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January 30, 2001 Why San Diego, Where Rates First Rose, No Longer Conserves Energy By LAURA M. HOLSON

AN DIEGO, Jan. 25 — It was here, in the heat of last summer, that consumers got their initial lesson in how painful California's experiment with deregulation could be.

With electricity supplies short and the state's power grid on the brink of collapse, wholesale electricity costs nearly tripled, and the San Diego Gas and Electric Company, the first utility in the state freed by deregulation, passed those costs on to its customers. Homeowners took to the streets, and businesses threatened to leave the city, California's second largest.

Logic would suggest that San Diego consumers, having felt the price shock that the rest of the state so far had been shielded from, would be wiser about using electricity than other Californians. But the price shock was too short.

In September, California legislators called off the experiment, capping retail electrical rates at 6.5 cents a kilowatt hour, the average market price paid in the month before the summer crisis.

Now, six months later, San Diegans are back to their old ways.

Electricity use, which dropped 9 percent in August, is back up to precrisis levels, according to San Diego Gas and Electric. Rather than investing in insulation or energy-efficient air-conditioners, consumers here seem to be hovering between denial and defiance.

"I feel I do all that I can to conserve," said Vicki Barber, an escrow coordinator for a real estate broker in San Diego. "But I'm not going to spend all this money upgrading my house when it doesn't matter anyway."

As a test laboratory of consumer behavior when the cost of a necessity skyrockets, San Diego seems confused by how politicians reacted when consumers here revolted last summer, demanding relief.

In September, when California legislators restored the lower rates, residential and small-business rate payers received credits on their utility bills — even though the credits are really a postponed debt that is expected to come due as soon as 2002. And it is true that the utility's largest customers are already paying market rates.

Still, Jeannie Thompson's reaction was typical. In August, Ms. Thompson, the branch manager of a Coldwell Banker real estate office in the Pacific Beach district, made it her business to turn off office lights and computers every night. "When the news first came out, you wanted to do your part," she said.

Then, in October, the office got its credit, and "we started to go back to the way things were before."

Economists look at San Diegans' behavior and draw this lesson: Consumers must suffer a lot before they willingly give up comfort and conveniences they have grown used to.

"Summer should have been a wake-up call," said Peter Navarro, associate professor of economics and public policy at the University of California at Irvine. "You can't blame San Diego consumers for not doing anything, because legislators stepped in and lowered prices. If the discomfort isn't of a lengthy duration, the adjustments to behavior that need to take place won't."

Indeed, in a recent paper, a group of energy experts and economists, including two Nobel Prize winners, made the same point, saying that if consumers knew the true cost of electricity, they would conserve more.

Even Gov. Gray Davis seems to be backing away from his promise that rates would not rise.

But San Diego consumers, once again insulated from rate increases, have shrugged off the crisis, in part because they have taken to heart the governor's oft-repeated claim that the problems are the fault of out-of- state power generators that need to be reined in.

"Ask these people if they feel safe at night," Pete Phelps said wryly of those generators. Mr. Phelps, an airline pilot, was, with his wife, Pat, loading a 50-gallon water heater into the back of his pickup truck at a Home Depot near the San Diego Sports Arena.

Mrs. Phelps added, "You don't know what is legitimate, who to believe."

So the Phelpses have done little in recent months to conserve, except turning off lights, as their monthly electricity bill has climbed to $130, from about $85, in the past two years. Their new water heater was billed as "energy efficient," and while it should save them $150 a year, they did not buy it with conservation in mind. "I spill that in beer money," Mr. Phelps said.

High prices alone cannot change consumer behavior, Mr. Navarro, the economist, said. If consumers, for instance, believe that turning off lights benefits someone other than themselves, they will feel no incentive to conserve. That, he said, is the situation in the Pacific Northwest, where many residents believe that any power they save will simply be diverted to hot tubs in the San Francisco suburbs.

But in San Diego, people have gotten a particularly mixed message. To begin with, high rates did not last long enough to make an impact. Rather, the lingering impression was that legislators would step in to protect consumers at any cost.

The math, said Severin Borenstein, director of the University of California Energy Institute, was simple.

"If you go from 6 cents to 22 cents to 6 cents, then the response will be to weather the storm," Mr. Borenstein said, referring to the price of a kilowatt hour. "But if it stays at 22 cents, then it makes sense for people to go out and invest in ways to save energy."

Mr. Borenstein drew a parallel to the gasoline shortages of the 1970's. At first, he said, motorists demonized Middle East oil producers, as lines of cars snaked around gasoline stations, waiting for rationed supplies. Only after high prices persisted did consumers begin to change their habits, buying more fuel-efficient cars, he said.

Still, some San Diegans insist that they are pitching in.

"I have not put the heat on," said Ms. Thompson, the real estate agent. "I close my doors and put on a sweater."

But she has not had an energy audit of her home, a service provided by San Diego Gas and Electric, or bought energy-saving appliances.

During last summer's price spike, surveys by San Diego Gas and Electric found that 91 percent of its 1.2 million users did not think the utility was being wholly honest with them about the crisis, said Stephen L. Baum, chairman of Sempra Energy, the utility's parent company. And there is bound to be more anger, now that the utility has requested a surcharge of about 16 percent in March, to pay off $450 million it owes its power suppliers.

Higher rates will also make life harder for people who are just getting by. At a recent outdoor farmer's market in El Cajon, a working-class town 15 miles east of San Diego, Heidi Van Horn, a massage therapist, and her fiancé, Bernie Herloss, a handyman, were supplementing their $1,200 monthly income by selling grilled bratwurst and hamburgers to hungry shoppers.

For the two-bedroom apartment they share, the couple have $200 in past-due energy bills. Those bills hover at about $100 a month, up from $55 two years ago. "We aren't one of these high-rollers who make $9 an hour," Ms. Van Horn said. "We either pay the electricity or have the phone shut off."

Even so, she said, they do what they can to conserve, turning down the thermostat or turning off the occasional light. But their apartment building is poorly insulated. Cold wind seeps in through closed windows, and the heating vents are near the ceiling, where the warmth is wasted. Their only energy-efficient light bulb is the one that came in the mail from San Diego Gas and Electric.

And the two birds and the iguana they keep, Ms. Van Horn said, would die if she turned off any of the three heat lamps that run continuously in the apartment.

She would never consider getting rid of the pets. Ms. Van Horn said. "They are family."

http://www.nytimes.com/2001/01/30/national/30CONS.html?printpage=yes

-- Martin Thompson (mthom1927@aol.com), January 30, 2001