.

Before the energy crisis, wholesale power was sold through trading floors at the Power Exchange's day-ahead market and the ISO's last-minute spot market. Now, the PX is closed, and a good portion of the utilities' electricity comes from the longterm state contracts signed in 2001. That has reduced the amount of electricity traded at the last minute through the ISO.

The Legislature has at least two bills pending that address the restructuring of California's energy market and lawmakers could debate the issue this year.

Congress would have to change federal laws governing the wholesale side of the energy market, which doesn't seem likely.

Q. What structural or regulatory changes have been made to avoid the next energy crisis?

A. The California Energy Commission has become a clearinghouse of energy information and is required to report to the governor and lawmakers every two years. The hope is that will help facilitate long-term planning so the state won't be blindsided by shortages in the future.

The California Legislature approved and then-Gov. Gray Davis signed a bill requiring that utilities increase their use of environmentally friendly power. That law is designed to diversify the state's energy supply and decrease its reliance on natural-gas fired plants. Most of California's power plants use natural gas, which is subject to price spikes that can raise the cost of electricity.

Another energy agency, the California Power Authority, was also created during the energy crisis. It can sell up to $5 billion in bonds to build, buy or lease power plants, or to spend on conservation efforts. It has implemented programs to double the number of solar panels on state buildings and cut commercial power use by 250 megawatts on demand. But Gov. Arnold Schwarzenegger has proposed scuttling the Power Authority, saying its not vital to solving California's supply problems.

Davis had issued an emergency declaration that streamlined the application process for building new power plants to as little as 21 days, but those orders have since expired. A six-month process could be reinstated by the Legislature this year, which would cut by half the typical application process.

Lawmakers also made it easier for utilities to sign longterm contracts without fear that they'd would be penalized later by state regulators.

Q. Will California ever recover the money it was overcharged for electricity?

A. Probably not all that state officials are seeking to recover. California officials say they're owed $9 billion for electricity overcharges. The FERC says that's more like $3 billion. FERC has already approved about $100 million in settlements, most of which are separate from the refund case, which is ongoing.

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