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Oversee the Power to the People

Deregulation has exposed residential consumers to price volatility.

April 29, 2002|BILL AHERN and MICHAEL McCAULEY | Bill Ahern is an energy analyst and Michael McCauley is the media director for the West Coast regional office of Consumers Union, the nonprofit publisher of Consumer Reports magazine.

California faces a series of critical decisions this year on how best to reconfigure its electricity market now that the state's experiment with deregulation has resulted in disaster for consumers. Industry groups are pushing for full development of truly competitive retail and wholesale power markets. Some consumer and labor groups are advocating a return to utility franchises and cost-of-service regulation.

There is a middle ground: Protect residential consumers and small businesses and let large industrial electricity users, who were the driving force behind deregulation in the first place, navigate competitive markets.

California's attempt to restructure its electricity market was a disaster. Consumers were promised lower electricity rates and the opportunity to choose their own energy provider in a competitive marketplace. They got neither.

According to the California Public Utilities Commission, 2% of residential customers chose alternative providers. And when wholesale rates went through the roof last year and the rate freeze suddenly turned out to be a bad deal for the utilities, the state was forced to begin purchasing power. Consumers were socked with an average 40% rate hike.

Whatever happened to lower rates and the magic of the competitive marketplace? Retail competition simply failed to materialize in California, and there is little evidence from other states that deregulated their electricity markets that energy providers are clamoring to serve individual consumers. Consumers are ill-equipped to evaluate complicated pricing information on electricity choices, especially when they are forced to rely on questionable marketing materials offered by energy providers.

Given the volatility of the market and the essential nature of this commodity, residential consumers and small businesses would be better served by a return to electricity service more strictly overseen by the PUC. Under PUC regulation, the state's utilities should offer consumers a standard service constructed from a mix of short- and long-term power supplies that provides stability and reliability.

The retail power rates should be based on the cost of supply to the utility. Under this plan, the utilities would use their own power generation sources and obtain any additional supplies they needed through competitive bidding overseen by the PUC. The utilities would be required to maintain a 15% energy reserve to avoid emergency shortages and blackouts.

Also, utilities could offer choices for consumers who wanted such things as environmentally friendly resources by using a bidding process to select the providers of these alternatives.

Large businesses, on the other hand, can protect themselves and should have the option of buying power in an unregulated marketplace as long as the remaining utility customers are not unfairly burdened as a result.

Earlier this year, the PUC voted to give businesses that signed contracts before Sept. 20, 2002, direct access to a range of energy providers. But the agency still needs to make sure that businesses that pursue direct access pay off their share of the state's short-term power purchases from last year and long-term energy contracts. These businesses should shoulder a significant part of the ratepayer costs associated with PG&E's bankruptcy and the PUC's bailout of Southern California Edison.

Deregulation has exposed small consumers to price volatility and the boom-and-bust cycles of the market without providing the benefits promised by its proponents. Let's scrap California's misguided attempt to deregulate the electricity market and give consumers the protection they need to enjoy an affordable, reliable power supply.

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