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Deregulation Didn't Foster Competition


The way people scrambled for a stake in California's power market three years ago, you'd have thought it was the second coming of the Gold Rush.

Politicians and free marketers boasted that they were freeing millions of customers from their monopolistic utilities so they could shop for cheaper electricity. The state ordered an $87-million publicity campaign, promising a brave new energy world bustling with competition.

But those dreams of capitalism unleashed never materialized, dashed by provisions in the 1996 deregulation law that effectively undermined competition and gave the utilities a substantial edge over newcomers. In the end, only 1.7% of the utilities' residential users switched to other providers, many opting to pay more for "green" energy.

Although the chaos swirling around California's electricity crisis has chiefly focused on soaring wholesale prices, the virtual absence of competition at the consumer level has played a key role in deregulation's undoing.

Had competition among retailers flourished, garnering the millions of customers deregulators expected, prices might never have reached today's unprecedented peaks and the turmoil might have been tempered, economists and retailers say.

Retail competition "would not have prevented a crisis, but it would have toned it down," said Richard Counihan, spokesman for Green Mountain Energy, which has returned most of its 50,000 customers to the utilities' ranks.

Now even the prospect of competition is gone. A measure enacted by the Legislature last week, which made state government the biggest electricity buyer in California, suspended further retail competition, preventing anyone from underbidding the state.

"That buries us," said Tony Wayne, president of UtiliSource of Brea, which, under the new law, can keep its relatively small number of customers but is barred from entering into new contracts.

Few thought it would come to this.

High Hopes Collide With Reality

Almost 300 firms registered with the state to sell electricity to consumers. Many of them, quick-buck hucksters or small-time operations, were scared off by background checks, fingerprinting and the $25,000 deposit required to enter the market.

But then there were the likes of giant Enron Corp., which predicted that the new market would pull 700,000 customers from the utilities in the first few weeks. Another firm deployed 400 salespeople, nabbing residential and business prospects by the thousands.

They quickly discovered that the structure of California's landmark deregulation effort erected protective barriers preventing most retailers from beating the prices of the big three utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric.

For example, deregulation law allowed the utilities to keep their 9 million customers until each took the initiative to switch. Any ratepayer who used a moderate amount of energy and wanted to change companies had to pay $600 for a new meter--unless the retailer wanted to eat the cost itself.

In contrast, Pennsylvania, where deregulation has been more successful than in California, requires most of its utilities to surrender some of their customers. Last year, 300,000 customers of one utility were auctioned off to the retailer who could promise them the most savings. All together, close to 1 million customers have switched from utilities to retailers, with savings estimates ranging from a few dollars to $15 per month.

In California, the next barrier was expressly designed by deregulation architects to keep new retailers at bay, at least temporarily.

Before throwing utilities into a free-for-all, lawmakers felt obligated to give them time to pay off debts that would hurt their ability to offer competitive prices. The Legislature froze customer prices at 1996 levels, well above what the utilities were then paying for electricity. The difference would be used to pay their debts.

The hitch for prospective retailers was that their customers--like those remaining with utilities--would be charged the extra amount too. That seriously hurt the retailers' ability to shave prices for their customers without taking a hit themselves.

Utility executives say the so-called competition transition charge accomplished its intent: providing some protection against new players until the utilities could shed their debt and compete on an even field.

According to those executives, the plan went awry when wholesale electricity prices soared before the special debt charge was lifted and competition had a chance to flourish.

"We haven't had enough time for this market to work," said Denise Grant, director of the Edison division that works with retailers. She said Edison expected to lose 150,000 customers annually--a far cry from what has happened.

Retailers say they faced other obstacles that seemed designed to help the utilities keep as many of their customers as possible.

One of the biggest was a newly created energy marketplace called the Power Exchange.

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