Carl Wood Editorial Today's SDUT

["Sandy Perle" <sandyfl@earthlink.net>]

Can utilities customers be protected?

By Carl Wood 

Note: Wood is a member of the California Public Utilities 
Commission. A long-time San Diego County resident (and former 
worker at SONGS), he was appointed to the panel by Gov. Gray 
Davis and has served since June 1999.

August 2, 2000

San Diego residential and small-business electricity consumers have the
dubious privilege of being the first in the nation to experience the
benefits of deregulation. As everyone who has opened his or her SDG&E bills
this summer knows, the results have been a shock.

The promise of deregulation was lower rates and continued reliability, and
we have received neither. For San Diego's small customers, rates this month
were nearly doubled compared to the same month last year. And the energy
component of the bill, the only part which is presently fully deregulated,
is up an incredible 247 percent! In Northern California, unexpectedly hot
weather on June 14 forced the utility to conduct the first intentional
rolling blackouts in California since before World War II.

Why is this happening? Should we have foreseen it?

Since the 1930s, privately owned electrical utilities in the United States
have had the legal responsibility to provide reliable service at reasonable
prices. Because the industry was understood to be a "natural" monopoly,
utility operations were subject to public scrutiny, and their rates and
profit levels were limited by state public utility commissions. Under this
system, our nation's utilities provided the most reliable and lowest-priced
(after Canada) electricity in the world.

However, in the 1980s, a worldwide wave of free-market ideology subjected
every form of public regulation to attack. In Great Britain, the publicly
owned electric utility system was broken up, privatized and deregulated. At
home, the California Public Utilities Commission (CPUC), in implementing a
1977 federal energy conservation law, tried to introduce competition by
generously subsidizing non-utility electrical generation, at customer
expense.

The results? In Britain, consumer prices went up after deregulation, while
profits in the newly privatized utility companies averaged more than 30
percent per year (compared to 10 percent to 15 percent in typical U.S.
regulated utilities) until a new government imposed a windfall profits tax.

In California, consumers paid a hidden subsidy of billions of dollars per
year to provide unregulated generators guaranteed prices far exceeding the
costs of regulated utility generation they replaced. All in the name of
competition.

More ominously, California utilities stopped building new generation. Under
our state's pre-deregulation system, the California Energy Commission
analyzed economic trends and forecasted the need for future generation. The
CPUC was then supposed to authorize the utility companies to build or
contract for these resources in a timely, cost-effective manner.

Instead, the CPUC actively discouraged the utilities from building new
generation, favoring for ideological reasons so-called "market solutions"
over the out-of-fashion "government planning." And the utilities
themselves, foreseeing future deregulation under which their investment
would no longer be protected, were none too enthusiastic about investing
billions of dollars of shareholders' money in needed power plants.

The inevitable crisis was masked for a number of years by the long economic
downturn that stagnated the region's economy in the early 1990s. Electric
generation reserve margins of over 20 percent (about 14 percent was
considered normal to assure reliability) convinced many large industrial
and commercial customers that they would reap lower prices in a competitive
market in which supply greatly exceeded demand.

These corporations prevailed upon then-Gov. Pete Wilson to direct his
appointees on the CPUC to deregulate the electric utility industry in
California. On April 20, 1994, the commission issued the "Blue Book," a
radical proposal to do just that. The following months witnessed a classic
insiders' game, as hearing rooms full of expensive lawyers and consultants
argued over stranded costs, divestiture, market structure and other arcane
matters, while the public at large remained blissfully unaware of what was
being done to them.

In December 1995, the CPUC issued its deregulation order. But it was
unclear whether this unelected body had the legal authority to implement
such a drastic change in public policy without changes in the law. So in
early 1996, the Legislature, itself divided between a Republican-majority
Assembly and a bare Democratic-majority Senate, wrestled with the scheme
Gov. Wilson's CPUC had enacted.

The outcome was AB 1890, a complex piece of legislation built around the
CPUC's plan but incorporating some provisions to protect reliability and
small consumers, concerns notably absent from the "preferred policy
decision." At the core of both the commission decision and the legislation,
however, was a reliance on market mechanisms to provide new generation
capacity. And as this summer is demonstrating, this reliance was certainly
misplaced.

There are shortages of electric energy that reflect the failure to bring
new power plants on line, and there is questionable operating and market
behavior by generators and marketers. There are shockingly high consumer
prices and obscenely high producer profits.


Defenders of deregulation are now saying that this summer's events are the
result of an unforeseeably strong economy. In fact, the situation was
completely foreseeable. On June 19, 1997, I offered the following testimony
to a congressional committee considering federal deregulation legislation:

"In commodity markets with high capital requirements and long investment
lead times, boom and bust cycles are a normal part of free-market life.
When demand exceeds supply, new supply cannot be brought online immediately
-- or even quickly.

"Businesses and residential users could face skyrocketing prices and
brownouts."

It is said that, if protected from government interference, the market will
solve the problem in two or three years, at least until the next imbalance
occurs. Good theory, perhaps, but what about the El Cajon resident on a 103
degree day who is faced in the meantime with the choice of paying $5 an
hour to run the air conditioner while the market plays catch up?

The CPUC was created to protect consumers. I believe that we must actively
intervene to protect consumers from the short-and long-term consequences of
an experiment gone terribly wrong.

The first priority is to help consumers with high energy bills. We have
been presented with several proposals, including a retail rate freeze and
level-pay plans. In responding to these proposals, it is important to
remember that the root cause of high bills is the deregulated wholesale
market.

The California market is not workably competitive and is subject to the
exercise of monopoly power and unfair market practices. We need to be
forceful in acting to protect consumers from the effects of shortages, real
and artificial, and from excessive prices.

We must explore every legal means of assigning the costs of these high
rates to those who caused and profited from them, not innocent consumers.
We need to promote conservation and accelerate power plant and power-line
construction consistent with our commitment to environmental protection. We
need to expose and punish anti-competitive market behavior and price
gouging.

The electric utility system is the lifeblood of modern society, essential
to our safety, our comfort and our economic well-being. Economic dogma must
take a back seat to prudent, socially responsible action by both market
participants and public regulators.

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