Can San Diego avoid higher electric rates?

Contents

II.Executive Summary
III.Overview
IV. Will San Diego's Chequered Energy Past Return?

1. Infrastructure Constraints
2. Generation Constraints
3. Electric Transmission Constraints
4. Gas Transmission Constraints
5. ISO/SDG&E Plans to Build Transmission Lines Will Have Profound impacts on Short and Long-Term Energy Needs

V.Why Competition can not be Relied Upon to Rescue San Diego

1. Energy Service Providers can't Compete with SDG&E
2. Utility Distribution Companies (UDCs) have Implemented Anti-Competitive Strategies that protect their advantage in the deregulated market
3. Creation of New Market Barriers Must be Avoided

VI.SDG&E's Self-Dealing with Sempra is Costing San Diego Consumers
VII.Potential Solutions to the Impending Energy Crisis

1. Steps that regulators must take
2. How San Diego can Take Control of its Energy Future

Tables and Charts

Impact of Deregulation: SDG&E Rates, Before, During, and After the Rate Freeze

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1984 Electric Prices: Disparities between SDG&E, PG&E and SoCal Edison

Predicted Demand: Too Much Demand, Not Enough Supply

The Sempra Holding Company: Diagram of Sempra's Affiliate Corporations.

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I. Executive Summary

The San Diego region is the first in California and the United States to be subjected to a deregulated electricity market. When it initiated energy restructuring, the State Legislature anticipated that all customers would reap rate reductions of 20% or more. This has not, and will not, happen for San Diego customers. San Diego's energy infrastructure, the politics of natural gas and electricity, the unexpected demand for power and the impacts of the state's deregulation of electricity will lead to higher, not lower, electric costs for San Diego in the coming years. And it will also create far more volatility and unpredictability of electric rates.

This report details the circumstances that make San Diego extremely vulnerable in this recently reformed energy market. Absent state and local action, the future of electric prices in San Diego may prove to be shocking to its residents.

In July of this year, San Diego abruptly ended its fifteen-year period of declining energy costs and adequate supply. For the last ten of these years, San Diego enjoyed some of the lowest electric rates in the state of California. This energy tranquility ended when SDG&E customers paid off the San Onofre Nuclear Power Plant costs, terminating the rate freeze that has maintained stable electric prices since 1996.

In the future, San Diegans will buy their electricity in an environment where rates are at least in theory dictated by the competitive marketplace. 1 In order to reap the benefits of that competitive market, customers must have meaningful choices and accurate information.

Unfortunately, the San Diego region is woefully unprepared to take advantage of this new emerging market. Some of the problems that face the region are:

The absence of a viable competitive retail energy services market - over 90% of San Diego customers and 60% of the overall load have few alternatives to SDG&E.

• The region is served by a single monopoly natural gas pipeline owned by SDG&E interests - would-be local generators have no choice but to buy natural gas from Sempra.

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

• There are few available generation sites located near SDG&E transmission lines within the county.

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

• Costs for existing generating plants are expected to increase due to expensive "must-run" contracts.

It is apparent that San Diego gas and electric rates will be among the highest in the state within three years.2
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 short, San Diego is in trouble. It is caught in a disturbing energy spiral of growing demand that exceeds all projections and inadequate supply to accommodate the regional demand. And unless the San Diego community can take proactive steps before the energy crisis hits, the problem is going to get worse.

The trouble is compounded by the fact that much of San Diego's energy policy is shaped by one holding company, Sempra Power. Sempra owns all of the gas and electric transmission lines in San Diego and is actively cornering the market on the new electric plants that might serve the region. And Sempra is subject to far less regulation than in the past, so its interests are even less aligned with those of San Diego than in the past.

This report explains the problems that confront San Diego. It also discusses the remarkable opportunities available to San Diego to turn a serious energy problem into a dazzling local success story. Through proactive steps, the region could be positioned to husband a new industry and help bring low-cost innovations in energy service to the market.

But, the question remains, How can does San Diego confront the problems that and collaborate on a practical solution?
UCAN calls for a San Diego Energy Summit to be attended by the region's governments, businesses, customers and energy companies to help shape a future vision by which we can avoid a San Diego energy crisis.