By Kathleen Davis, Associate Editor

Most Californians worried about their electric bills didn't have sugar plum fairies dancing in their heads over the holiday season: They had hard cap vs. soft cap issues, deregulation vs. re-regulation debates, FERC mandates and statements by both Governor Gray Davis and Energy Secretary Bill Richardson-all of this still at the forefront months after the supposedly heat-induced power emergencies of last summer.

It seems the road to deregulation in the golden state remains quite a rocky one-in sunshine or in rain.

And those summer emergencies have not fallen by the wayside with the drop in temperature. They became weekly-even biweekly occurrences-by early December, culminating in a fearfully anticipated stage three emergency (when rolling blackouts are enforced) poised over the collective neck of California power only a week before Christmas.

And as each emergency exploded onto already weary consumers, Californians were asked again to turn down the thermostat (the flipside of the summer's request to turn it up), to turn off lights, TVs, and computers-when possible. But the most Grinch-like interruption came with the request that people turn off outdoor Christmas lights early, at 10 or 11 p.m., if they bothered to hang any at all.

Even the state capitol had its holiday cheer dimmed. The Sacramento capitol lit the 56-foot-tall official state Christmas tree in early December only to have the plug pulled a handful of minutes later to save electricity. But pulling that plug didn't seem to help matters much. That very same day, California came within a hair's breath of another stage three emergency.

And with every new stage one, two or three emergency, the confidence in deregulation ebbs just a bit farther out into the legislative sea.

Consumers cry foul

Californians are tired of wading through the mess of deregulation; they just want it over. And the most common solution proposed by consumer groups in the area is re-regulation, giving the keys back to the government.

The Foundation for Taxpayer and Consumer Rights, a Santa Monica-based consumer group, has called for a ballot initiative to reverse the 1996 law putting deregulation in place in the state. They would like to place utilities under an umbrella of a citizen's review board, as well as establish an agency to run the grid.

Overall, they consider deregulation a dead issue-one that no one should be able to argue has real merit for the state.

"Deregulation is an unmitigated failure," stated Doug Heller, a representative of the Foundation for Taxpayer and Consumer Rights.

"I don't want to mince words. Deregulation has failed the consumers of California and the California economy in a most dramatic way," he added.

"We have to get past the ideology that a free market solves every problem," Heller argued. "We've also learned-through deregulation-that California should develop a public power system to protect against the manipulation of our energy markets."

Pointing to the Los Angeles Department of Water and Power as a good example of a municipal-owned utility reflecting what the Foundation would like the rest of the state to move toward, Heller contends that the power companies, "who have the sole purpose of maximizing profit," should not hold the reigns of a commodity that is so necessary to the basic health and welfare of the state's citizens. He added that the Foundation has received letters and calls from citizens on lifeline devices who have been warned by their utilities to invest in a generator in case of deregulation related outages.

And the Foundation for Taxpayer and Consumer Rights is not the only one looking to-at least partially-re-regulate the industry. Along with the expected support of other consumer groups like the Utility Reform Network, they've also found help in State Senator Steve Peace, once a major player in the game to deregulate the state. In fact, initially, he was one of its biggest leaders.

Since the summer problems, though, Peace has become a serious proponent of price caps, fighting tooth and nail to get them in place at the California Independent System Operator (ISO), and then to get them lowered to what he believed was a reasonable rate. And, at times, the fight got down and dirty, involving name-calling and media sound bytes that threw around adjectives like "dysfunctional" and "manipulative."

Peace is now calling for a slice of the state's surplus budget (projected at $10 billion). He wants to set aside $2 billion to pay for a variety of energy projects. Peace believes such a move would help ease the high costs that consumers in San Diego have felt most directly, and power users across the state have encountered at least on the peripheral. Implying that out-of-state generators are committing a form of power extortion, Peace now rallies behind the idea of keeping utilities in the hands of the people-with no reflection of the open market when residents open the monthly bill.

Governor takes on Feds

Peace isn't the lone state official calling for government-controlled reform. California Governor Gray Davis has been keeping a sharp eye on the power issue for months and, as of late, he's been more than willing to put his foot down.

When the Federal Energy Regulatory Commission (FERC) agreed with the California ISO and changed the hard-nosed price cap to a soft cap, allowing generation tagged above the line to fall into a hierarchy of use, Davis was livid. Although the ISO stated that they truly felt it was the only way to insure enough power for the drained state, Governor Davis saw it as an attack on the state's residents.

"This ruling, issued in the dark of night without notice to anyone in California, is an outrageous assault on the consumers and businesses of California by a federal agency answerable to no one," he commented.

He called on FERC to rescind the order, adding, "Clearly, this ruling is more evidence that shows the market under deregulation isn't working, it's working us over."

Davis also announced his intent to "dismantle" the ISO, claiming it needs to be restructured in a way "responsive to Californians."

After the declaration of a stage three emergency in that week before Christmas, Davis also revealed his feelings on deregulation's cost not just to the end-use resident of the state, but to utilities caught between a price freeze and a price cap.

"The price of power has risen astronomically on the spot market and may very well bankrupt two of California's major utilities: Pacific Gas & Electric and Southern California Edison," he said in a joint statement with Senator Dianne Feinstein.

"[They] are in the process of having their credit ratings downsized. Their stocks have plummeted, and they have been unable to gain adequate financing because of the out-of-control situation in the state," he added.

Utilities gasping for air

Davis is right to be worried about the state of utilities in California. At press time, Standard & Poor's had placed PG&E Corp. including Pacific Gas & Electric Co.-on CreditWatch with negative implications.

"The CreditWatch listings for PG&E and units reflect the rapidly escalating financial burden resulting from PG&E's substantial undercollection of purchased power expenses," the company released in a statement.

"The undercollection is attributable to the interplay between California's extraordinarily high, and still increasing, wholesale power prices and a legislated freeze on the electric rates that the utility may charge its consumers. This freeze has resulted in PG&E's wholesale power purchases exceeding revenues by nearly $5 billion," Standard & Poor's added.

Standard & Poor's has also placed Edison International, the parent company of Southern California Edison, on CreditWatch with negative implications. Adding that the company predicted that the California Public Utilities (CPUC) would deny requests to modify consumer rates to help the utilities recoup losses, Standard & Poor's contended that PG&E and Southern California Edison were skirting the edges of dangerous financial ground.

And, on top of financial woes, many in the industry are being painted as villains in the melodrama surrounding California's lack of power. In early December, a suspicious CPUC, along with the California ISO, sent representatives to power plants in the late evening to check up on maintenance problems. The surprise inspections were to make sure merchant plants had real reasons for being off-line and were not simply manipulating an already taxed marketplace.

"We're mystified why they carried it out in the middle of the night like a drug raid," said Richard Wheatley, a spokesman for Reliant Energy, whose Oxnard, Calif., merchant plant was inspected that night around 10 p.m. "Why would any generator deliberately withhold power in California when the FERC has the state under a microscope? It would invite all sorts of litigation and onerous re-regulation."

Inspectors also appeared at the door of Southern Energy Inc.'s Pittsburgh plant in San Francisco that night and spent hours pouring over records and inspecting their facility.

"Some units are down because of a rupture in boiler tubes," stated Chuck Griffin, a spokesman for the company. "It was dangerous to run the units. We ran that plant flat out during the summer."

While Southern Energy says they had no problems with opening both books and doors, it was the way the inspection was carried out that bothered most of the companies involved.

"A PUC inspector showed up at the gates unannounced," Wheatley commented.

"We were asked to prove the work was physically being done."

"The rationale for inspecting us is not clear," said Aaron Thomas, a representative of AES Corp. whose southern California plants were also visited. They have 2,000 MW out of service due to NOX compliance issues.

"It's no secret that we are being investigated by the South Coast Air Quality people," he explained.

Feds respond

And issues of trust ring even farther up the legislative chain than either the CPUC or Governor Davis. With FERC and Energy Secretary Bill Richardson watching every energy-related move in the state throughout the month of December, California's woes only continued to boil. After Governor Davis released a statement listing 13 out-of-state generators that he claimed refused to sell power to the state, Richardson laid down the law: Thou shall sell electricity to California. Richardson's rationale was a simple one: Keep the lights on.

FERC was trying to do just that when they shifted the price cap to a soft cap-a somewhat stringent suggestion-for marketers of energy to California. Governor Davis claims that the results have been disastrous: spot markets as buoyant as $1,000 per MWh.

Originally, tariff amendment 33 was intended to open the door to more power by softening the $250 cap on the California ISO's real-time market. According to the ISO, generators selling at excess of the cap would be required to submit the reasons for excess cost to FERC in an official filing, along with filings at the ISO and the state.

FERC returned to the issue that same week, laying out its solutions for the California crisis that's been in the industry spotlight since early summer. The federal entity will allow Southern California Edison and Pacific Gas & Electric to bypass selling generation through the PX (the California Power Exchange) as originally required by deregulation. Instead, they can market it retail. (FERC has also left it up to the CPUC whether those investor-owned utilities can return to cost-of-service selling.)

FERC has also pulled the power on the PX as of April 30. After that date, investor-owned utilities will not be required to schedule all power purchases through the PX. Along with release of 40,000 MW from the spot market, the move allows utilities to sign bilateral contracts for two or more years.

FERC has also legislatively mothered the load by requiring that 95 percent be pre-scheduled with the ISO or be subject to penalties-after the ISO is restructured this month.

But that soft cap that Governor Davis was so unhappy about hasn't been fiddled with much. They've dropped the "break point" to $150 per MWh until the end of April, but they'll still be taking bids above that number on an as-needed basis.

In the end, at least all the players seem to be attempting to work together, a move that FERC chairman James Hoecker would certainly agree with-if his comments to a meeting of the Cambridge Energy Research Associates were any indication.

"We have to get beyond the turf fights that in part have led to the circumstances we are in," he stated.

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Citing the end-users who have been most affected by the price fluctuations and political backbiting, Hoecker made it perfectly clear what the residents of the golden state desire. "People want solutions," he said.

Policy & Regulation