clock menu more-arrow no yes

Filed under:

California may re-regulate energy

Would Proposition 80 help state avert another crisis?

Gov. Arnold Schwarzenegger campaigns for his special election initiatives in Oakdale, Calif. Direct access, a keystone of 1996 deregulation, is a focus of his energy policy.
Gov. Arnold Schwarzenegger campaigns for his special election initiatives in Oakdale, Calif. Direct access, a keystone of 1996 deregulation, is a focus of his energy policy.
Adrian Mendoza, Associated Press

SACRAMENTO, Calif. — Five years after California suffered through blackouts, soaring electricity prices and the bankruptcy of its largest utility, voters are being asked to roll back a key part of the deregulation effort blamed for the state's energy crisis.

Consumer advocates promoting Proposition 80 on Tuesday's special election ballot say the initiative will allow California to regain control of its energy markets.

"There is no fixing electricity deregulation," said state Sen. Joe Dunn, D-Garden Grove, a supporter of the initiative. "The only solution to our electricity situation is to find a way back to a re-regulated system."

Dunn chaired the state Senate committee that investigated the energy crisis. California, he said, "can't go back exactly where we were because we have taken some irrevocable steps, but Proposition 80 is a good first step."

The initiative would most affect so-called electric service providers and the businesses they supply. The service providers are private companies that sell electricity directly to major businesses and universities, which seek lower power costs than they otherwise would receive from municipal or investor-owned utilities such as Pacific Gas & Electric or Southern California Edison.

Specifically, Proposition 80 would subject the private energy companies to regulation by the California Public Utilities Commission and restrict the ability of their major customers to switch from private companies to municipal or investor-owned utilities. It also seeks to increase use of renewable energy among all sellers of electricity.

Opponents of the measure say the state's electricity market is too complex for energy policy to be decided by voters. A Field Poll released this week indicates that voters may indeed be too confused by the measure to support it. The survey found that just 24 percent of likely voters favored Proposition 80, while 48 percent opposed it and 28 percent were undecided.

Even the state's nonpartisan legislative analyst's office said it was impossible to determine Proposition 80's effect on electricity rates.

The analyst's review said that in general the measure would give some certainty to the market structure, which might encourage investment in power plants, greater supply of power and eventually lower rates.

But the measure also could lead to higher prices in the future, the analyst concluded, because it would prohibit commercial users from shopping around for cheaper power.

The initiative is opposed by energy companies that want California to create a competitive electricity market.

The biggest donor to the opposition campaign is Constellation Energy Group Inc., which has given $1.3 million to head off what company spokesman Larry McDonnell called "wrongheaded public policy."

The company has several dozen direct-access customers in California — the large commercial users who shop for the best rates when buying electricity. But Constellation has not been able to expand that business because of restrictions on retail competition, McDonnell said.

The measure also would move up a requirement that utilities get 20 percent of their power from renewable resources, from 2017 to 2010. Nevertheless, several renewable energy groups have opposed Proposition 80, saying it's a bad idea to lock in an energy policy because the industry can change quickly.

Laws passed by initiative can only be reversed by going back to the voters. Limited changes can be made with a two-thirds vote of the Legislature, but those changes cannot go against the initiative's intent.

That could tie the hands of future lawmakers if the electricity market changes substantially in the future, said V. John White, executive director of the Center for Energy Efficiency and Renewable Technology.

The same concern was expressed by the board of the California Public Utilities Commission, the state agency that regulates electricity. It voted in September to oppose the measure.

The commission has spent three years crafting regulations on renewable-energy standards and how utilities buy power. Commissioners said the initiative would force them to start over on these issues.

California's 1996 deregulation law was supposed to lower electricity rates, which were among the highest in the nation. The state-regulated utilities were allowed to sell most of their power plants, and an independent agency was created to manage the transmission grid. Retail rates were frozen until the utilities paid off the debts incurred over decades of building power plants and transmission systems.

The plan was built around the assumption that getting rid of the utilities' monopoly would lead to competition, driving down the price of electricity.

But while private energy companies bought the utilities' power plants, they didn't build new plants to keep up with California's growing demand for electricity.

That energy deficit was compounded by a drop in the amount of hydroelectric power available from the Northwest in 2000 and an increase in the price of natural gas, which fuels most of California's power plants. Instead of having a more competitive power market that drove down wholesale prices, the energy shortage drove prices sky-high.

That left California vulnerable to market manipulation.

In 2001, the state suffered rolling blackouts and its three largest utilities teetered on the brink of bankruptcy after months of buying expensive wholesale electricity and selling it at the capped retail rate.

Energy companies found to have overcharged the state during the energy crisis have been ordered to repay billions.

Direct access was a cornerstone of the 1996 deregulation plan and remains a focus of Gov. Arnold Schwarzenegger's energy policy.

During the energy crisis of 2000 and 2001, energy companies passed on rising wholesale costs to their customers, many of which fled back to the regulated utilities.

The rates that public utilities could charge their customers, however, were capped under the law. As wholesale prices rose, they ran up billions in debt. Eventually, the major utilities were allowed to raise consumer rates to pay off the debts incurred during the energy crisis.

The Legislature later halted direct access when wholesale prices dropped again and large customers tried to leave the utilities. When those customers fled the utilities, that left residential and small business customers stuck to pay off the debt, said Mike Florio, an attorney with The Utility Reform Network, a consumer advocacy group.

Schwarzenegger and Michael Peevey, the head of California's Public Utilities Commission, which regulates the industry, have made it clear that "they want to move back toward deregulation over time, bringing back direct access," Florio said. "That would be a disaster."