Power Rates Slow to Cool : Deregulation of the state’s electricity industry has cut the big users’ bills, but not so for the little guy.

Nearly 18 months into the sweeping restructuring of California’s high-cost electricity industry, the grand experiment has both sizzled and fizzled.

For Tamco Steel, a Rancho Cucamonga steel mill that is one of the state’s largest industrial electricity users, the market overhaul has meant a welcome 5% drop in the electric bills.

“Every little bit helps,” said Brad Wilkins, Tamco vice president and chief financial officer.

But for Helen Engebretson and many other residents of San Diego and southern Orange County, the dawning of a new competitive era promising cheaper energy instead brought a bit of a shock in July and August: electric bills that were about 10% higher than a year ago. San Diego Gas & Electric on July 1 became the first utility to remove its state-mandated rate freeze, creating something of a free-market laboratory just as summer temperatures sent electricity rates soaring.

“Everything has gotten so expensive,” marveled Engebretson, who relies on Social Security to support herself and her husband.

California’s $28-billion electricity market has changed enormously since state officials threw it open to competition, and it remains very much in transition as it mutates by 2002 into a form that hasn’t yet been determined.

“This is a very infant market now, and we’re learning as we go along,” said state Sen. Steve Peace (D-El Cajon), one of the authors of the landmark 1996 legislation, Assembly Bill 1890, that flipped the switch on the regulatory rewiring and gave most of California’s energy users the ability to decide from whom they buy their electricity.

There are some bright spots: The state’s power grid under a new system operator performed reliably through adverse weather conditions, and an untried electricity exchange brought together buyers and sellers with few glitches.

Many large electricity customers saved some money while discovering innovative ways to manage energy use and consume less. New, largely out-of-state investors went on a power plant buying spree and are lining up to build more than 7,000 megawatts of new power-generation facilities in California. (That’s enough electricity to supply 7 million average California homes for one day.) Opportunities were created for a new breed of electricity marketer, particularly those peddling power from renewable energy sources.

Some Consumers Are Paying More

But the picture dims for consumers and small businesses. Although they got a four-year rate freeze, a 10% electric bill discount and the right to choose a power provider for the first time, small customers didn’t save much or are actually paying more than they were before the industry was restructured.

The market has not been lucrative enough so far to support the nearly 300 companies that registered with the California Public Utilities Commission to sell electricity. Predictions of huge savings for large electricity users have proved overly optimistic, and metering and billing problems have dampened the enthusiasm of some early market participants.

Meanwhile, regulators and legislators continue to tinker with the rules that govern the industry as they ponder how a truly competitive marketplace should operate.

“Ultimately, the deregulation of electricity was an act of faith,” said Robert J. Michaels, an economics professor at Cal State Fullerton who has consulted for some of the new electricity marketers.

“It’s a faith that pretty much was justified in other deregulations,” Michaels said, referring to telecommunications and airlines, because benefits were widespread or--as with call-waiting and frequent-flier programs--hadn’t existed before. But in this “bizarrely complex industry” of electricity generation, distribution and sales, he said, “a lot of this will take years to play out.”

On March 31, 1998, California became the first state to open its electricity market to competition. This dismantled a decades-old system in which utility monopolies supplied the electricity and regulators decided what the consumers would pay.

California’s electricity rates were among the highest in the nation, adding to the high cost of doing business in the state for large users.

Nearly 80% of Californians now are able to shop for power the same way they shop for telephone service or takeout pizza: by evaluating a number of companies for the best price or the best toppings.

Those eligible are the more than 10 million customers of the state’s investor-owned utilities, primarily Southern California Edison, a division of Edison International of Rosemead; PG&E; Corp.’s Pacific Gas & Electric; and Sempra Energy Corp.’s San Diego Gas & Electric. (Municipal utilities such as the Los Angeles Department of Water and Power are not required to open their markets to the new breed of electricity service providers but are expected to participate eventually because of customer pressure for lower rates.)

The big investor-owned utilities were also required to sell most of their power-generation facilities, to prevent them from influencing the price of electricity, and they relinquished responsibility for their long-distance transmission lines, so they could not control access to the state’s power grid.

To keep the electrons flowing in a fair, reliable and price-effective way, the Legislature created the Folsom-based California Independent System Operator, which schedules the movement of electricity around the state’s power grid, and the Pasadena-based California Power Exchange, which operates the primary market for the state’s electricity.

The undertaking was enormous, and a three-month delay in the changeover caused great anxiety. But when the first electrons finally flowed, the transition was flawless and the system continued to perform reliably through record summer heat, winter freezes and a power outage in San Francisco caused by errors at PG&E.;

“I think you could almost be surprised that everything has worked as smoothly as it has, given the magnitude of the change,” said Stephen E. Frank, president and chief operating officer of Southern California Edison, the still-regulated utility whose primary role now, as envisioned in AB 1890, is as merely an electricity distributor.

Switchers Are a Tiny Minority

Only an adventurous 1.5% of eligible electricity users had signed up with new power providers through July 31, the latest figures available. More than 200 large industrial and commercial users celebrated the first anniversary of the restructuring by switching back to their old utility, reflecting frustrations over billing and metering problems and lackluster savings.

But those who have changed providers represent 11.6% of the electricity used in the large utilities’ territories. That’s because most of the switchers are large commercial and industrial customers that use as much power in a single day as a residential customer uses in a year. About 26% of these big customers--the ones that the restructuring was designed to keep happy--have switched.

These big customers are chasing rate reductions that have averaged 3% to 5%, said Ahmad Faruqui, manager of retail and power markets for EPRI, a Palo Alto-based research organization funded by the utility industry.

Tamco Steel, which consumes nearly $1 million in electricity a month turning scrap metal into steel reinforcing bar used in construction, still pays more for power than its competitors in other states even after shaving 5% off its bill, Wilkins said. The former Edison customer has been getting its power from New Energy, one of the new marketers, since deregulation began.

“The savings have not been huge,” he said, laying part of the blame on the Legislature’s deal with utilities that allowed them to recover all of the costs of unprofitable investments made during regulated times. That is shown on electricity bills as the “competition transition charge” and is paid for by all users, even those who opt for a new, non-utility supplier.

The 10% discount mandated for small users is closer to 2%, consumer advocates contend, after accounting for payments made on the bonds sold to finance the discount. Activists put Proposition 9 before voters last November, which would have created a 20% discount and forbidden the use of ratepayer funds to pay for nuclear investments. Utilities saw Proposition 9’s failure as a referendum on the restructuring; activists said it represented the triumph of heavy election spending.

“If regulators don’t go to bat for consumers, they will be permanently shut out of the benefits of deregulation, which thus far has provided them with absolutely no savings,” said Nettie Hoge, executive director of the Utility Reform Network, or TURN, in San Francisco.

Deregulation “was not as much as advertised,” said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego. “They gave a party and nobody came.”

State Sen. Peace traced consumer dissatisfaction to early over-hyped promises by marketers, who backed off when they found they couldn’t profitably beat the prices established at the California Power Exchange. In addition, savings are possible only on the commodity portion of an electric bill, which makes up only about one-third of the average charges.

“But it did benefit employers and big users,” he said, and that helps the state’s economy.

The electric market revamp brought investors flocking to California.

Primarily out-of-state power companies paid more than $2 billion, well above book value, for most of the power-generating facilities owned by the three big utilities. That money went to paying off some of the competition transition charges.

SDG&E;’s plant sales were so lucrative that it was able to pay off most of its transition charges by June 30, astonishing regulators, who allowed the company to end its rate freeze. Several of the new plant owners are expected to upgrade the aging facilities so that they produce cleaner and cheaper energy.

San Jose-based Calpine Corp. recently began building the first major power project since deregulation, the $300-million, 500-megawatt Sutter Power Plant near Yuba City. The California Energy Commission expects as many as 30 other plants to seek licensing.

As in other markets that have deregulated, the electricity industry will increase the pace of innovation as companies compete to attract customers and increase profits, Faruqui said.

Marketers such as NewEnergy, a Los Angeles subsidiary of power giant AES Corp., and Sempra Energy Services, the unregulated sister company of SDG&E;, are selling customers new meters coupled with Internet sites that let them monitor and manage energy use. Other services that improve environmental compliance and productivity also should become popular, Faruqui said.

“The overall savings to some customers can be significantly higher with these services,” he said. For residential users, there is talk of bundling electricity with telecommunications or cable TV service.

One tangible benefit of restructuring has been the proliferation of new products from renewable, and often costlier, sources--primarily wind, solar and geothermal--from aggressive marketers such as GreenMountain.com Co. and Commonwealth Energy Corp.

California’s electricity industry is a work in progress, with much left undone by AB 1890. The experience of these early days could shape the regulations for the post-transition market. The PUC is beginning proceedings on various facets of the market, including rates. And the Legislature is considering a smattering of bills that would alter aspects of the restructuring.

Electricity marketers complain, for example, that utilities are able to include retail costs in the distribution rates that all must pay. As a result, customers of the new market participants end up paying twice for some business costs, such as telephones and employee benefits.

Regulators also have to figure out what a truly competitive market looks like, including how much market power the utilities should be allowed to retain, Michaels of Cal State Fullerton said.

San Diego Paves the Way

San Diego is the closest thing so far to a free market, and power providers have been marketing heavily there since the freeze ended July 1.

SDG&E; customers were warned to expect electric rates to jump immediately, because that’s what power rates do during summer, said SDG&E; President Ed Guiles. A 12.5% ceiling was set, though it hasn’t yet been reached, and customers were given the option of leveling their bills over the year. The utility now expects rates for residential customers to decline about 5% on average for the year; that’s on top of the mandated 10% cut already in place.

“We continue to be the guinea pig,” Guiles said. “We’ve been spending a lot of time explaining to customers that the commodity price is higher because of the weather.”

Even with the bigger bills, he said, “most residential customers haven’t switched, because it’s just not a major issue in their lives. But they have choice, and that what it’s all about.”

Helen Engebretson said her bill “went up some--not terrifically, but enough.” She said she plans to check out some of the new electricity companies to see if she can get a better deal, “because that’s what you have to do.”

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Gauging Deregulation

Since energy deregulation went into effect on March 31, 1998, only 1.5% of customers of California investor-owned utilities* have switched to other electricity providers.

Switchovers have been few in number ...

*

Have not switched: 10,130,571

Have switched: 153,393

*Including Southern California Edision, Pacific Gas & Electric and San Diego Gas & Electric.

*

... but larger in impact.

Some of those that have switched are large industrial and commercial users. Their actions account for most of the shift of 11.6% of all electricity use.

Source: California Public Utilities Commission

Have not switched: 166 billion kwh**

Have switched: 19 billion kwh

** Kilowatt hours used in last 12 months.

Source: California Public Utilities Commission