In June 2000, a wary nation watched as utility prices in California jumped from an average US$30 per kilowatt-hour to prices of $90 and up -- yet another stumbling block in California's much anticipated deregulated market. Manufacturers, the same group that forced the deregulation issue in California some six years ago, moaned, and individual customers rallied to fight the prices. Everyone wanted to know what went wrong, and how were the utilities going to fix the problem.
     
      The Reasons
      Many of the problems, however, were out of the hands of the utilities. One of those issues was the underlying increase in the cost of natural gas, the primary fuel used for generating power in California. "Many of you from other parts of the country have seen gas prices increase from $2 and $3 to $5, $10, $15 at a time," reported Gary Stern, director of marketing, monitoring and analysis with Southern California Edison (SCE), at the Investor-Owned Utility Economic Development Association Winter Forum in San Diego.
      But for California utilities, the situation was even worse. Due to limited capacity, the prices in California have reached $60 per billion BTU. "That's about 20 times what it was the year before," Stern said. "Today, gas prices have moderated somewhat. Most places around the country are paying in the $5.50 range. California still pays $22 for gas."
      As a result, the cost of power for California's deregulated market rose from $5 billion in 1998 to $7.4 billion in 1999 and $28 billion in 2000. In January and February, Northern California experienced rolling blackouts for the first time since WWII because there weren't enough utilities willing or able to supply the power during that period.
      Also adding to California's energy woes is the financial crisis in which utilities find themselves. Pacific Gas & Electric had undercollections of $6.6 billion as of December 2000, and the company defaulted on more than $1 billion in power obligations. SCE, too, had undercollections totaling $4.5 billion at year-end 2000 and defaulted on $700 million in obligations.
      The financial crisis and other market uncertainties discouraged new investment for generation plants to be built, leaving California to import much of its energy and again raising prices. Stern also noted that California regulations "don't allow you to build a plant around anything. So unless things change, the reliability crisis that we're facing in 2001 and 2002 will only get worse."
     
      Baby Steps
      Today, solutions are slowly coming round. The state has made efforts to streamline procedures in order to bring additional power online, Stern said. In the last couple of years, some utilities fought hard for forward purchasing rights (to buy energy in advance for use in times of need) instead of relying strictly on the spot market. Though the restrictions on forward purchasing are numerous, SCE saved its customers more than $800 million with the little amount of forward contracting it was allowed to do last year.
      California's situation also forces utilities to come up with innovative ways to manage its power load. SCE, for example, developed a program to pay customers who reduce their power consumption. "We'll pay them the market price of the power up to 20 cents for energy," explained Stern.
      Frank Urtasun, national public affairs manager with San Diego Gas & Electric, said that there will be a legislative fix to the energy crisis in California. "In fact, there already has been," he said. "Last year was election year, and people who had voted for regulation weren't doing well in the polls. So they came in with a Band-Aid and protected the residential customers with a 6.5 cent rate cap because they're the ones who vote."
      Urtasun added, however, that a lot of work is under way to correct the problem. "If you go to Sacramento right now, there is no other issue being considered," he said. "There are hundreds of bills out there being developed to resolve this problem. In my opinion, Bill 1890 [the deregulation bill] is going to be reversed for a long period of time. I don't know how long, but I do believe deregulation will, in fact, be set back for a long period of time."
      Many markets are looking at municipalization of utilities, and distributed generation has come to the forefront. At conference time, Gov. Gray Davis had also looked at some 30 sites for peaking plants.
      "We're not out of the woods yet, but the bleeding has stopped," said Urtasun. "By that I mean that the red ink that's bleeding from the utility companies has stopped for now, because the state is spending something like $40 million to $50 million a day to help."
      -- Tracy Heath