II. Overview

Assembly Bill 1890. Passed in September, 1997.

Section 1 (b) It is the intent of the Legislature to provide the legislative foundation for transforming the regulatory framework of California's electric industry in ways that meet the objectives stated in subdivision (a). It is the further intent of the Legislature that during a limited transition period ending March 31, 2002, to provide for all of the following . . .

(2) An immediate rate reduction of no less than 10 percent for residential and small commercial ratepayers . . .

(4) An anticipated result through implementation of this act of a subsequent, cumulative rate reduction for residential and small commercial customers of no less than 20 percent by April 1, 2002.

Assembly Bill 1890, the legislation responsible for California's electric restructuring experiment, pledged a reduction of no less than 20% in customers' rates by 2002.

The reality of the situation indicates that San Diego electric rates for many customers will more likely be 20% higher rather than lower.

As shown in the graph on the next page, SDG&E's average rates have dropped by only 3% since the end of the rate freeze. For residential customers, the current market rates dictate a 3-4% increase over the rates that were in place prior to the beginning of electric restructuring.3 This does not bode well for residential customers. Moreover, rates for local governments, businesses, industry, and businesses will be subject to rate increase pressures.

SDG&E RATE COMPARISON BEFORE, DURING, AND AFTER RATE FREEZE

This graph demonstrates the negative impact of electric deregulation on San Diego consumers. 1999 industrial calculations assumes 4.0 cents /kWh average commodity price for electric energy. This price has fluctuated between 3.5-4.5 cents since the rate freeze was lifted in July, 1999.

San Diego is in deep energy trouble. San Diego's unique geography, the politics of natural gas and electricity, and the impacts of the state's deregulation of electricity will lead to higher, not lower, electric costs for San Diego. Despite promises that electricity deregulation would reduce electricity by at least 20%, the prices have not dropped in San Diego.

The first foreshadowing of things to come came when San Diegans were hit with summer rate increases of 10% in July of this year. As will be explained, electric prices will continue to rise unless the San Diego community formulates policy decisions that address the underlying economic and political forces causing these price hikes.

At the moment, this problem is unique to San Diego. The transition from a monopoly electric power generation system to a more market-dominated industry has been largely completed in San Diego. The over-priced San Onofre Nuclear Generation Stations have been effectively paid off by SDG&E customers. The two other aging gas-fired power plants that serve San Diego have also been sold.

San Diego is the first region in the State and in the United States to emerge from the transition to deregulated competition -- no other utility will expose its customers to the unfettered prices of an electric market before 2001.
This report examines some of the problems of deregulation for residential and small business customers in San Diego, and begins the difficult process of applying public policy prescriptions to the problems identified. The lessons learned in San Diego will determine whether California's experiment with deregulated electricity results in more competition and better service, or a consumer nightmare of a stronger unregulated monopoly that is accountable to no one.

San Diego's situation has some unique elements. For instance, demand for electricity has grown 33% in the last five years with SDG&E predicting another 15% increase within the next five years. SDG&E's previous energy consumption forecasts were shattered by an insatiable demand for still more electricity. It is likely that current demand projections will fall short of the region's real energy demand.

In the last two years, a combination of unexpected growth in electricity demand and the end of the electricity generation glut in the Western states has resulted in more expensive power, yet few new competitors have entered the market.

Textbook economics would dictate that new electric generating companies would move into San Diego to take advantage of rising prices. But they haven't and they won't. As San Diego's population grows, there is less and less space available to build large-scale power plants locally. Though one company has announced its intent to build a plant in San Diego, many have stated that there are no feasible locations. Prices would have to rise significantly for new central power plants to locate in the region.

It will not be easy for the rules of classic supply and demand to operate in San Diego. The region is also at the mercy of regulatory foot dragging in developing the new rules for a competitive energy market in California. Numerous essential decisions about pricing, congestion, metering, default service, interconnection standards, emissions standards, and other regulatory matters have yet to be resolved, and they are not likely to be resolved for many years.

But even if deregulation had been overseen more effectively, San Diego consumers would still be compromised because SDG&E and its Fortune 500 holding company, Sempra Energy, have a figurative stranglehold on the local energy market. Also, San Diego -- the third largest metropolitan region in the state -- can be accurately described as a "classic load pocket". This is the equivalent of an energy cul-de-sac, geographically isolated and vulnerable to "bottleneck" problems. Here are some of the factors contributing to the emerging San Diego electricity and gas bottlenecks:

• The absence of a viable competitive retail energy services market;

• A single monopoly natural gas pipeline owned by SDG&E interests;

• Only two electric transmission lines connect San Diego to regional and statewide transmission lines and both are owned by SDG&E interests;

• The lack of available generation sites located near SDG&E transmission lines within the county.

• Restrictions on air pollution emissions in the San Diego air basin.

• SDG&E's failure to utilize energy efficiency and demand-side strategies more effectively;

Combine these factors with the anticipated increased costs for the "must-run power" plants scheduled to occur in 2001, and it is apparent that San Diego gas and electric rates will be among the highest in the state within three years.4
New large-scale electric generators will not likely locate in San Diego any time soon. And even if they did, the region will still be hamstrung relative to other regions throughout the state. There are solutions, but no easy ones. Multi-dimensional problems require matching prescriptions. In light of the gravity of the impending crisis, three immediate actions must be taken:

Emergency Legislative Hearings
The Legislature should initiate interim hearings, with the technical assistance of the California Public Utilities Commission and the California Energy Commission, to draft legislation creating a pilot five year retail competition law aimed at increasing consumer choice, accelerating deployment of advance technologies in distributed energy resources and reducing arbitrary access charges imposed on energy service providers who compete with SDG&E, PG&E, and Edison;

Additional Scrutiny of SDG&E Line Construction
Efforts by SDG&E and the state Independent System Operator to build expensive transmission line projects to allow for import of electricity must be suspended until it is shown that lower-cost distributed resources can not be used to address San Diego's energy needs.

Immediate Convening of an "Energy Summit"
Local government agencies should reconvene a process by which it examines the region's energy options and takes action to promote energy innovation and low-cost solutions to the problems before it.

San Diego has a choice: it can let an increasingly unregulated monopoly effectively dismantle consumer protections or it can lead California into an era of innovative new energy technologies, increased competition, and lower electric prices. Turning the emerging energy crisis into an opportunity to lower prices and strengthen the economy will take foresight and resolve.

As will be explained in Section III, there are specific actions that local and state leaders can take to prevent San Diego's return to the electric price shocks that plagued the region in the 1970s and 1980s.