Utilities Are Treading Water in California

The Problem

In a nutshell, the state’s two largest utility companies, Pacific Gas & Electric (PG&E) and Southern California Edison, serving 24 million consumers, are teetering on the verge of bankruptcy. With an accumulated debt topping $9 billion, these giants are looking for help, and fast.

When deregulation took hold in 1997, utilities were strapped with massive debt from unrecoverable costs stemming from the construction of power plants. State lawmakers managed to pass legislation that allowed these companies to recover these costs.

The bad news was a trade-off of sorts. Lawmakers requested a 10% cut in retail energy costs and a freeze on retail price increases until 2002, or when utilities would have paid off their unrecoverable costs. The problem? No such ceiling existed on wholesale prices charged to utilities. That was OK while energy costs remained manageable and the California economy continued to flourish. But the you-know-what hit the fan.

When wholesale prices for electricity and natural gas began spiraling upward, wholesalers, many from outside California, seized on the increasing demand for energy by charging hefty wholesale prices to the utilities. At one point the wholesale price of electricity was $0.40 per kilowatt-hour and the price PG&E was charging retail customers was $0.054.

Think of it in hvacr terms. Your supplier is billing you $400 for a compressor and you are charging your customer $54. I don’t think too many of you would stay in business very long if you lost $346 per job.

Consumer Reaction

Consumers are starting to view deregulation in a different light. The Los Angeles Times conducted a poll and found that two out of three Californians favored re-regulation. Half of the people polled didn’t even believe there was an electricity shortage and blamed utilities for higher prices. And it’s no wonder. Citing that it had paid off its unrecoverable costs, San Diego Gas & Electric began charging customers the market rate allowable for electricity, and consumers saw their bills double each month. It’s a nightmare scenario. Meanwhile, how is all of this going to affect contractors and their customers in other parts of the country? In some cases, it may not. After all, lawmakers in states that have passed deregulation have not set up the same debt repayment-retail price restrictions California has. But the demand for energy will not go away. The rapid growth of communities in Arizona and Nevada and in the Pacific Northwest makes it difficult to justify diverting electricity and natural gas to California. What if we face a summer of brownouts and power disruptions? Will the likelihood of high utility bills and voluntary energy usage reductions result in fewer service calls and fewer replacement sales? Will deregulation come to a screeching halt? There are a lot more questions, and consumers aren’t the only ones who might be left in the dark.

Editor’s Note: It may have been a coincidence, but I completed this article in total darkness after a transformer blew at the Hyatt Regency in San Antonio, TX.

Hall is business management editor. He can be reached at 734-543-6214; 734-542-6215 (fax); halljr@bnp.com (e-mail).

Publication date: 01/22/2001