California News and Analysis

September 2003

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Highlights:

  • Governor May Lose Job Due in Part Due to Energy Crisis
  • FERC Upholds Long-Term Power Contracts
  • State Supreme Court Upholds SCE Deal; Rates Decrease
  • Energy Action Plan Implemented
As of September 2003, the fate of Governor Gray Davis hinges on a recall effort that was prompted in part by the state’s massive deficit stemming from deregulation fallout.

The Governor’s alleged mishandling of the state’s power crisis was listed by the recall initiators as one of the top five reasons to recall him. As of late August, polls showed 58 percent of Californians supported the recall.

Meanwhile, attempts in the legislature to return to a regulated utility system have failed, at least for the time being. On July 10, Senate Bill 888, which would have reversed California's disastrous experiment with power deregulation, failed to clear a key committee, ending its chances of approval though backers say its concepts could be revived. Committee members were wary of rushing to pass the bill, given all the unanticipated problems that emerged after state lawmakers unanimously passed the original legislation. SB 888 came under fire from the influential business lobby, which wanted to retain customer choice, at least for big commercial and industrial consumers.

Customers of the state’s two largest utilities, Southern California Edison (SCE) and Pacific Gas & Electric (PG&E), will face some good news and bad news in the next year or so.

Here are some of the key issues still plaguing the state in the aftermath of price explosions and utility bankruptcies during 2000 and 2001.

Californians are paying the highest utility bills in the nation because of Davis’ gross mishandling of the state’s power crisis. This has hurt other states as well as the notoriety of the California Energy Crisis created a disincentive for other states to explore reforms to public power agencies as the means of providing affordable electricity to the public.
www.recallgraydavis.com

The evidence of fraud and abuse is extraordinary, yet FERC has not yet proven itself to be an effective regulator. If FERC will not step in, Congress must.
Senator Dianne Feinstein, D-CA on FERC’s June 25 rulings against the state

The Court has, in effect, said that the entire burden of the failed deregulation of the state should fall entirely on consumers and that shareholders should not share any risk.
Bob Finkelstein, TURN, on August 22 Supreme Court decision upholding SCE surcharge


Long-term power contracts
A ruling from the Federal Energy Regulatory Commission (FERC) in late June continued a string of mostly bad news the state has gotten from that agency.

On June 25, FERC refused to order the renegotiation of some $12 billion worth of long-term power contracts that the state says it signed at inflated prices with companies accused of manipulating power markets during the state’s energy crisis.   In a 2-1 vote, the commission said there was ``no credible evidence'' that the challenged contracts led to financial distress or harmed ratepayers.

Still pending is another request by California to have FERC overturn $9 billion in contracts the state made on the spot energy market. FERC has indicated the state may be entitled to only $3.3 billion.

However, in another ruling on June 25, FERC asked 60 companies and municipal utilities to justify their bids that exceeded $250 per megawatt hour from January 2000 through June 2001. If the sellers cannot prove they did not violate market rules, FERC could order them to give up profits earned during the 18-month period, although it did not indicate how much, if any, of those profits should be returned to the state. The targeted power sellers include Pacific Gas and Electric, the city utilities of Los Angeles, Anaheim, Azuza, Glendale and Pasadena, as well as major power vendors such as Dynegy, Duke Energy, Sempra Energy and Williams.

The commission said that some of the manipulation of the California power market was legal "and must be recognized as appropriate business practices.'' But it also said that much of the behavior included illegal "gaming" of the market and was "rooted in deception or misrepresentation.''

Similarly, a long-awaited FERC ruling on March 26 also disappointed the state in its fight for refunds. On the one hand, FERC agreed that rampant manipulation of California's electricity and natural gas markets in 2000 and 2001 had boosted prices by billions of dollars, although it also said that significant energy shortfalls and a fatally flawed market design were the root causes. It singled out 12 companies for potential discipline, issued an exhaustive explanation of how markets were exploited and left open the possibility of additional investigations.

On the other hand, FERC didn’t agree with the state in its claims that it was owed refunds for overcharges. State officials were disappointed with both the March and June refund rulings, but pleased that the federal agency finally recognized that the state had been a victim of market manipulation and illegal gaming.

A previous decision by a FERC judge in December 2002 was also bad news regarding the long-term contracts. The state claimed in an appeal to FERC that it had been overcharged by at least $9 billion during the 2000-01 energy crisis. On December 12, a FERC judge ruled that the energy supply companies overcharged California utilities by $1.8 billion, but that the state owed the companies $1.2 billion for unpaid bills.

The state has been able to reduce the power contracts tab by re-negotiating with some of the suppliers. During 2002, the state re-negotiated a majority of the deals and, as of November, had been able to get the contracts reduced by about $5 billion. However, consumer advocates said the reworked contracts won't cause consumer rates to drop anytime soon.

The state, through its Department of Water Resources, was forced to purchase the power because the deregulation law did not allow the investor-owned utilities (IOUs) to pass along market prices to their customers. As a result, the two largest IOUs claimed they were broke and could not get credit to purchase more power. Critics of Governor Davis, who negotiated the contracts, said he paid too much – reportedly average prices were $69 per MWH (prices as of September 2002 were less than $30 per MWH) – and locked the state into these prices for over a decade. The total estimated cost of the contracts is $43 billion. Furthermore, due to a massive conservation effort, milder weather, and lower prices, the state hasn’t needed all the power it contracted for and has sold surplus power at a loss.

The financial condition of the two largest electric utilities
The utilities, PG&E and SCE, serve 68 percent of California’s electricity customers. During 2001, PG&E filed for bankruptcy. Its reorganization plan, after undergoing several revisions, was tentatively approved by CPUC staff in June, and during August was the subject of public hearings throughout the state. It must be approved by the CPUC, the bankruptcy court, the utility and its parent company.

PG&E’s original plan would have removed the company from state regulation and spun off all the most valuable assets to an unregulated affiliate. The CPUC filed an alternative plan and the bankruptcy court ordered the two to negotiate an agreement.

The agreement would keep PG&E a regulated company, but would saddle ratepayers with most of the debt it incurred during the energy crisis – costs which consumer groups say could be as much as $9 billion, while PG&E shareholders and executives will continue to profit.

The CPUC projects that the utility’s rates, which currently average 13.87 cents per kWh, will decline by about half a cent on January 1, 2004, and continue falling to about 12.8 cents by 2008.

In late 2001, Southern California Edison reached a bail-out agreement with the state that allowed its $3.3 billion in debts to be repaid by ratepayers and continued its current rates until 2003. This was contested by consumer groups and held up in court until a ruling by the State Supreme Court on August 21 favoring the utility.

The court unanimously affirmed the CPUC’s authority to require ratepayers to cover utilities' losses from the 2000-01 spike in power prices. The justices rejected a consumer group's argument that the 1996 deregulation law required utilities, not ratepayers, to bear any losses from energy costs through March 2002. The justices also ruled that the CPUC's settlement of a lawsuit by Edison, approved in a closed-door session in October 2001 after secret negotiations, did not violate open-meeting laws. It overturned a federal appeals court decision, which had sided with the consumer group TURN in challenging the bailout deal as illegal. TURN had argued the state deregulation law (AB 1890) precluded the CPUC from permitting the electric utilities to recover in their rates all of their costs incurred during a transition period when the electric industry was being restructured.

The ruling will likely impact the CPUC’s pending bankruptcy settlement with PG&E by giving the Commission the green light to require its customers to pay most of PG&E's debt.

Suspension of direct access, end of deregulation
Another decision made by the CPUC at the height of the energy crisis was to suspend direct access to electricity supply, one of the cornerstones of the 1995 restructuring bill, effective September 20, 2001. However, it did not affect direct access contracts prior to that date, most of which had been made by large industrial and commercial customers (less than 3 percent of residential customers had chosen new suppliers). As a result, many large users left the system, leaving most of the burden for the long-term contracts on residential and small business ratepayers. According to the PUC's decision, customers can keep the power deals they made prior to September 20, 2001, as well as renew these contracts or change their electricity providers.

In November 2002, the CPUC took up another issue related to direct access by assigning a surcharge or "exit fee," capped at 2.7 cents per kWh, to direct access customers. The CPUC said the surcharges would ensure that direct access customers pay their share of electricity procurement costs incurred during the energy crisis and prevent such costs from being unfairly shifted to residential utility customers. The charges amount to about $500 million per year and will be reviewed periodically. They apply to direct access customers of Pacific Gas and Electric Company, Southern California Edison Company, and San Diego Gas & Electric Company. In June, the CPUC voted to continue the exit fee at 2.7 cents per kWh.

On January 16, 2003, the CPUC unanimously voted to cancel an order from April 20, 1994, that set the state on its disastrous course toward cheaper electricity through free market competition. The order noted that restructuring the energy market was now moot. "The commission should close this deregulation proceeding, not just because there is no continuing need for it, but also because it was a disaster for ratepayers, utilities and their employees," said Commissioner Carl Wood, a deregulation critic.

Energy action plan
In May the CPUC approved an Energy Action Plan for California that had been proposed by a subcommittee of the PUC, the Consumer Power and Conservation Financing Authority (CPA), and the Energy Resources Conservation and Development Commission (CEC).

The EAP is supposed to provide a blueprint for implementing a unified state energy policy. It proposes six sets of actions that will help to: optimize energy conservation and resource efficiency, accelerate the State's goal for renewable generation, ensure reliable, affordable electricity generation, upgrade and expand the electricity transmission and distribution infrastructure, promote customer and utility-owned distributed generation, and ensure a reliable supply of reasonably priced natural gas.

The CPUC website has information on the ongoing implementation of the plan.

Lawsuits, investigations against suppliers and utilities
In a move that was mostly seen as moot, the FERC in its above-mentioned June 25 ruling, voted unanimously to revoke the authority of Enron Corp., now in bankruptcy, to operate in the deregulated power markets. Other companies involved power market misdeeds may be required to return profits as punishment, according to the FERC order.

The CPUC, the state Attorney General and FERC have been investigating suppliers for price gouging, withholding capacity, and other misdeeds leading up to and during the state’s power crisis. The state of California has filed numerous suits against electricity and natural gas suppliers, as well as against the parent company of PG&E. It is unclear how many of these are still active given the FERC order, re-negotiated power deals and bankruptcy settlements.

The most complete list of charges came in March 2003 when California submitted a 1,000-page final report to FERC that purported to name "almost 60 companies that participated in gaming our energy market." State officials said the evidence, which was the result of a 103-day investigation, was just the "tip of the iceberg" in a web of abuse.

The current rate story
On May 15, 2001, what was termed the largest electricity rate increase in California history was adopted by the Public Utilities Commission for customers of PG &E and Southern California Edison. At the same time the commission made permanent a 1-cent per kWh rate increase it had set in January. However, the rate increase was set up so that low-usage electricity consumers wouldn’t see much of an increase, while high-usage consumers would. A baseline rate of consumption was established, along with a five-tiered rate structure, wherein those whose usage was up to 130 percent of baseline are billed at the lowest two tiers, i.e., 12.3 cents or 14.3 cents per kWh. (Baseline is a quantity of electricity, about 60 percent of the average residential user's consumption, which is billed at the lowest rate. The amount of baseline is based on climate zones and seasons.)

Customers who consume over 130 percent are billed at higher tiers, which range from 19.3 to 25.8 cents per kWh, an increase of up to 47 percent. Low-income customers on the California Alternate Rates for Energy (CARE) discount were exempt from the increases. The CPUC estimated that 50 percent of users would see no increase.

A review of the rates in December 2002 revealed that the CPUC was mostly correct. A SCE spokesman said that approximately 41 percent of residential accounts have never received a bill reflecting the 3 cents-per-kilowatt surcharge. The number of customers billed the 3 cent surcharge varies from month to month based on consumption patterns, with most of the highest billing occurring during the summer months. Likewise, PG&E reported that about half of its customers had not incurred the higher rates.

In a controversial move, the CPUC in November 2002 revised a previous restriction on the use of surcharge revenues collected as a result of two rate increases, so that they might be used, if necessary as authorized by the Commission, to return the utilities to reasonable financial health.  The decision was criticized by consumer groups such as TURN, who said it extended the surcharges indefinitely and shifted a disproportionate share of the costs of the long-term contracts onto small customers.

A significant move toward rate relief came when SCE dropped its rates 8 percent to 19 percent effective August 1, 2003. The rate change was based on SCE’s previous forecast that during July it would complete recovery of $3.6 billion in uncollected power procurement costs incurred during the 2000-2001 California energy crisis. A settlement was reached with representatives of various customer groups that included the use of forecasted rather than after-the-fact cost-recovery verification.

Current (2003) rates for the three investor-owned utilities are shown below:

Tiers

% of
Baseline

PG&E
Cents /kWh

SCE
Cents/kWh*

SDG&E
Cents/kWh
Summer**

Tier 1

0 – 100%

12.6

11.8

13.4

Tier 2

100 to 130%

14.3

13.8

15.9

Tier 3

130 to 200%

19.3

15.4

16.8

Tier 4

200 to 300%

23.6

17.1

17.7

Tier 5

300%

25.8

17.1

19.3

Source: California Public Utilities Commission

*Includes August 1, 2003 rate reduction

**SDG&E has summer and winter rates. The table above shows the summer rates. Winter rates are: Tier 1 - 13.4 cents/kWh, Tier 2 - 15.1 cents/kWh, Tier 3 - 16.0 cents/kWh, Tier 4 - 16.9 cents/kWh, and Tier 5 - 18.7 cents/kWh.

Here is a look at California’s residential electric rates over the last 13 years.

Average Annual Price per kWh (nominal cents)

  1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002* 2003**
Residential 10.8 11.1 11.3 11.4 11.6 11.3 11.5 10.6 10.7 10.5 12.32 13.54 12.57
Sources: Federal Trade Commission and California Energy Commission

*Note that 2002 rates are based on averaging the three lowest rate tiers from the three IOUS, plus averages from two municipal utilities, Los Angeles Department of Water and Power, (10.3 cents,) and Sacramento Municipal Utility District (11 cents). Rates are not adjusted for inflation.

**Note that this price is as of May 2003


Gas rates
  

Like electricity customers, the state’s residential gas customers are charged a baseline amount, the amount of natural gas needed to meet the minimum basic needs of the average home. The gas companies are required to bill these "baseline" amounts at the lowest residential rates in order to encourage efficient use of natural gas.

Reflecting spikes in gas prices across the country, California customers are expected to see the volatility in prices that the rest of the conuntry has experienced since 2000. According to an April 2003 press release from PG&E, "prices remain elevated relative to long-term averages and are expected to stay this way for the foreseeable future." Both PG&E and Southern California Gas, the two largest gas companies, reported higher rates in August 2003 than a year earlier.

PG&E’s current and past rates are on its website at http://www.pge.com/tariffs/GRF.SHTML#RESGAS or http://www.pge.com/customer_services/business/tariffs/.

SCG’s are at http://www.socalgas.com/regulatory/tariffs/tariffs_rates.shtml


Other resources

Much has been written about California’s deregulation experiment to date from a variety of perspectives, and there are also suggestions for improvement, also from a variety of perspectives. Some analyses follow:

Ad-Hoc Group of Regulatory and Energy Economics Professionals. Manifesto on The California Energy Crisis, January, 2003. Claims the state’s energy crisis was the "consequence of a flawed regulatory design and of misguided decision-making at the time of the crisis, rather than the result of any inherent inability of electricity markets to work."  Suggests five measures the state should take to address its energy issues: rely on markets whenever possible, rely on competitive procurement to meet California electricity needs, clarify jurisdiction of state and federal agencies, encourage the creation of true commodity market institutions and promote their use, and implement real-time pricing.

Alexander, Barbara.  Default Service: Can Residential and Low Income Customers Be Protected When the Experiment Goes Awry?, April 2002.   This paper was originally published in April 2001 and updated in October 2001. This version reflects the most recent information available for state activities with respect to Default Service through 2001 and early 2002. However, readers are cautioned that the states described in this paper routinely consider changes to state restructuring policies that have a significant impact on the nature, price, and purpose of Default Service.

Alexander, Barbara. Default Service: Can Residential and Low Income Customers Be Protected When the Experiment Goes Awry?, April 2001, and an Update to the April paper issued in October 2001. These papers summarize and make some preliminary conclusions about the development of a default or provider of last resort service for residential and small commercial customers as part of the move to retail electric competition. Both papers highlight the status of default rates and impacts of restructuring-related developments on residential and low-income consumers in the states of California, Massachusetts, New York, Pennsylvania, and Texas.

Bay Area Economic Forum.  California is Still Coming Up Short on Electricity: The State's Power Sector Remains Troubled and is at Risk of a Future Supply Shortfall, May 2003. Identifies the challenges that policy makers face in reforming the state's power sector and provides the principles they should use to address them.  This paper also warns of a state energy shortage by 2006 and calls for a program to accelerate power plant construction, including a healthy competitive wholesale market. 

Bay Area Economic Forum. California's Energy Future: A Framework for an Integrated Power Policy, December 2002. Recommends that California adopt a market-based approach in order to obtain a healthy competitive wholesale market that will provide least-cost power and a properly functioning supply-and-demand system. It also makes recommendations for streamlining state regulatory agency functions in order to eliminate redundancies and save money and for helping the state reduce the burden of costly long-term power purchases.

California Energy Commission.  2002-2012 Electricity Outlook Report, January 2002. Analyzes the state’s generation and demand decisions that could be made in the next two years, along with trends and policy choices and tries to project the statewide energy picture through 2012.

California Independent System Operator Corporation.  Investigation of Wholesale Rates of Public Utility Sellers of Energy and Ancillary Services in the Western Electricity Coordinating Council, July 2002. Docket Nos. ER02-1656-000, et all. (An order on the California Comprehensive Market Redesign Proposal) In this order, the Commission presents a comprehensive action plan to the Federal Energy Regulatory Commission (FERC) to improve California’s market rules and update market power mitigation over the short term, and to build a sound foundation for long term markets and infrastructure investments.

California Public Policy Institute.  The California Electricity Crisis: Causes and Policy Options. The report states that the energy crisis cost California approximately $40 billion in additional energy costs over the past two years. When factoring in the costs attributed to blackouts and a slowdown in economic growth due to the crisis, the report's author, Christopher Weare, estimates the total costs to be as high as $45 billion -- approximately 3.5 percent of the state's total annual economic output.

Congressional Budget Office.  Causes and Lessons of the California Electricity Crisis, September 2001. Reviews of the history of deregulation in California, the state’s response to its market problems and discusses what other governments can learn from the experience; also provides a chronology of key events.

Consumer Federation of America.  U.S. Capitalism and the Public Interest: Restoring the Balance in Electricity and Telecommunications, August 2002. This report is one of several by CFA Research Director Mark Cooper. It argues that deregulation of electricity and telecommunications destroyed the critical balance that U.S. policy had struck between private incentives and public obligations. It did so in five ways: public infrastructure, public resources, public responsibility, public participation and cooperation, and public information and knowledge. It further argues that if the Public Utility Company Holding Act (PUHCA) had been enforced vigorously, the market manipulation that afflicted California never would have happened. CFA also points out that the Senate has voted to repeal PUHCA rather than strengthen it.

Consumer Federation of America.  Electricity Deregulation and Consumers: Lessons From a Hot Spring and a Cool Summer 08-30-01, August 2001. This analysis is another analysis by CFA Research Director Dr. Mark Cooper that review the California situation, along with other states. While critical of deregulation’s structure in almost every state, charging that policymakers rushed to provide competitive markets without ensuring that certain conditions exist to allow competition to occur, Cooper lists measures that can be taken to make it work for consumers.

Consumer Federation of America. Behind the Headlines of Electricity Restructuring: A Story of Greed, Irresponsibility and Mismanagement of a Vital Service in a Vulnerable Market, March 2001. Another analysis by CFA’s Cooper during the height of California crisis, it describes the mistakes made by industry, state regulators and government, and FERC, and puts California’s experiences into perspective for other states that may be considering restructuring.

Consumers Union.  Drift and Disarray: The California Energy Crisis Continues , March 2002. This paper by the Consumers Union office in San Francisco presents findings on the status of California’s restructured electricity market. It reports on retail electricity rates, consumer and wholesale market protections, power reliability, and the potential for more renewable energy projects since deregulation. It also makes predictions of what’s to come if the market is not redesigned, and offers suggestions that the Governor could take to stabilize the market.

Consumers Union. Protecting California’s Residential and Small Business Electricity Consumers, January 2002. This report recommends a return to a regulated market by the state's public utilities commission as the way to protect residential consumers and small businesses from the price spikes and market instability. It proposes that large businesses should be allowed to buy electricity directly on the open market, as long as they are first held responsible for paying off their share of the long-term energy contracts negotiated by the state last year.

Edison Electric Institute. The California Electricity Crisis: Lessons for Other States, July 2001.  Holds that the lesson from California’s experience is to learn that competitive markets can work, if properly designed, and sets a blueprint for proper design.

Energy Foundation.  California's Secret Energy Surplus: The Potential for Energy Efficiency , September 2002.  This study estimates potential energy and peak demand savings from energy-efficiency measures in California. In contrast to energy conservation, which often involves short-term behavioral changes, energy-efficiency opportunities are typically physical, long-lasting changes to buildings and equipment that result in decreased energy use while maintaining constant levels of energy service. It was recently estimated that roughly 70 percent of California’s peak demand reduction in the summer of 2001 is attributable to short-term conservation behavior rather than long-lasting efficiency improvements (Goldman et al. 2002). This study shows that significant additional and long-lasting energy-efficiency potential exists.

Foundation for Taxpayer and Consumer Rights.  Hoax: How Deregulation Let the Power Industry Steal $71 Billion from California, January 2002. Claims that the state’s energy crisis was a hoax, set up by deregulation, to suck billions of dollars out of the state, and that the crisis isn’t over yet.

Public Citizen.  It’s Greed Stupid: Debunking the Ten Myths of Utility Deregulation, January 2001. Analyzes what it sees as common misconceptions of deregulation's promise and its failure in California and pins the blame on price-gouging, profiteering and lack of government oversight.

Public Citizen.  The Public Utility Holding Company Act and the Protection of Energy Consumers: an Examination of the Corporate Records of the top Companies Pushing for PUHCA Repeal, September 2002.  This report provides information about the main energy companies -- American Electric Power, Duke Energy, CMS Energy, Southern Company/Mirant and Xcel -- that are striving to repeal the Public Utility Holding Company Act (PUHCA). It reports that abolishing PUHCA would largely remove government oversight of these companies and this would lead to further industry consolidation, more deregulation and the creation of corporate structures that leave consumers and investors at the mercy of unaccountable, growth-hungry conglomerates. Public Citizen notes that these companies pushing for the repeal of PUHCA are the same ones that are being investigated for gouging ratepayers and maipulating the California energy market.

The Regulatory Assistance Project.  Portfolio Management: Protecting Customers in an Electric Market that Isn't
Working Very Well
, September 2002.  This paper describes a new approach to markets, Portfolio Management, that maintains a balanced portfolio of supply and demand side resources, reduces the risk of volatile short run markets, provides stable rates, and delivers constant environmental improvements.

The Utility Reform Network (TURN).  Highway Robbery--Unmasking the PG&E Bankruptcy Plan's Costs to Consumers, January 2002. Argues against PG&E’s proposed bankruptcy plan claiming it will cost consumers billions, turn over California's electric generation assets to unregulated companies; and also claims that PG&E has enough assets to bail itself out without ratepayer help. PGE issued a rebuttal to the report on its website.

U.S. DOE Energy Information Administration. Status of the California Electricity Situation. A web document that provides the government’s history and analysis of what happened to California’s electricity market. It includes a chronology of events taken by the state and federal government to address the problem through May 2001.

U.S. General Accounting Office. Restructured Electricity Markets: California Market Design Enabled the Exercise of Market Power, June 2002. GAO’s analysis and other studies it cites found evidence that wholesale electricity suppliers exercised market power by raising prices above competitive levels during the summer of 2000 and at other times after restructuring and that California’s market design enabled the exercise of market power. 

San Francisco Chronicle: News articles, analyses and special reports on deregulation issues are archived and accessible dating back at least two years.  A three-part series titled The Energy Crunch: A Year Later began December 23, 2001. It reviews the tumultuous events of 2001 (price spikes, blackouts, utility financial failure, etc.) and the state’s attempt to fix them through long-term power purchases, the costs of which may burden taxpayers for a long time. It also looks ahead to the political realities of the deregulation issue, predicting that deregulation may not be dead after all.

Sacramento Bee: This paper also has an energy deregulation news article archive dating back to July 2000.

 

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Last Updated: 11/20/2003