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Top Of The News: California Power Madness

California's political and financial crisis--falsely billed as an energy crisis--took another turn yesterday as the state's utility commission voted to increase rates in certain parts of the state by a total of $5 billion.

Roughly 60% of consumers in affected areas will suffer no rate increase, but others--including industrial and commercial customers and the most profligate residential users--will face hikes of 47% to 80%.

The California Public Utilities Commission voted 3-2 for the plan to raise cash to cover the cost of electricity that the state itself is paying for in the wake of a badly botched deregulation plan. The plan left the state's largest utility bankrupt and has led to rolling blackouts in parts of the Golden State that are serviced by the California Independent System Operator, which runs the transmission grid in parts of the state.

Los Angeles, Sacramento and several other California municipalities* never joined the 1996 deregulation plan. These areas have not been affected by blackouts and this rate increase will not apply to them.

The two Republicans on the commission voted against the plan, and many consumers also protested the action. Some businesses even warned that electricity rates could drive them from the state, which still has one of the most prosperous economies on earth.

The new rates affect about 9 million customers. Industrial customers will pay 49% more and big commercial customers like malls and hotels will fork over an additional 36% to 41%. Residential users will face a punitive 12% to 54.5% increase for all electricity they use in excess of an established baseline that takes into account "reasonable'' power use in each of the state's climate zones. Homeowners who use more than 300% of the baseline amount will pay 80% more for their excess usage.

But residential customers who stay within 130% of their baseline will see no price increase at all. The new rates go into effect on June 1.

Increases are needed because of "unbounded, unjust, unreasonable and unlawful" prices being charged by wholesale electricity providers after California's mangled deregulation plan, said Loretta Lynch, president of the utility commission. Lynch also attacked the Federal Energy Regulatory Commission (FERC) for not capping wholesale rates.

California Gov. Gray Davis has also pleaded with the FERC to impose price caps on the market to stem what he calls price gouging by independent power merchants who sell to the California utilities and now sell to the state.

FERC has rejected all such pleas on the grounds that a lasting solution is for a free market to set rates.

The California rules allowed wholesalers to charge whatever the market would bear but capped the amount retail consumers could be billed. The deregulation plan also forced utilities to sell their power plants to out-of-state companies like Dynegy (nyse: DYN - news - people) and Duke Energy (nyse: DKE - news - people). This aspect of the plan left the utilities vulnerable to extremely high prices in times of relative scarcity.

The result was a financial calamity for Pacific Gas & Electric (nyse: PCG - news - people), which recently declared bankruptcy, and Southern California Edison, a unit of Edison International (nyse: EIX - news - people), which is also facing shortfalls.

In February, Davis signed a $10 billion emergency energy rescue plan through which the state agreed to step in for its utilities and buy and sell the power that the private companies can no longer afford. The situation has led both Moody's and Standard & Poor's to lower the state's credit rating. The rate increases announced yesterday were needed to stop the financial crisis from spreading.

*A previous version of this story mistakenly stated that San Diego did not join the 1996 deregulation plan.

http://www.forbes.com/2001/05/16/0516topnews_print.html

-- Martin Thompson (mthom1927@aol.com), May 17, 2001

Answers

Re: "Los Angeles, Sacramento and several other California municipalities* never joined the 1996 deregulation plan. These areas have not been affected by blackouts and this rate increase will not apply to them."

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This is in error. The Sacramento Municipal Utility District is not part of the deregulation program but still coordinates with the Cal ISO. Sacramento and Modesto and other cities have had blackouts already because their utilities "voluntarily" participated in the rotating blackouts to prevent the entire state going down. We also had blackouts when Southern California did not, because there was not enough transmission line capacity going north, and power we used to import from the Pacific Northwest literally "dried up".

Higher rates are not just hitting electricity users in the big 3 utilities. SMUD just announced it was raising its electricity rates 20% in May, because it still had to buy some power on the spot market. In state NG was priced at $4-500/mw last time I looked (Cal ISO web site, which does not yet reflect the recent price of $2,000/mw). Rates for homeowners' gas have already gone up (NG price for heating was not capped) and my heating bill from PG&E quadrupled in 3 months last winter.

The whole state is feeling the pinch.

-- Margaret J (mjans01@yahoo.com), May 17, 2001.