Retailers expect lower rates from electric power deregulation

Discount Store News, Sept 4, 1995 by Darren Chervitz

NATIONWIDE DSN REPORT -- The deregulated light of a new day is approaching. After 60 years of an electric industry powered by government-regulated monopolies, wide-open market competition is on the horizon.

And discount retailers, who will probably be able to negotiate significantly lower electricity rates in an unregulated market, should benefit from the coming change.

But before any savings are realized, some intense battles brewing in states throughout the country over the speed and direction that this deregulation process will take need to be resolved.

Perhaps nowhere has the battle been more fierce than in California, where electricity rates are double the national average. In a state where three utilities control at least 60% of the total power market, electrical consumers of all types--industrial, commercial and residential--are demanding reform and increased competition. Even the major utilities, Pacific Gas & Electric (PG & E), San Diego Electric and Southern California Edison (SCEcorp), have indicated they realize deregulation is inevitable.

The latest move in what has been an acrimonious political fight was the Aug. 11 announcement of a new compromise proposal regarding deregulation, put together by a coalition including SCEcorp and the California Manufacturers Association. Governor Pete Wilson and several state legislators prompted the new development. The proposal is now the major one on the table, and a number of competing interest groups have begun negotiations to produce a memorandum of understanding that will provide the basis for any future policy.

What ends up happening in California is important because the state could provide a model for other states to follow as they move to deregulate the industry.

The trouble began in California in May when the state's Public Utilities Commission agreed on a plan to introduce retail wheeling--the direct transmission of power from a supplier to a consumer--into the state through an independently controlled, utility-owned central pool, or poolco. All power producers in the state would bid to sell their power to the poolco, which would then sell the electricity at that rate to consumers (plus a fee to cover transmission costs). The commission believed the plan would lower rates because power producers would have to compete for the poolco's dollars.

But the poolco plan was lambasted by a variety of industry, environmental and consumer groups, which said that the utilities would still be able to control prices under the structure of the pool. "It was, literally, a billion dollar giveaway for the utilities," said Don Fields, a political consultant who organized opposition to the plan.

The California Retail Association was one of the groups against the May poolco plan. According to Jenny Keehan, director of state government relations for the International Mass Retail Association, utility costs "rank between second and fifth in a retailer's cost structure." (IMRA has sponsored a one-day conference and formed a committee to study electricity deregulation, but does not yet have an official stance on the issue, Keehan said. "We just want to make sure any changes that are made are beneficial to the mass retail industry." .

Bill Dombrowski, president of the California Retail Association, said he had many problems with the original poolco plan. For example, he said a retailer would not have been guaranteed the right to aggregate its electricity needs to negotiate better prices with power producers. Dombrowski said a company like Safeway, a grocery chain and the largest electricity user in California, should be able to act as a single customer in order to secure a lower price for electricity to power its stores.

What Dombrowski and many other groups want is called "direct access" retail wheeling, which would allow customers to bargain directly with suppliers to obtain their electricity. The power would be transmitted, for a mandated charge, over lines owned by investor-owned utilities IOUS). In this model, other power producers, such as wind generators and out-of-state utilities, would be better able to compete with the three major in-state IOUs.

The compromise makes the poolco, now called the Western Power Exchange, voluntary and allows for the gradual introduction of bilateral contracts between certain individual customers and suppliers until full and wide-open competition is reached at the end of five years. Thomas Higgins, vp of corporate communications for Southern California Edison, said response to the compromise has ranged from "cautious approval to strong approval, to a wait-and see attitude."

California isn't the only state moving toward deregulation. IMRA reported that at least 29 states are considering the issue. For example, in Rhode Island, a coalition that included utilities, consumer groups and businesses agreed in May on a set of guidelines for restructuring the industry in the entire New England region, where rates are also much higher than the national average. Massachusetts was the first state to act on that proposal when its Department of Public Utilities issued a comprehensive deregulation order on Aug. 17, forcing the state's utilities to allow competition within a certain time period.