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An Electric Moment In California


News: Analysis & Commentary: ENERGY

AN ELECTRIC MOMENT IN CALIFORNIA

The rush to sell deregulated power will be closely watched

They're the bane of dinnertime. With uncanny precision, telemarketers from long-distance telephone companies manage to call with hot discount offers just as you're about to sit down to your evening meal. Well, brace yourself. In the not-too-distant future, there may be a new set of callers to interrupt dinner: companies offering you a great deal on electric service.

In California, phones are already ringing off the hook with offers of bargain-basement rates for electric power. On May 6, regulators in California voted to allow customers to go shopping for lower electric rates as of Jan. 1, accelerating the original timetable by four years. Anticipation of that decision has set off a modern gold rush in the state, which has an annual power bill of $20 billion. Companies as far away as Atlanta and Louisville are launching marketing programs and lining up customers eager to cut their bills. "You name 'em, they're here," says John F. Fielder, Southern California Edison Co.'s vice-president of regulatory affairs.

From Washington, D.C., to Washington State, regulators, utility investors, and consumers are watching how electric-utility deregulation plays out in the largest electricity market in the nation. Several other states, such as Massachusetts, New York, Washington, and Illinois, are getting ready to deregulate their electricity markets, too. And in Congress, a bill sponsored by Rep. Dan Schaefer (R-Colo.) would require all states to give their residents a choice of electricity suppliers by Dec. 15, 2000. Under the proposals, states are splitting up electricity generation and transmission into separate businesses, allowing companies such as natural-gas producer Enron Corp. to pay a fee for distributing their current on existing power lines.

BIG SPENDERS. With electric rates roughly 30% higher than the national average, Californians are especially easy pickings for the newcomers. Under the new California rules, customers can secure lower cost power from inside or outside the state, paying their local utilities only for the costs of shipping to their home or business. Houston-based Enron, for example, has already signed on with the Northern California Power Agency, a cooperative of 11 cities that includes Palo Alto and Santa Clara. It will act as a broker for the members' surplus power and find low-cost power in the open market for the co-op to buy.

Oregon's Portland General Corp., which Enron hopes to buy if regulators allow, has commitments to find low-cost power for the city of Palm Springs and its residents. Portland General has also negotiated a deal with the City of South San Francisco. "We're getting geared up to serve one million customers by Jan. 1, 1998," says Enron CEO Kenneth L. Lay, who figures Enron will expand in Arizona and New Mexico when those states follow California's lead and deregulate.

The model for many municipalities may well be Palm Springs, a city of 42,000 where utility bills skyrocket in sweltering 100-degree temperatures. "My bills run $550 a month, but I know folks with $1,200 or more," says former city councilman Arthur Lyons, who spearheaded an effort to recruit Portland General's FirstPoint Utilities Solution unit in January. Now the Oregon utility, in addition to finding low-cost power for the city, will establish the Palm Springs Energy Service in the resort city to handle billing and other service arrangements for customers.

At first, most of the competition won't be for residential customers but for the factories and other businesses that account for more than two-thirds of California's power sales. New Energy Ventures Inc., a Los Angeles-based company started by former SoCal Edison President Michael R. Peevey, has already lined up more than 60 clients that include Rand Corp., office buildings owned by investor Samuel Zell, the Robinson-May Department Stores Co., and several private colleges. Peevey's drawing card? A contract to distribute hydroelectric power from Washington's Bonneville Power Administration at bargain rates. "We figure we can take half the utility companies' industrial and commercial market share," says Peevey. In Australia, he notes, the incumbent utility lost 40% of such business after deregulation. "These are utility guys who have never had to compete before," he says.

Utilities will still get a piece of the action by supplying the wires that deliver power and in some cases, billing services. In exchange for the right to collect billions from ratepayers to cover the "stranded costs" of plants they've built, California's largest utilities, SoCal Edison and Pacific Gas & Electric, will cut rates by 10% to their smallest customers and freeze them there until 2002.

SAVINGS. Energy executives insist there's little risk that they'll lose millions of consumers. Enova Corp. subsidiary San Diego Gas & Electric, in the midst of a $5.2 billion merger with Southern California Gas Co.'s parent Pacific Enterprises, says it will split $1.2 billion it will get over 10 years in savings from the deal between its shareholders and customers. And officials at both SoCal Edison and PG&E contend that most deregulated power will be purchased through a newly created agency that will auction power at rates that won't be any lower than the 10% cuts in rates they'll be offering.

What's more, after 2002, even the largest utilities will be free to cut their rates to compete. The utilities say they can hang tough until then. "Most people are going to be fairly cautious and won't experiment with companies they never heard of," predicts PG&E's manager of business customer services, Tom Bottorff. "At the beginning, it won't be more than a fraction of our market." But in the end, the leap into electricity deregulation could prove to be one more hot consumer trend Americans welcome from the coast.By Ronald Grover in Los Angeles, with Gary McWilliams in Houston, Nicole Harris in Atlanta, and Peter Coy in New YorkReturn to top


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