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		 Subject: Utilities, Electric: Deregulation: Electricity Crisis Cools Down a 
Bit in San Diego County, ...


 Electricity Crisis Cools Down a Bit in San Diego County, Calif. Dan McSwain 
? 09/26/2000 KRTBN Knight-Ridder Tribune Business News: North County Times - 
Escondido, California Copyright (C) 2000 KRTBN Knight Ridder Tribune Business 
News; Source: World Reporter (TM) 

An uneasy aftermath has settled over this summer's power price shocks in San 
Diego County, punctuated this weekend by cool weather and falling electricity 
prices, as the state and federal policy-making apparatus shifts from a season 
of panicked damage control to the extremely difficult question of what to do 
next.

In the parlance of the electricity industry, these are the "shoulder" months; 
a breather between periods of heavy demand for summer cooling and winter 
heating in which power-generating plants are typically pulled out of 
commission for trouble-shooting, overdue maintenance and refueling. 

California's pioneering deregulation of its electricity industry lies in a 
state of exhaustion. Guarantees from politicians of greater efficiency and 
lower prices have collapsed this summer into chronic power shortages and a 
historic transfer of wealth that in about 90 days moved $10.6 billion from 
the buyers of electricity to the sellers.

Optimism is in short supply as a fractious collection of stakeholders and the 
nation's political and regulatory institutions begin to search for solutions.

Emergency legislation approved by state lawmakers in August will temporarily 
reduce bills for the 1.2 million customers of San Diego Gas & Electric Co. 
from an average $146 in September to about $72 per month. In July 1999, San 
Diego County and parts of south Orange County became the first region in the 
nation under deregulation law to directly pay the wholesale price of 
electricity.

Cool weather has caused demand for power to sag this weekend, bringing prices 
down from their lofty summer peaks to about 7.5 cents per kilowatt hour on 
Friday.

But while the legislation has capped rates at 6.5 cents per kilowatt hour for 
SDGOcustomers, the utility will continue to pay the volatile wholesale cost 
of power, which averaged 21.4 cents this month. Historically, prices have 
fallen to as low as 1 cent per kilowatt in the winter months, but this year 
prices seem likely to exceed 6.5 cents for most of the year, and take off 
again in summer 2001.

Analysts say generating and power marketing companies will retain their 
ability to raise prices, called market power, because their costs are higher 
and supplies of power are tight in the Pacific Northwest.

SDGOsays the legislation could create a shortfall, to be financed by the 
company, that could run up an $800 million IOU by 2003. In the past, the 
Public Utilities Commission has allowed the utility to pass on such 
shortfalls to consumers in the form of higher rates.

Pacific Gas&Electric and Southern California Edison, the state's other 
investor-owned utilities, have collectively lost at least $3.3 billion this 
summer because their retail rates have remain capped under deregulation. Both 
utilities are seeking to end their retail rate caps early to escape the risk 
of sustained high wholesale prices.

Consumer groups are outraged; investors are skeptical. Three major credit 
rating companies said the California utilities face increased regulatory 
uncertainty, and the utilities' stock prices fell last week.

A hot-potato mentality is emerging among policy-makers who say the authority 
to clamp down on market behavior has been dispersed by deregulation.

California regulators and consumer advocates have great expectations for a 
series of state and federal investigations into the causes of higher prices 
and into charges of market manipulation and price gouging by power companies. 
Chief among them is an investigation by the Federal Energy Regulatory 
Commission that may lead to changes in California's power trading system.

"Unfortunately, we have ceded most of our authority over wholesale markets to 
the federal government," said Loretta Lynch, the president of the California 
Public Utilities Commission, the state's top regulator.

James Hoecker, the chairman of the federal commission, said Lynch overstates 
the case. "California has not given me one scintilla of authority that I 
didn't already have," Hoecker said in August.

The federal commission has been critical of California's approach to 
deregulation, but has been reluctant to intervene in interstate wholesale 
markets, into state trading systems, or to make aggressive use of its 
investigative powers.

What is dawning on California policy-makers, analysts say, is the hard lesson 
that deregulation transfers considerable authority away from government 
officials and to the market participants. The challenge is to get 
deregulation right the first time.

"The problem is not deregulation," said Robert McCullough, an economist and 
former utility executive based in Portland, Ore. "The problem is this Rube 
Goldberg device that has been constructed in California."

The trading practices of power marketers in the West also is under scrutiny 
by the federal commission. Regulators informed electricity marketing 
companies in August that if price gouging is found, the refund of some 
profits may be ordered by the commission for windfall profits that are earned 
after mid-October.

A surprising number of observers say generators have simply acted in their 
own interest and taken advantage of the rules to make money. Ranging from 
consumer advocates to economists to some regulators themselves, many say 
bungled deregulation is a more likely cause of high prices than a conspiracy 
of generating companies.

"This market has behaved very rationally this summer," said Frank Wolak, a 
Stanford economist who chairs the market surveillance committee of 
California's power transmission manager. "All you need is tight supply to 
exercise market power in this market; you don't need collusion."

A titanic shift is shaping up in the way power is bought on the wholesale 
markets on behalf of California consumers. All three utilities have been 
granted authority by state regulators to make confidential deals for 
electricity directly with individual generators or power trading companies, 
largely bypassing the state's nonprofit power exchange.

In an equally important development, the manager of most of California's 
transmission system has asked federal regulators for permission to sign 
long-term deals for power. Up to now, the transmission manager has been 
limited to last-minute purchases of emergency power to stabilize the grid.

Critics fear both measures are steps toward reinstating the system that 
existed before deregulation, in which a small number of buyers made large, 
long-term deals with a handful of suppliers.

The architects of California's deregulation, fearing the monopoly power of 
the utilities, had stripped bilateral purchasing authority to foster 
competition among a new kind of retail power provider. Under the scheme, 
utilities were to be limited to the highly regulated business of electricity 
distribution Folder Name: Utilities, Electric: Deregulation Relevance Score 
on Scale of 100: 
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