Electric Juice Master

— Nobody expected anything big to be decided at last Tuesday's electric-power summit. The California Public Utilities Utilities Commision (PUC) had called for the roundtable at the Al Bahr Shrine Temple auditorium on Kearny Mesa Road. The unexciting-sounding agenda: to talk about th "energy market and infrastructure."

Yet in some ways it was a litmus test for San Diego's godfather of electricity deregulation, California state senator Steve Peace (D, 40th District). Twenty-eight months after Pete Wilson signed what was essentially Peace's legislation to deregulate California's electricity industry, the reviews are mixed: a bona fide independent power exchange is up and running, buying and selling ohms by the hour. But some San Diegans are complaining deregulation has meant anything but savings for the average resident, and exchange officials worry that SDG&E may want out.

It'll be two years March 31 since the California Power Exchange opened for business on the basis of a simple idea: create a spot-market exchange to buy and sell electricity. Trade it as you would oil or pork bellies. Make it fairer by separating private utilities like SDG&E from their own electricity-generating plants. Have them bid for the electricity their customers need exclusively through the Pasadena-based Power Exchange, or PX, as everyone calls it.

Despite many skeptics, the PX has attracted 72 organizations, some of them electricity producers, others electricity deliverers. All, sellers and buyers alike, have learned to ride electricity prices, which fluctuate hour by hour. California's electric current has become a commodity. Consumers can even specify whose electricity they want to buy. Theoretically, you could buy your power from some good old boy up in Canada who's planted solarpower collection panels in his marijuana patch. SDG&E would be obliged to transport it for you over its lines. The utilities just supply the lines and charge for the distribution.

Has it been successful? And has it brought the price of juice down?

Jesús Arredondo, the California Power Exchange's spokesman, in town for this week's meeting, may be Peace's greatest cheerleader. "We provide a market that is transparent, so the price of energy is not determined by a producer, but by simple logarithm of supply and demand. Without this [system] there is no transparency and the consumer is more likely to be gouged."

Before the PX, Arredondo says, what you really had was regions dominated by lone 800-pound gorillas. "For instance, Southern California was SDG&E-Sempra controlled. What happens in a situation like that is the 800-pound gorilla squeezes out the smaller utilities. But when you provide a transparency in the market, everybody's got to play on an even field. The municipal producers and the smaller independent producers are able to play in the same market as SDG&E-Sempra. Probably a third of participants in this market are small utilities."

The most significant development, says Arredondo, is that utilities and producers from beyond California now want to participate. "It's very significant in that we are trading across international borders. This wasn't the intent, but this makes us a North American operation. Canadian [power plants] are participating in our market. People from all over the West trade power here, people who either sell energy through us or buy energy through us. So the power that's coming to [San Diego] may not only be coming from SDG&E-Sempra, it may also be coming from Enron in Texas or Sierra Pacific Power in Nevada." Last October 23, history of a sort was made when Californian electricity crackled down the 408 megawatt-capacity power line that connects San Diego with Baja California. Mexico's state power monopoly Comisión Federal de Electricidad had bought into Alta California's deregulated power grid and was bidding for electricity on the PX to make up for a shortfall in its local production. It has been buying and occasionally selling through the exchange ever since. "[The advantage is] we can buy one, two, three hours' worth of energy when we need it," says Mario Lara Carmona, manager of the federal electric monopoly's control center in Mexicali. It was his idea to join the PX. "If we have a generating shortage, we can buy, or, when we have extra capacity, sell."

And soon, says Lara, the deregulation of Mexican electricity will also be a reality. "Only Mexico City knows the timing of the decision of when and how this deregulation will happen. But it is coming." For Arredondo, Mexico's positive involvement is the crowning confirmation that Peace's vision was correct -- but also just the beginning. "In the U.S. our potential for growth is all throughout the Midwest. And we've had interest worldwide. [Last week] I was visited by some folks from Poland. They want to use the California model. I have major utilities from Japan coming to see what our model is like. Visitors from Taiwan tell us this is what they want to recreate in Taiwan."

But Michael Shames, executive director of the San Diego-based Utility Consumer Action Network (UCAN), says the residential consumer isn't getting a good deal. He says the promise of savings, "no less than 20 percent by April 1, 2002," made to residents and small commercial customers in the deregulation bill (Assembly Bill 1890), is not happening. "San Diego is in deep energy trouble," said Shames in a recent report to UCAN's 35,000 San Diego members. "San Diego's unique geography, the politics of natural gas and electricity will lead to higher, not lower, electric costs for San Diego." Shames says that, according to his analysis, many customers will end up paying 20 percent more by 2002.

"Demand for electricity has grown 33 percent in the last five years, with SDG&E predicting another 15 percent increase with the next five years," Shames writes. "In the last two years, a combination of unexpected growth in electricity demand and the end of the electricity generation glut in the Western states has resulted in more expensive power, yet few new competitors have entered the market."

That's why Shames wants Peace and other lawmakers to look at encouraging alternative local "distributed energy resources," meaning smaller electricity generators scattered around San Diego, from solar power to fuel cell. They're even looking at a refrigerator-sized fuel cell electricity generator that could be installed into every house and effectively take all residential San Diego off the grid.

"We want to look at ways San Diego can actually start producing its own electricity," says Shames's colleague Jodi Beebe, "so we don't have to rely on this complicated infrastructure. There are so many other types of alternatives that could be looked at that currently are not. There has to be a way for San Diego to create more electricity here, instead of having it imported from someplace else. We're not there with fuel cells yet, but don't close that door."

Shames's report goes farther. "SDG&E and its Fortune 500 holding company, Sempra Energy, have a figurative stranglehold on the local energy market...it is apparent that gas and electric rates [in San Diego] will be among the highest in the state within three years."

"That's just completely wrong," says Severin Borenstein, a business professor at U.C. Berkeley, director of the University of California Energy Institute, and a member of the PX's board of governors. "[Residential bills] were mandated to go down 10 percent, and they did go down 10 percent on January 1, 1998. [The rate] is going to go down further, but we're not sure how much yet. It would have gone down anyway. The reason prices were so high was bad investments and contracts that had been signed."

Those "bad investments" were alternative power sources that the government pushed power companies like SDG&E to invest in during the '70s and '80s. The cost, Borenstein says, proved high, and the investments often environmentally unacceptable.

"In the case of San Diego, they had these contracts with independent generators that were signed under the PURPA [Public Utility Regulatory Policies Act] back in the 1980s [at] extremely high prices. The act's purpose was to get utilities to not generate all their own power. It was oriented to getting them to buy more environmentally friendly generation. Some of it was [natural] gas, some of it was wind, some of it was hydro, some of it was geothermal. San Diego also had part of the San Onofre nuclear-generating station. And that turned out to be way more expensive than anticipated."

Then, says Borenstein, the price of natural gas collapsed, making generation by any other means expensive by comparison. Peace's legislation allowed utilities to pass on to customers the "stranded costs" of those contracts with "competitive transition charges." That wiped out the 10-percent reduction in residential power bills.

But SDG&E has now sold off its interests in the San Onofre nuclear-power station and two other gas-fired generating plants, in part to meet deregulation requirements that utilities separate themselves from the power-generation business (though Sempra is building a power plant in Nevada).

"San Diego's [bad investments] were probably proportionately smaller than San Francisco's Pacific Gas and Electric and L.A.'s Southern California Edison's," says Borenstein. He's not surprised that with proceeds from the sale of its nuclear and other power plants, SDG&E is the first of California's "big three" utilities to pay off that debt.

So why has this good news gotten the PX's Jesús Arredondo -- and UCAN -- nervous? Because they worry that, led by SDG&E, the utilities could bust out and go back to their old bilateral dealings, once they've paid off their bad investments. If SDG&E decided to leave the California Power Exchange, and PG&E and Southern California Edison followed, the PX would look anemic. Despite the involvement of the 69 other companies (from California and seven other western states, Canada, and Mexico), Peace's baby may not survive abandonment by the "big three," which the PX says still serves 80 percent of California's electrical demand.

"[SDG&E] think they might be able to cut a better deal working with somebody outside of the power exchange," says Borenstein. "They have covered their stranded investments, but the law was unclear on whether that was sufficient for them to have the right to buy outside of the power exchange."

The good news, says Borenstein, is that SDG&E has been negotiating a deal they've submitted to the Public Utilities Commission for approval; it still involves them buying most of their power through the PX.

But for Shames, Peace's law leaves too much opportunity for utilities to get out of hand. And San Diegans, he says, are the test monkeys.

"San Diego is the first region in the state, and in the United States, to emerge from the transition to deregulated competition. No other utility will expose its customers to the unfettered prices of an electric market before 2001," he writes in his report. "The lessons learned in San Diego will determine whether California's experiment with deregulated electricity results in more competition and better service or a consumer nightmare of a stronger unregulated monopoly that is accountable to no one."

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