California's Deregulation Woes

Feb. 1, 2003
Distributors could hold the key. With the bankruptcy of several California utilities said to be imminent and much of California at the mercy of out-of-state

Distributors could hold the key. With the bankruptcy of several California utilities said to be imminent and much of California at the mercy of out-of-state power brokers, the state of California is looking at plans to solve the current utility crisis.

While state lawmakers are trying to raise energy rates to keep utilities afloat, the state's energy power fund has been exhausted and California has had 15 consecutive days of a stage-three power alert.

The first problems appeared over the summer, as air conditioners started to crank up.

"We pay about $1,600 a month as a norm. It went up to about $5,600 in July (of 2000)," said Baldur Schindler, president of Beacon Electric Supply, San Diego.

During the summer months, the open market resulted in wholesale energy prices being multiplied by nearly 20 times in some areas.

Bill Durkee, president of Walters Wholesale Electric Co., Los Angeles, called San Diego County "one of the first truly deregulated counties in the entire country (for electricity)."

Besides prices going up, workdays are being cut short for some Los Angeles area businesses as power companies are mandating less usage.

Initially, 1998's deregulation in California released price controls, privatized power plants and made utilities primarily just distributors of power. But the unusually high demand for power led to exceptionally high rates. The present situation can be attributed to any number of parties: the utilities for not anticipating the jump in consumption, the state of California for expecting competition to lower electricity prices, power companies for not building more plants and consumers for not conserving. Depending on one's point of view, one or all of those factors resulted in a plague of power shortages and debt.

When officials realized what was happening to consumers, the state government stepped in and reissued price controls. The natural result was that the utilities went into immense debt as they absorbed the prices that the unregulated power companies were charging.

Distributors are seeing two sides to this: the negative costs of being a business owner and the positives of gaining business in energy-efficient products.

Like every other business in California, wholesalers are bound to start paying more for their electricity.

"Energy rates (went up) anywhere from 7 percent to 15 percent on businesses," said Eric Peters, chief financial officer of Gaines Electric Supply Co., Signal Hill, Calif. "It just increases the cost of doing business. We certainly can't pass it along to our customers. It's just another increase in expenses, and we can't make it up on the margin side so it hurts the bottom line."

Most distributors will not be able to pass the costs on because there could be competition looming outside of the state, or even in parts of the state currently exempt from the rate increases.

There are exceptions. Los Angeles, for instance, has its own public utility, as do some other cities like Anaheim.

Besides dealing with their own electricity rates, distributors have to cope with what their customers are going through.

"The only thing I have seen around here is: A) rates are going up, and B) I have customers who are on interruptible pricing schedules, so they have been told to shut their businesses down (periodically)," said Ward Ferguson, president, Madsen Electric Supply, Los Angeles.

The interruptible pricing schedules allow utility customers to pay reduced rates at the quid pro quo of being asked to shut off all power at times when the supply is low. Ferguson has a similar plan for his home air-conditioning unit. But since power had always been abundant in California, being shut off was never a concern.

"Up until last summer that never happened," he said. However, he noted that in December it happened approximately fifteen times in some of his customers' factories.

If customers aren't operating their assembly lines, they certainly aren't buying MRO electrical products such as lamps and replacement parts.

The last, and somewhat positive, way that power shortages have affected California distributors relate to customers' need to conserve.

With deregulation starting to actually affect consumers, there is suddenly an incentive for them to conserve. Home owners can react quickly when rates increase - to save money, they turn off lights and reset the thermostat. Companies need time to anticipate this change.

"The people who had the foresight to understand what was going to happen to their energy bills started working very quickly to get the demand down in the buildings they were either owning or leasing," said Walters' Durkee. "There's going to be increased demand for the products to get electric bills down."

With the price of electricity now affecting all levels of the market, consumers must save electricity to keep the demand down and thus reduce prices.

With fingers being pointed in all directions and no quick fix in sight, the pragmatic answer to California's electricity quandary could be found in the resourcefulness of the local electrical distributors.

As Durkee said, "Wholesalers can help the end user by going to their facilities and actually looking around ... looking at the lights and looking at where their buildings demand electricity and trying to get that down."

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