III. Will San Diego's Chequered Energy Past Return?

Since 1989, SDG&E has boasted the lowest electric rates among the three investor-owned utilities in California. However, within the next three years, UCAN projects that local electric and gas rates will become the highest in California and among the highest in the Country. Between 1972 and 1983, SDG&E electric prices soared by 318% -- more than any other American locale with the exception of Hawaii. At one point, San Diego rates were 56% higher than its neighbor to the north, Southern California Edison, and 84% higher than Pacific Gas & Electric. In response, state regulators and local government developed a number of initiatives geared at reducing the region's reliance upon oil and increasing energy options. The result: prices dropped to the lowest in the State for a decade. During that period, SDG&E was able to increase its profits and reduce its obligation to buy energy for its customers. In the coming years, the forecasted energy demand will outstrip the region's ability to buy energy. In the market-based deregulated model of energy, prices will go up for San Diegans.

The era of regulatory protection from electric price uncertainty is over. In the previous era of regulated prices, San Diegans could expect regulatory intervention to make sure that the increase in demand did not force prices up. However, beginning in July of this year, as the shift from a regulated to a deregulated industry began, regulatory protection disappeared. The forces of the market now dictate electric rates. Already, in the month of July, overall bills for customers increased by 10%, reflecting the summer increase in rates.

UCAN projects that the increase will be substantially higher in 2000, especially if a normal weather pattern returns to San Diego next year.

Since 1989, SDG&E has benefited from some of the lowest electric rates in California, but by 2003, UCAN projects that San Diego electric and gas rates could well be among the highest in the Country. The problems facing San Diego are acute. They are only beginning to be witnessed today and absent immediate action, the problem will become more pronounced over time.

In theory, a competitive market is supposed to send signals to increase supply, thus matching demand. But San Diego is not positioned to take advantage of that market mechanism. In fact, of all the regions in California, San Diego is among the most poorly positioned to reap benefit from the restructured energy markets. As will be discussed below, most customers lack choices of supply or the ability to read market signals. Thus, they continue to be subject to SDG&E's administration of energy services.

But first, some history: San Diego hit its energy nadir in 1983. A series of electric rate shocks rocked San Diego electric bills in the early 1970s as OPEC began flexing its global muscle. San Diegans rudely discovered that its local utility was overly dependent on fossil fuel for its power generation and when oil prices skyrocketed, San Diego ratepayers paid dearly. Over an 11- year period, SDG&E electric prices soared by 318% -- more than any other American locale with the exception of Hawaii.

This history is important in understanding the gravity of the current situation. California's 1996 restructuring law removed many of the regulatory checks over the electricity market which were used in the 1970's and 1980's to protect consumers from electric price spikes. When rates increase now, the "market" will be expected to respond instead of regulators.

In the 1980s, regulators developed a number of initiatives geared at reducing the region's reliance upon oil. They permitted SDG&E to extend its transmission lines to the Southwest to enable the utility to purchase lower priced electricity and import it to San Diego. They blocked SDG&E's attempt to build its own nuclear power plant (Sundesert) and instead encouraged it to co-invest in a large-scale nuclear power plant built by Southern California Edison at San Onofre. It also urged the company to invest in energy efficiency, and to reduce customer demand for power. Regulators also scrutinized SDG&E's rate requests and ordered rate reductions. The PUC harshly criticized SDG&E's contract procurement practices and pushed the company to rely more on short-term energy purchases. By 1990, San Diego's electric rates had dropped from the highest to the lowest among the state's three large investor-owned utilities.

Similarly, local action had an impact on energy rates. The San Diego community mobilized and pressured the utility and regulators to rescue San Diego customers and the region's economy from "death by electrocution". A series of County and City-led efforts to articulate an energy strategy led to recommendations; many of which were formulated by and embraced by SDG&E itself.

While SDG&'E's rates still remained about 130% above the national average in the 1990s, its rates were 10% below Pacific Gas & Electric's and 12% below those charged to Southern California Edison's customers. However, during this same time period, SDG&E made few efforts to increase the region's ability to generate or import more power. Rather than building new capacity or offering comprehensive efficiency planning to address growing electricity demand, SDG&E sought incentives to delay building any more plants and relied on purchasing its power instead.

All of these strategies were accompanied by self-serving reforms. For example, SDG&E fought for a controversial new Performance Based Ratemaking (PBR) scheme that freed the company from regulatory oversight in exchange for a promise to keep rates low. Ignoring the warnings of consumer groups, the CPUC approved the new performance based rate-setting plan. The result was immediate. SDG&E's annual net income soared by $22 million. At the same time, the performance based rate-setting scheme discouraged SDG&E from investing additional monies into upgrading the electric system or preparing for the impending energy crunch. As a result, demand for electricity rose while supplies remained stable, further increasing SDG&E's revenues and profitability.