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San Diego Union Tribune
Apr 29, 2004 - 01:00 AM

by Craig D. Rose, Copley News Service

Governor backs plan to spur energy competition

SAN DIEGO -- With California still smarting from its last foray into deregulation, Gov. Arnold Schwarzenegger Wednesday moved to bolster what remains of the concept by endorsing plans intended to spur competition for new power plants and allow large electricity users to seek private power deals.

In a letter to the California Public Utilities Commission, the governor urged the commission to set rules that would allow utilities to enter into long-term power contracts with electricity suppliers without the risk of facing later reviews by the PUC.

Utilities say they're reluctant to enter into contracts without this clarification, and electricity suppliers say they can't win financing for new power plants without the contracts in hand.

Schwarzenegger said he would support legislation to allow more large power users to bypass local utilities and seek electricity on the open market.

New private power deals were banned by the Legislature after the state's first attempt at electricity deregulation descended into chaos in 2001, though customers with deals in place have been allowed to keep them.

The governor also called for accelerated efforts to more than double the state's reserve electric generating capacity to 15 percent above demand to guard against future power shortages, a plan that could spark a plant building spree in the next few years.

"Enacting these measures will encourage investment in California's energy infrastructure and reduce the likelihood of blackouts," Schwarzenegger said. "I encourage the PUC to move quickly to adopt this regulatory framework so that California consumers and businesses can begin to realize the benefits of lower electricity costs and stable energy supplies."

The proposals come as California continues to grapple with the aftermath of its power crisis. Consumer advocates have unsuccessfully pressed for a re-regulation of the industry by a revitalized PUC and say any plan allowing big users to seek private power deals will dump costs onto smaller power users.

The power industry and large electricity users have advocated at least a partial deregulation of the market, though few dare to use the term "deregulate." They say competition will bring lower prices and innovation.

The governor's plan falls in the camp of partial deregulation, as it seeks to open the market to plant building from non-utility companies and allow large electricity users to seek power supply agreements on the open market, known as a core/non-core structure.

The governor said the PUC could act under AB 57, a measure passed two years ago that he said opened the door to competitive power plant bidding.

Aides to the governor said he also preferred that the PUC, rather than the Legislature, take the lead in shaping California's electricity markets because the commission could act faster.

The governor endorsed aspects of the Energy Action Plan recently crafted by the PUC and other state agencies calling for priorities on conservation, energy efficiency and renewable energy over any new fossil-fuel plant projects.

Schwarzenegger offered his proposal as the state's power grid operator reported that electricity supplies are adequate but growing increasingly tight. Utilities and power plant developers say they've been unable to obtain financing for projects because of regulatory uncertainty.

The governor's plan won immediate praise as an important first step from the California Manufacturers & Technology Association and the Independent Energy Producers, a trade group representing non-utility power suppliers.

Michael Peevey, president of the PUC, said he was "very pleased" that he and the governor agree about "the major policy issues."

But the proposal immediately generated criticism from Assembly Speaker Fabian Nunez, D-Los Angeles, as taking California down a failed path.

Nunez, who has proposed his own energy legislation, said the governor's plan pointed in the direction that "created the energy crisis and left consumers vulnerable to profiteering by out-of-state power companies."

"(The plan) again trusts the so-called invisible hand of the marketplace that in the past has picked the pockets of California consumers and businesses alike," Nunez said.

His proposal differs from Schwarzenegger's in the role it assigns to the competitive market. Power industry critics of the Nunez plan say it would restore the monopoly that utilities formerly held on power plant construction and freeze them out of competing for the projects.

The assembly speaker's legislation would allow utilities to build their own power plants or enter into contracts for power after approval by the PUC, but it would not require them to solicit market bids from outside suppliers to meet their customers' needs.

And while the legislation would allow up to 30 percent of the state's electricity load to seek private power deals, he proposed setting strict bounds to moving between such deals and returning to utility service, including a mandatory five-year commitment for those who make private power deals.

Consumer advocates, meanwhile, who had opposed Nunez's bill, found themselves in agreement with the speaker's criticism.

"We are more encouraged by his response to the governor than by his bill," said Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Heller said his organization continues to oppose Nunez's plan to allow large users to seek private power deals, believing it will inevitably create instability and dump costs onto smaller business and residential electricity customers.

"We could have a pro-consumer bill before the Legislature, if the speaker will get rid of deregulation provisions," Heller said.

The chairwoman of the Senate Energy Committee, Debra Bowen, D-Marina del Rey, said she might support legislation allowing large customers to buy their own power through the market, if a detailed plan seems workable.

"I need to see the rules," she said.

Bowen said one problem is that the painful experience of deregulation shows that energy suppliers will look for "creative" ways to drive up prices and increase their profits.

"Who is the referee of the wholesale market, and do we trust the Federal Energy Regulation Commission?" she said. FERC has been widely criticized by state officials as an inadequate market cop.

Another problem, Bowen said, is that large businesses have told legislators they want to be able to move between the market and utilities, getting power from the cheapest source.

Bowen said this would allow businesses to avoid being locked into an overpriced power source, but makes it difficult for utilities to make long-term plans because of an uncertain customer base.

Michael Shames, executive director of the Utility Consumers' Action Network, noted that the governor had not consulted with any of the state's largest consumer groups in crafting his proposal.

Shames said the governor's plan to increase electric generating reserves to 15 percent before 2008 was excessive and would be costly to consumers. He said reserves of that level would be needed only to guard against problems in deregulated markets, such as occurred during the state's crisis of 2000-01.

He called the heightened reserves an expensive insurance policy for the deregulated market, one that would be paid by smaller electricity customers and benefit only the larger consumers who could get the cheaper deals in the deregulated market.

Shames added that core/non-core proposals have yet to deliver on their promise of sparking the construction of lower cost power plants, noting that similar promises were made before California's initial deregulation foray in the late 1990s. He said trying to craft competitive markets for power plant projects has also proven to be extremely difficult.




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