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Published on 02/09/1998 All articles from this issue

Electric industry restructuring: Will consumers benefit?

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By Faramarz Mark Yazdani

Other Voices

Some aspects of the electric power industry are being deregulated. Starting March 31 consumers will be allowed to choose among a number of registered electric service providers when it comes to buying their electricity. Will reliability suffer? Will rates come down? Who are the winners of deregulation?

First and foremost, it is important to remember that only the generation, commodity, part of the industry is being opened up to competition. PG&E will continue to be the monopoly in transmission and distribution of power. In other words, consumers will be able to choose among many electric service providers only as far as the electricity itself is concerned. However, we will continue to rely on PG&E to deliver that energy. As a result, reliability is not expected to suffer. We should be able to get the same reliable - or unreliable - service from PG&E as we have in the past.

With respect to rates, the state legislature and the California Public Utilities Commission have mandated a 10 percent rate reduction, relative to 1997 rates. Electric rates will be frozen at this level from Jan. 1, 1998, through 2001 for all residential and small commercial customers. You will receive this discount regardless of whether you stay with PG&E or choose an electric service provider.

If you are looking for additional savings to come from the service providers on top of the 10 percent, it does not look promising. The electric industry restructuring is designed such that the utilities, such as PG&E, will be able to recover the book value of all their existing investments.

The utilities have four years to complete the recovery of this so-called competition transition charge. It is only in 2002 that the utilities will allow the industry to become truly competitive.

Transition costs are to be collected until the beginning of 2002. The California utilities issued more than $7 billion worth of tax exempt bonds in December 1997 to help them recoup a part of their stranded assets in a lump sum fashion. The ratepayers will pay for these bonds over the next 10 years.

Looking at these cost categories, the only category open to competition is the commodity aspect, which is only 20 percent of the total cost of electricity. Whether you stay with PG&E or choose an electric service provider, you will have to pay transition costs, bond payments, transmission, distribution and public program charges. Furthermore, electric service providers in general don't have any better access to inexpensive energy than PG&E does. Enron, the most aggressive of the service providers, is offering two weeks of free electricity after you have been with them for one year. This translates into approximately a 4 percent discount over the year. If you figure out the math, an electric service provider offering a 5 percent discount off the energy-only price, is in fact offering you only a 1 percent discount off your total electric rate. I, for one, have decided it is not worth dealing with a number of service providers for a possible 1 percent saving on my bill.

The real winners of the deregulation game are the utilities. The deregulation process started in 1994 in response to consumer complaints that electric rates in California were 50 percent higher than the national average. The regulators thought they could reduce the rates by introducing competition. However, the utilities ended up getting a better deal under deregulation than they could get while being regulated. To see how well the utilities have done, one needs to only look at PG&E's stock price, which is close to its all time high.

Yazdani is the president of FMY Associates, Inc. of Los Altos, a consulting firm advising clients on financial matters with respect to utility regulation on electricity issues.