California Utilities at Charged Crossroad

In what may become a national model, the Golden State decides today how far down the free-market path it will go in the production, sale, and distribution of electricity

THE details are enough to glaze over the eyes of the average consumer and several holiday dinner hams.

But the overall decision may affect how much 30 million Californians shell out for electricity and how the rest of the nation's trillion- dollar utility industry sets its rates.

After nearly two years of heated debate, five California public utilities commissioners will gather today in San Francisco to select which fork to take in the public-utility road.

The choice: whether the Golden State should remain a regulated monopoly of singly-owned utilities that produce, distribute, and transmit electricity or whether all three playing fields should be opened to other players, big and small, in a market-driven approach.

''Clearly, California is on the vanguard of this issue as other states look to it to try and figure out the issue for themselves,'' says Al Danielsen, director of the James C. Bonbright Center, a think tank that studies the utility industry at the University of Georgia in Athens, Ga. ''Because so much attention has been focused on this from every corner of the country, what California decides will be the model others work from.''

Possible upheavals within the state from today's decision have been compared to those resulting when American Telephone and Telegraph (AT&T) was broken up and long-distance rates deregulated. Because so much is at stake - including the high costs of doing business here - a decision has been slow in coming.

The impetus for a change is driven by residential and business owners who want to lower the state's electricity rates. At 10.28 cents per kilowatt-hour, they are among the highest in the nation and 50 percent above the national average.

The issue has been languishing since April 1994, when California Public Utilities Commission (CPUC) promised consumers that they would soon be able to comparison shop beyond the state's only three investor-owned companies: San Diego Power, Southern California Edison, and Pacific Gas & Electric.

By breaking up an 82-year monopoly, large companies were to be allowed to choose their own electricity supplier this year. Other customers, including residential users, were to be phased in by 2002.

But after heavy lobbying by those investor-owned companies - $440,000 was spent in the last three months of 1994 alone - CPUC has stayed at the drawing board figuring out how and when to phase in such a plan.

Many think a compromise will emerge that is only a faint echo of what free-market advocates had wanted.

''The commission looked the free-market, brave new world in the face but then they blinked,'' says Peter Navarro, professor of policy and management at University of California at Irvine. ''Southern California Edison has been pressuring the commission to adopt something that be more protective of themselves.''

Because the final recommendation is likely to require state legislative action and federal approval, many observers feel the commission will design a hybrid that is acceptable to all sides.

''If they do something too radical or too alienating to one set of parties, the legislature will give it the kibosh,'' says Michael Shames, president of Utility Consumers Action Network, a San Diego-based, consumer advocacy group.

The three main utilities are already streamlining in anticipation of more competition. What concerns them most are costs incurred by switching to a new system.

In the 1960s and 1970s, California utility companies built expensive nuclear-power plants that are no longer economical. In the 1980s, federal regulations bent on developing an alternative-energy industry forced utilities into long-term contracts with other generating companies such as solar, geothermal, and wind facilities, which have also incurred spiraling costs.

If these same utilities are now suddenly exposed to unprotected competition, those so-called ''stranded costs'' - estimated as high as $135 billion - would have to be eaten by shareholders. The market value of the stock in the three utilities fell by 20 percent after CPUC's 1994 announcement to deregulate made utility investors jittery.

Opponents of free-market options also worry that Californians could become dependent on cheaper, out-of-state competitors.

For these reasons, many think the eventually adopted plan will be a patchwork quilt sewn from four basic ideas:

* Pool proposal. A company would be formed that would pool electricity produced by a variety of generators for a wide range of prices based on spot-market values.

* Direct access plan. Customers would be allowed to negotiate directly with power companies, permitting them to buy from the cheapest supplier.

* Formal compromise plan. As suggested by Gov. Pete Wilson (R), this third option would combine elements of the first two but also allow for full recovery of transition or ''stranded costs.''

* A framework for restructuring, sponsored by major consumer and environmental groups.

In a memorandum of understanding submitted to CPUC in September, Southern California Edison and a coalition of independent power producers announced their joint recommendations. Included were an independent system operator to control scheduling and dispatch of all state electricity; a separate independent power exchange to manage an economic auction which would balance electricity supply and demand; and a ''non-bypassable'' competitive transition charge to pay for past regulatory commitments.

''Customers will be able to choose a market system that best suits their needs while maintaining the reliability of California's electric system,'' says John Fielder, Edison's vice president for Regulatory Policy and Affairs. ''We believe [the memorandum] allows for an orderly transition to acompetitive marketplace.''

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