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Spencer Michels reports on California's plan to bring competition to the power industry.

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SPENCER MICHELS: Sometimes it seems our lives are measured out in kilowatts. We rely one electricity to supply our basic and not so basic needs, and we pay for it. Northern Californians, in fact, pay 50 percent more than the national average. They, like most Americans, have to buy it from a monopoly, they have no choice. In this case the supplier is Pacific Gas & Electric Company. But now all that is changing as competition comes to the electricity business in California. Daniel Fessler is president of the State Public Utilities Commission which regulates public utilities.

DANIEL FESSLER, California Public Utilities Commission: What we're talking about is admitting competition into the generation of electricity and saying that that's going to be a more efficient means of putting sustainable downward pressure on costs than was regulation.

SPENCER MICHELS: Under regulation, the Public Utilities Commission, or PUC, set the rates and rules for Pacific Gas & Electric. The regulator also guaranteed PG&E's stockholders a fixed rate of return on their investments. In return, the utility had to meet all power demands and provide service to all. Fessler says that system didn't work very well.

DANIEL FESSLER: The fact is that government, in the final analysis, is not a very good watchdog of these matters.

SPENCER MICHELS: So, in a move that 46 states are contemplating and a few already experimenting with, the PUC and the California legislature changed course. They made it so customers will be able to buy electricity the way they now buy long distance telephone services. They altered the way PG&E will operate and promised lower electricity rates. Before deregulation, PG&E generated power at plants like this old natural gas-fueled facility on the shorts of San Francisco Bay. Under the new rules, it will have to sell off half of those plants to competitors. In the old days the public utility would transmit its electricity over high voltage lines. Now, a non-profit operator will handle transmission. The only part of the business that stays the same is distribution. The utility will continue to bring electricity into area homes and businesses. PG&E's president, Robert Glynn, says he knew the monopoly had to come to an end someday and the company is prepared to adapt.

ROBERT GLYNN, President, Pacific Gas & Electric: We don't intend to be road kill in this transition. We intend to be out in front. And part of being out in front is getting through the transition.

SPENCER MICHELS: PG&E, a $9 billion a year utility, may have to pay a price, at least at first, to comply with the new law.

ROBERT GLYNN: It is going to cost us some money. There's no question about that. Where we have a lower stock price today than we did a couple of years ago, we have a lower dividend than we had a year ago.

SPENCER MICHELS: With PG&E forced to sell power plants in California, it is buying and building power plants elsewhere in the country and world to compete in an increasingly deregulated market. In California, the utility's new competitors will be independent power producers, like the owners of this new $250 million power plant in Crockett, North of San Francisco, which also provides steam to the sugar refinery next door. Such privately-owned facilities already provide 20 percent of California's electricity, but they sell it to the big utilities, which under federal law must buy it. Now, however, efficient, state of the art plants like this using natural gas, which has declined in cost, will be able to sell their inexpensive power directly to small customers. Greg Blue is regional manager for Desk Tech, a part owner of the Crockett plant.

GREG BLUE, Independent Power Producer: We see a much broader market now if we can due to deregulation actually sell to industrial customers, perhaps residential customers, small commercial customers.

SPENCER MICHELS: Why is that good for you? You already are selling all the power you're producing.

GREG BLUE: Well, we want to sell more power. We want to build more power plants. We are the competition. We will be competing with the utility for the end-use customer.

SPENCER MICHELS: So too will be producers of power generated by the wind or geothermal sources under the ground. These producers of electricity joined with the entire industry to lobby for deregulation. But independent electricity producers like these will rush to serve mostly big energy users or affluent communities, where they can make more money, according to consumer advocate Nettie Hoge. She is executive director of The Utility Reform Network, TURN.

NETTIE HOGE, Consumer Advocate: We don't have enough consumer protections in this legislation as it currently stands to provide the folks that are at the bottom of the heap, when the cherry picking is done, are going to get reliable and inexpensive energy.

SPENCER MICHELS: Hoge is also concerned about projects like PG&E's Diablo Canyon nuclear power plant. As part of the restructuring deal, utilities will be able to collect money for five more years to help pay off such inefficient and expensive plants that they built in the past. These investments, which totally nearly $30 billion, are called “stranded costs.” PG&E's Glynn argues that as a regulated monopoly, his firm had no choice but to build expensive facilities; therefore, the company should be compensated.

ROBERT GLYNN: We didn't have a choice to open a store in this neighborhood and close a store in other neighborhoods. We had an obligation to serve everyone who showed up, and we've done that.

NETTIE HOGE: We don't think that they're entitled by, you know, decree or God-given right to 100 percent of what they called a stranded investment.

ROBERT GLYNN: We're recovering nowhere near 100 percent of our costs, although some say we are. As I said, on our nuclear power plant, which is a large source of transition costs, we're recovering about 40 cents on the dollar on a forward-looking basis. That's hardly full recovery.

NETTIE HOGE: We're going to dog the utilities at the PUC until the end of the--you know--2000 decade to make sure that that money, the stranded investment, is not overpaid by us.

SPENCER MICHELS: Industry insiders say that if the utilities had not been granted substantial repayment, they never would have gone along with deregulation. Large electricity users, like steel and cement companies and agriculture as well, say the eventual savings will be worth paying off the utilities now.

BARBARA BARKOVICH, Electricity Consultant: I mean, I think if you go to meters and--

SPENCER MICHELS: Barbara Barkovich, a consultant to those large consumers, foresees a 30 percent price drop in five years for her clients.

BARBARA BARKOVICH: For them, electricity represents 15 to 25 percent of their total production costs. And in an intense internationally competitive market, to be able to save some significant percentage on something which is such a big percentage of your total operating costs, can make a big difference in terms of being able to stay in business and continue to provide jobs, for example, in California.

SPENCER MICHELS: The legislation calls for an immediate 10 percent rate reduction for small electricity users effective in 1998. After five years, the market forces are supposed to reduce rates even more, but consumer advocate Nettie Hoge is not convinced.

NETTIE HOGE: After 2001, however, the regulatory grip of the PUC and the legislature will be off, and all bets are off. Rates will change, depending upon "the market". Our analysis indicates that small customers will not do well in this new market unless they can aggregate their demand. That means get together and buy like a buying cooperative or something, because we don't have any market power.

SPENCER MICHELS: How consumers, large and small, fare under utility deregulation in California will be watched carefully as other states, especially those with high electricity costs, consider bringing competition to the power industry.

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