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Good News— Bad News

Most IPP readers know about the mess of deregulation in California. For the average utility ratepayer, there are dark clouds on the horizon. For the renewable energy industry in California, there are some bright spots.

The picture is varied and complex. To understand what is going on, a brief historical review is warranted. Actually, the history ought to start with the early development of the electrical energy industry. The pattern of utility behavior has not changed. However, that story is beyond the scope of this article. Two excellent references for the big picture, Berman's Who Owns the Sun? and Wasserman's The Last Energy War, are recommended.

A Brief History of California Deregulation

Early in 1994, the California Public Utilities Commission (CPUC) issued a series of recommendations stating in general terms that the generation of electricity in California should become competitive (deregulated). This document is referred to as the Blue Book.

In order to move towards that goal, a number of workshops and hearings were initiated by the CPUC. Participation in these efforts included a spectrum of interests and stakeholders—there were utilities, environmental groups, renewable manufacturers, electric service companies, and public interest groups.

Because of the diversity of these groups, the process was contentious at times, and protracted. Issues being hammered out during the next year included low income assistance programs, renewable energy portfolios (they set percentage benchmarks for renewable energy content in the electricity mix), and questions of utility "stranded assets" (how to value power plants that would not make it in a competitive environment—mostly nukes).

Meanwhile, a quiet group in the California State Legislature, shepherded by the utilities, introduced AB 1890, California's deregulation law. This was behind the backs of the hundreds of people who had spent huge amounts of time and resources in the public process to craft recommendations for the CPUC. The legislation was signed in September of 1996.

Thus I learned a fundamental operating principle of utilities: "If you can't get what you want from the regulators, take it to the legislature." What didn't utilities like about the participatory process initiated by the CPUC? Two things: there were strong efforts to limit the utilities' stranded assets recovery, and the renewable and environmental interests were crafting strong portfolio standards for renewably generated electricity.

What were the promises of AB 1890 as enacted? Recovery of stranded utility assets, competition and consumer choice, rate reductions, reliable electric service, and support for renewable energy generation.

The Scorecard

What did the utilities get from AB 1890? The most significant prize was a US$28 billion recovery for stranded assets. The amount of this settlement benefits them in two ways. First, it recapitalizes the utility holding company so that it may acquire new unregulated generation resources outside of its own regulated territory. Second, and perhaps more significantly, it stifles competition from other electricity providers within the utility's service territory during the transition period.

This is so because the bailout is funded by a competition transition charge (CTC). This charge is a monkey on the back of every KWH sold by a competitive electricity provider, since the CTC is again passed on to the customers in their energy bills. On the basis of this analysis, it should be no surprise that in California, competition, as measured by the number of customers getting electricity from a nonregulated provider, is a failure. Less than 1 percent of California's residential utility customers have switched from a regulated utility to a competitive power supplier.

Another promise of AB 1890 was a 20 percent rate reduction for consumers by 2002. The mechanism set up to accomplish this was a bond scheme to borrow money and give it to the utilities so they could reduce rates. The repayments for the bond are recovered from an additional charge on the utility bill. In spite of this Ponzi-like scam, utility rates are going up.

As I write, our local utility, PG&E, is in federal court attempting to pass on to its customers a US$3.4 billion rate hike. The same thing is going on in Southern California with the other large utilities, Southern California Edison and San Diego Gas and Electric. Yet—and this is true for all three major utilities in California—profits for the unregulated holding company are significantly up, while the regulated distribution companies cry poor and demand rate increases!

How about reliability? This summer, we saw at least a few rolling blackouts in California. Even more frequent were electric alerts, a daily occurrence during heat spells. During the alerts, electricity consumers were asked to curtail consumption. If the system-wide load did not drop sufficiently, rolling blackouts were initiated. Electric system reliability since the enactment of AB 1890 has declined.

Renewables Under Restructuring

How have renewables done under AB 1890? Restructuring has been good for renewables. During the transition period (1996-2002), 540 million dollars has been allocated in support of renewables. The bulk of these funds support existing and new renewable sources such as wind farms. PV receives support as part of an Emerging Renewables account (PV, Small Wind, and Renewable Fuel Cells).

The total allocated for PV from this account is around US$30 million, about US$6 million per year. There is no doubt that this has been a benefit to the PV industry. Approximately 395 buydown systems have been installed to date, with a capacity of about 1.3 million watts.

It is illuminating to put the renewables support program under AB 1890 in perspective. Let's imagine that a renewables portfolio approach had been adopted (the path not taken). A portfolio approach stipulates a certain percentage of renewables in the energy mix. California's average renewable energy content is now about 12 percent. A portfolio approach may have increased the existing percentage to 20 percent over ten years. The US$540 million for renewables provided by AB 1890 provides less than a 1/2 percent increase in renewable capacity. This is far short of the modest goals envisioned by the portfolio approach.

Another perspective is to compare AB 1890's renewables allocation to the utility stranded assets bailout. Comparing renewables' US$540 million to the US$28 billion bailout works out to 2 cents spent for renewables to every dollar spent on the utility bailout.

Remember that the utilities are buying combustion-powered generation plants with these dollars. Imagine what a different outcome it would have been if things were turned around—US$28 billion for renewables. That's the kind of investment needed if renewables are really going to have an impact in California. In short, the renewables support component of AB 1890 is window dressing.

The utilities got everything they wanted, while the ratepayers got no real competition, higher rates, a less reliable electrical service, and token support for renewables. AB 1890 served to transform regulated monopolies into unregulated monopolies, all at the expense of the ratepayers.

Recent California Legislation

In the last issue, I mentioned that renewables got another boost from recently signed AB 995 / SB 1194. This bill will continue the public benefits charge, the funding mechanism currently in place for AB 1890. Additionally, the amount for the support of renewables is increased to US$135 million per year for ten years beginning in 2002.

This bill recognizes that the support for renewables in AB 1890 was inadequate. The US$1.35 billion over the next ten years is a very welcome step in the right direction. However, SB 1194 is really a Trojan horse maneuver and has a second purpose. This second purpose is the price tag paid for extending renewables funding.

SB 1194 reasserts, legislatively, that the distribution and transmission functions shall remain within the regulated utility franchise. To understand why utilities would require the legislature to reaffirm what they already had, you must know that within the CPUC there were arguments for and interests pursuing deregulation of distribution. These activities were taking place in the ongoing hearings on distributed generation at the CPUC. It is quite obvious that the utilities did not want to go there.

Another measure, AB 970, is called the California Energy Security and Reliability Act of 2000. As window dressing, this act sports around US$50 million for demand-side management and energy efficiency. The real substance of the legislation is to allow for fast-track siting of combustion power plants. Local permitting authority and air quality standards will be waived. A system of "offsets" and fines will be allowed as mitigation for excessive emissions. The act stipulates that these provisions are temporary, and in three years the plants will be brought into compliance with the highest standards or they will be removed.

Analyzing these recent bills leads to the conclusion that legislation with huge benefits for utilities now must contain small benefits for renewables, energy efficiency, and demand-side management. The score again:

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