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Subsidizing Small Ratepayers Actually HURTS Residential Energy Consumers

by Steve Peace, published

Residential Energy Rates CaliforniaIn the aftermath of the Enron-driven California energy crisis California politicians took powder away from the California Public Utility Commission by freezing rates for the smallest residential ratepayers.

It was a natural reaction by a Legislature stung by criticism over decisions they had nothing to do with and were powerless to prevent. The elderly, apartment dwellers, the smallest of single-family homes all seemed the natural constituency to protect as the state reassumed a regulated structure designed to recover over time the costs incurred during the onslaught.

It would be almost a decade before Federal Courts would complete a streak of wins for California in legal challenges demonstrating that an Enron led coalition of energy companies, federal public power companies, and the Federal Energy Regulatory Commission itself had all broken the law and were responsible for the billions of dollars in over-charges to ratepayers in California and other Western states.

With that outcome still unknown, the Legislature braced for the possibility that utility companies and the state would have to recover costs from ratepayers over time. Freezing small residential rates was a crude way of protecting the most vulnerable ratepayers and the legislature from a rerun of PUC policymaking.

Now, we find ourselves well past that transition, but still living with the legacy of the legislature’s decision to protect itself from the PUC and a fixed rate hardwired into statute for “small” ratepayers.

But, what these ratepayers gain in lower utility bills they lose five, in some cases ten, times over in lower paychecks, higher taxes, and/or fewer government services.

Ironically, this is the same miscalculation that led to the PUC’s decision to go along with Federal pressure to deregulate (or “restructure”) in the first place.

This is because California’s mild weather means that, by comparison with other states, residential utility bills remain low even if the rate per unit of energy consumed is higher. But, this “weather advantage” is of no value to a manufacturing firm that must compete against out of state competitors for energy costs. In 1994, as a member of the State Legislature, I met California’s largest manufacturers and asked them a simple question: Do you want guaranteed lower bills or competition?

Their answer was an unambiguous “No. We want competition.”

I argued that this was an ill advised choice because we can simply change the regulated rate structure to subsidize manufacturers and it would make perfect sense for us to do this because it would only mean a few pennies in higher bills to residential bill payers. But, they had all drunk the Kool Aide.

Ultimately, others joined these “large consumers”. PG&E was the first utility to reverse its position and announce that it would negotiate for a “restructured” competitive rate system as demanded by the Federal Energy Regulatory Commission. When Southern California Edison dropped its opposition the writing was on the wall. In December of 1995 the California PUC adopted a Competitive Restructuring order and the Governor announced that the state would go forward without legislative action.

Throughout the 1996 session the legislature held over 200 hours of televised hearings. That a majority of the legislature opposed the PUC order there was no doubt. But, the Governor did not need the legislature – his PUC had full authority over utility rates. Ironically, the utilities and consumer groups alike sought legislation principally to hold the PUC to its own agreement. Each feared that the PUC would change the rules midstream on the deal that had been hammered out over three years of negotiations.

AB1890 was the result. A measure that adopted the PUC decision with three substantive changes: a temporary retail rate freeze for residential customers, protection for historical alternative energy and conservation incentives, and a governing board majority for the Independent System Operator appointed by California representatives.

When the PUC submitted the plan, as required, to FERC, the ISO provisions were rejected by FERC, which insisted on a “stakeholder” board. The other two provisions remained in place and the rate freeze served its purpose when the crisis hit by insulating residential energy consumers in PG&E and SCE’s territories from the soaring wholesale rates.

In San Diego, on the other hand, SDG&E had accelerated its exit from the rate freeze and customers, who had benefitted from lower rates for a year, suddenly were slammed by the highest electricity rate increases in history.

So, here we are again, in a struggling economy and a desperate need to create ways to bring manufacturing back to California. Start a conversation on the barriers to getting this done and you hear arguments ranging from taxes to regulation to employment law. But, the one issue that you will get no pushback on is that the simplest thing we could do is to take advantage of our mild climate and reduce energy rates to manufacturers by spreading the cost across the entire rate base.

Just as it was in 1994, it’s a no brainer. But, current statue essentially prohibits it because of the freeze on small residential energy customer rates. It’s a bait and switch because these are the very people who would benefit most by growing manufacturing and expanding the job base.

Put simply, if you could pay $1 more a month on your utility bill, but make $100 per month more in your paycheck, what would you choose? If the new tax revenue produced by manufacturers and their employees meant lower taxes for you, what would you chose?

These are real choices. We made the wrong choice in the 1990’s. We put our fate in the hands of the Federal government trusting them to enforce the rules. That didn’t happen. More than a decade later fictions persist even in the face of hard evidence.

If we want to be competitive against other states we have to deploy all of our assets. Our mild climate is the best thing we have going. The failure to structure our utility rates to take advantage of this is just stupid. But, doing the smart thing requires shooting straight with Californians about their combined roll as ratepayers, taxpayers, employees, and retirees.

Admittedly, telling the truth will make one vulnerable to the sound bite. But, there is nothing more significant that could be done for California’s economic health.

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