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Editor’s Notebook The real designers of our energy woes

We know by now California’s experiment with deregulating the electricity industry is an unmitigated failure, making a handful of corporate energy giants rich at the expense of our economic well-being.

Accusatory fingers are pointing in all directions, from Washington, D.C., to Sacramento. There’s blame enough to go around, but what’s largely been missing from the debate is the role the state’s utilities had in creating this debacle.

Take, for instance, San Diego Gas & Electric Co. and its corporate parent, Sempra Energy. It was SDG & E;, along with Southern California Edison, which developed and pushed through the basic form of commodity market power deregulation from which we’re all now suffering. Why? because they didn’t like the plan originally conceived by the California Public Utilities Commission.

On the other hand, if you’re looking for a hero , if, indeed, there are any heroes in this dismal story , take a look at Jessie Knight Jr., who now works as president of the San Diego Regional Chamber of Commerce. It was Knight who, as a PUC commissioner, stood virtually alone in fighting SDG & E;’s plan in favor of the proposal first put forth by the commission.

The struggle began in April 1994 when, prodded by the federal Energy Policy Act of 1992 urging deregulation, the PUC determined to open California’s regulated electricity market to competition.

The PUC’s plan was straightforward: After a phase-in period, consumers would be allowed to shop around for the best energy deals among power generators , utilities, independent producers, even out-of-state generators. Consumers would pay utilities a fee for “wheeling” the energy over their transmission lines.

The plan was controversial, to say the least. Consumer advocates feared the plan, favored by big industrial users of energy, would force residential and small business customers to subsidize cheap power for manufacturers. Environmentalists feared the plan would abandon the state’s vaunted energy conservation programs. None of these worries were beyond fixing.

SDG & E; and Edison were aghast. They saw the state’s plan for “retail wheeling” as a profitless activity. So did Wall Street, which began reconsidering the creditworthiness of utilities under deregulation. Share prices plummeted.

Moreover, PG & E; , which, as the state’s largest utility, spanning from north of Los Angeles to the Oregon border, supported the PUC plan , could muster more market power in a competitive environment than the smaller SDG & E; and SoCal Edison.

Furthermore, the utilities saw the end coming for the protection they and their shareholders had enjoyed from the costs of all the bad decisions made over the years by their chief officers. Under the proposed deregulation plan, utilities might have to pay off these “stranded costs” themselves.

In addition, the utilities realized if they stayed in the generation business, their generators would remain under state regulation, putting them at a competitive disadvantage to nonregulated independent energy producers.

An Alternate Plan

In June 1994, SDG & E; joined SoCal Edison in presenting an alternate deregulation plan to the PUC. It called for formation of a power pool to be run by the state’s utilities , including northern California’s Pacific Gas & Electric , which would oversee the operation of the state power grid and act as a broker or commodity market for electricity sales. The plan also called for utilities to recover 100 percent of their stranded costs.

Called “PoolCo,” Edison’s and SDG & E;’s plan was based on a discredited system used in the United Kingdom and known for its wild swings in prices. One prescience energy consultant described the concept as exchanging energy monopolies for an energy oligopoly, or a market condition in which a shortage of sellers allows them to easily manipulate the selling price. Rather than reduce energy costs, analysts predicted the power pool and its concept of a single highest-bid-wins “clearing price” for all energy sellers would send rates skyrocketing.

Even then, SDG & E; was already planning to get out the generation business. In its 1994 annual report to shareholders, the utility warned its generation business would be spun off to a separate, nonregulated company in anticipation of deregulation. Company officials knew that, under their PoolCo plan, nonregulated power plants would be more profitable.

Despite intense opposition to PoolCo by virtually every type of consumer group in the state , both industrial and residential , as well as PG & E;, heavy lobbying by Edison and SDG & E; eventually won over a majority of PUC commissioners. On May 25, 1995, they voted to accept the PoolCo plan.

Compromise

Then-Gov. Pete Wilson (another San Diegan) stepped in to broker a compromise that brought the state’s heaviest energy users onto PoolCo’s side. In a memorandum of understanding, the PoolCo plan was changed to allow large power users to contract directly with energy producers. Even PG & E; was convinced to support the plan.

Jessie Knight, however, remained a stalwart opponent of the plan, virtually waging a one-man campaign against it across the state.

On Dec. 20, 1995, despite warnings from Knight and others, a majority of PUC commissioners voted their final approval of PoolCo. Three months later, they amended the plan, accepting another utility-devised plan to break PoolCo into two separate units , the Independent System Operator, responsible for the operation of the state’s power grid, and the Power Exchange, the state’s commodity market for electricity.

Concerned that the PUC played too closely to the utilities’ tune, the state Legislature stepped in. In a marathon legislative session spearheaded by state Sen. Steve Peace, D-San Diego, lawmakers sought to make the deregulation plan more fair to residential consumers and to protect the state’s conservation efforts.

Few Changes

In the end, however, the changes were relatively minor. Residential and small business users were allowed to eventually contract directly with producers , if they could find any willing to do so , and a token amount of funding was promised to conservation efforts. Renewable energy sources were essentially forgotten.

On Aug. 31, 1996, both houses of the state Legislature unanimously approved what was essentially PoolCo with a few tweaks. A few weeks later, Gov. Wilson signed it into law.

SDG & E; quickly sold off its generating units, not , as they have indicated , because they were ordered to do so by the PUC, but because it was more profitable. The utility recovered its stranded costs, and San Diego County became the first county in the state to experience electricity deregulation.

Last summer, just shy of four years to the day Wilson signed deregulation into law, all of Jessie Knight’s misgivings about PoolCo came true.

SDG & E; and Sempra Energy , stunned by public fury over skyrocketing electricity rates , brought out its “spin doctors.” Company officials criticized the state’s deregulation plan as “dysfunctional” and blamed everyone from energy-wasteful consumers to politicians to their competitors in the wholesale energy market.

Since this boondoggle began, neither SDG & E; nor Edison have mentioned their corporate roles in designing the economic disaster we call energy deregulation. On the contrary, on Oct. 20, in one of the most blatant examples of corporate cynicism imaginable, SDG & E; offered the Federal Energy Regulatory Commission a 17-point plan for reforming what it called California’s “dysfunctional electricity market.”

God help us.

Hill is editor of the Business Journal.

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