Power Struggle

Sparks fly in electricity deregulation debate.

Switching electric utilities may soon be almost as easy as switching on a light. That's the general consensus of utilities, consumer groups, and regulators. But they can't agree on how to change the current regulated monopoly system to a competitive market.

Electricity deregulation has been gaining momentum since Congress opened up the wholesale power market in 1992. In 1994, California's Public Utilities Commission said it would take the lead in rewiring the retail electricity market for competition. Other states looked to California as a possible model for their deregulation plans. Now after two years of heated debate, the PUC has voted 3-2 in favor of a compromise proposal suppor ted by Gov. Pete Wilson and Southern California Edison, the state's largest utility.

Beginning in 1998, power generators will sell electricity in a newly created wholesale energy pool. Most customers will continue to purchase electricity from their old utility, but rates will be based on the pool price. Large industrial energy users will be able to make "direct access" deals with any power producer. Individual ratepayers will have to wait until 2003. Consumer groups worry that individual ratepayers won't see rate reductions until that time. However, SCE has promised to reduce rates by 25 percent over the next five years. Electricity rates in California are 50 percent above the national average.

The PUC plan's most controversial provision allows utilities to recover 100 percent of their "stranded costs." Stranded costs are utilities' investments or obligations–many mandated or encouraged by regulators who guaranteed utilities a positive rate of return–that would be unprofitable in a market environment.

That could lead to financial disaster: Moody's Investors Service estimated last year that 34 of the nation's 114 investor-owned utilities have stranded costs higher than their total equity. Under the California plan, utilities can add a surcharge to their current customers until 2005, even if they sign on with another company.

Consumer advocates concede that utilities probably will recover some of their stranded costs, but they believe ordinary ratepayers shouldn't bear the entire burden for utilities' bad investments. "[The California utilities'] way of making money is to get out of bed in the morning," says Arthur Lyons, who advises Palm Springs on electricity deregulation.

California still has to hash out the details. Even if the divided commission approves a comprehensive blueprint, the California legislature and federal regulators have to sign off on the plan. By that time other states may have moved ahead of California. And Congress or the courts could step in and preempt state action.