Electric Utilities Face Power Shift With New Rules

The California Public Utilities Commission is expected to unveil a proposal Wednesday that could dramatically change how the state’s electric utilities do business--an overhaul that could shift billions of dollars in rate payments among residential, small business and industrial customers.

The announcement will easily be the most dramatic moment in a deregulation process being watched around the world, as governments attempt to remodel the basic role of electric utilities--fundamentally unchanged for more than a century--largely to promote competition and accommodate new, cheaper technologies.

Depending on the approach favored by the commission, residential customers could see savings of as much as 30% on their monthly bills, according to one estimate. Other scenarios could boost residential rates in California, already 50% higher than the U.S. average.

For their part, the utilities--already stressed financially by the state’s weak economy and other ills--are concerned that the proposed changes could deal them another blow.

Environmentalists, like most other interested parties, favor change. But they worry that the state’s much-vaunted support for non-fossil fuel energy and environmental protection could be threatened.

“We are at a moment of enormous opportunity and enormous risk,” said Ralph Cavanagh, energy program director of the Natural Resources Defense Council, an environmental group. “This is the most environmentally and economically significant industry in the state of California,” Cavanagh said. “The stakes are very high here.”

PUC officials, who have been working on their secretive deregulation proposal for a year, have declined to reveal details of the plan they will make public Wednesday. But commission President Daniel W. Fessler--who hopes to hold hearings on the proposal as early as June--describes it as a response to “very significant changes in the electric service industry that were being felt not only in California but in other American states and in a number of other countries.”

One big change in the industry has been technical--particularly, the development of what is known as a natural gas combined-cycle turbine.

“The simple discovery that you could harness a stationary jet engine and use that to burn natural gas,” Fessler said, has meant that electricity can now often be made cheaper--and in small plants scattered throughout a utilities’ service territory--than it can be generated in a utility’s big power plant.

Proponents of non-fossil fuels, meanwhile, say that wind power can now compete with big central plants. And others argue that energy conservation projects--such as subsidies for superefficient refrigerators--can be cheaper to mount than building generating facilities.

All this means that one reason big, publicly regulated electric utilities existed in the first place--that they alone could make electricity--may no longer apply. Other, smaller companies can do it now too, and often more cheaply.

“This is a challenge to the working assumption that electrical generation was a natural monopoly,” Fessler said.

Historically, the basic compact between society and a utility was forged with the earliest electric companies to avoid the prospect of tangled, competing networks of wires and power plants. The utilities agreed to provide reliable, low-cost power in exchange for monopolies on their geographical territories and an assured but regulated profit.

That profit was based on how much electricity the utilities made and sold--with no incentives to conserve or to buy from other sources.

But with the new economics of power generation, government regulators have been struggling to alter that pattern. Wednesday’s expected announcement will be the PUC’s proposal for doing so.

“There is a lot of very cheap electricity out there right now,” said Robert Finkelstein, an attorney for Toward Utility Rate Normalization, a San Francisco-based consumer group. “One potential impact of restructuring is that the commission could tell the utilities: ‘Thank you for your efforts in the generation business for the last hundred years, but now it’s time to capture the benefits that we’ve already seen in the wholesale (electricity) market.’ ”

Indeed, a robust wholesale market linking utilities with other power generators has developed, spurred by deregulation under several recent federal laws.

In turn, lower prices on the wholesale market have attracted the gaze of big industrial users of electricity, some of which--such as aluminum smelters--devote up to a third of their operating budgets to buying power.

Now these users want to turn the regulatory screw a big notch further, to allow them to buy electricity directly from producers--whether their local utility or independent producers--under a system called retail wheeling.

This highly contentious proposal has yet to be fully implemented anywhere, but the utility industry is obsessed with the looming threat of widespread desertion by its business customers. Retail wheeling is one of the range of proposals that the PUC has weighed over the past year.

One prospect, known in the industry as the “death spiral,” envisions the utilities losing their biggest customers to independents, being left only as transporters of electricity, much like today’s natural gas utilities. Industrial customers--which are much cheaper to serve than the house-to-house systems for residential users--might no longer share the cost of the utility’s infrastructure, driving up rates to the remaining residential and small business customers.

Another uncertainty is what would happen to investments the utilities have made in power plants, which could be “stranded”--that is, a cost to the utility without users to pay for it--if cheaper power suppliers are allowed to compete for retail customers.

This possibility has prompted environmentalists to join the utilities in opposing retail wheeling because that system could favor the cheapest power, whether it was generated in an environmentally benign way or not.

Indeed, renewable energy producers have reason to worry because their electricity is not yet as cost-competitive as its proponents believe, according to Edward J. Tirello Jr., a senior utilities analyst with NatWest Securities in New York.

“If you look at the new order that’s coming,” Tirello said recently, “the low-cost producer is the producer of choice. It will mean lower rates for everyone. But it will also mean one thing: All these higher-cost renewables . . . are out the window. When you’re running a business on razor-thin margins, you can’t do that.”