Old Energy Ideals, New Revolt

California looks to protect consumers from 'stranded costs' of poor investments.

When she saw a 10 percent rate reduction in her March utility bill, Dorothy Pollock lit up like a light bulb. But looking closer, she noticed her bill could actually become larger. The fine print showed a 13 percent increase to finance the "cost associated" with her 10 percent reduction.

"I had to pick myself off the floor," says the commercial real-estate appraiser. "Not only was my rate reduction a fraud, I found out I am helping to bail out decades of bad investments by utility companies in nuclear-power plants I never supported."

Ms. Pollock is part of a new voter rebellion under way in the Golden State that could eventually help redefine strategies in Congress over how to deregulate the $250 billion utility industry. As several states begin to dismantle decades-old systems in which large, monopolistic utility companies are forced to compete with dozens of smaller companies - 14 states have already passed plans and 36 more are on the drawing boards - all eyes are on California for lessons from a rollout plan begun last week.

"American citizens have been asleep at the wheel while some of these [deregulation deals] have been scripted by legislators and lobbyists," says William Armistead, a spokesman for Citizens for a Sound Economy, a 250,000-member Washington-based advocacy group.

Because a much larger percentage of household income goes to electrical power than to telephone service, Mr. Armistead and others note the new regulations will impact the average American family more significantly than the breakup of the telephone industry. Depending on whether utilities are allowed to pass on the huge costs they incurred since 1978, when federal law mandated they invest in alternative energies such as wind, solar, and nuclear, such impacts could average as high as $2,000 to $3,000 per customer over 10 years.

Rhode Island rolled out a plan last summer, and a Massachusetts law that went into effect last month is already the target of a November citizens' initiative. New York, Illinois, and Pennsylvania have pilot projects in place, while commissions in Arizona, Michigan, and New Jersey are moving ahead without legislation. But because of California's size, its history of setting precedent in public policy, and the current deregulation legislation that is already a model in other states, it is being watched closely.

"Citizens are getting their first inklings of what this massive and confusing transition will mean," says Armistead. "If California is any indication, we are going to see a prairie fire of rebellion coast to coast."

At issue here and nationwide, say observers, are the huge costs incurred by large utilities that invested in alternative energies. Utilities say such investments - now called "stranded costs" - were mandated by federal law during the energy crunch of the 1970s. They hold that losses incurred from such investments - about $200 billion nationwide, $48 billion in California - should properly be passed on to the consumer. Consumers say the utilities invested unwisely and should eat their own losses.

For her part, Pollock is supporting a citizens' initiative for the November ballot that will overhaul California's energy deregulation law. The law, AB1890, passed quietly in 1996 and has since become the model pushed by utility coalitions in other states.

The idea that made it attractive to politicians was the promise of a 10 percent cut in electric prices for small users. But as Pollock and other users have begun to find out, the state's three big utilities (Pacific Gas & Electric, San Diego Power, and Southern California Edison) are recovering their "stranded costs" (past investment debts) through "transition fees" and other surcharges levied as the price for choosing other power suppliers.

"While the California public wasn't looking, utilities cut a backroom deal giving themselves the bailout," says Dan Berman, energy expert and co-author of "Who Owns the Sun?"

CALLED Californians Against Utility Taxes, the citizens' initiative would reverse the "automatic bailout" of $28 billion, which authors are calling a tax. It would prohibit taxes and surcharges that would force rate payers to finance their own rate reductions. And it would ensure that all residential consumers and small businesses receive at least a 20 percent reduction in their utility bills.

"Whatever results from the California battle over stranded costs will be of supreme interest as other states look to grapple with deregulation," says Wenona Hauter, director of Washington-based Public Citizen. "Whichever side wins will likely become the trend elsewhere. It's as simple as that."

Utility industry officials have already begun to counter the California initiative.

"We feel the people behind this initiative are trying to depict 'stranded costs' as bad investments, which they are not," says Jim Owen of the Edison Electric Institute, an industry group in Washington. He notes that federal laws passed in 1978 - the Public Utilities Regulatory Policies Act - required utilities to invest in alternative energies. "It is fair and reasonable for California utilities to recover these costs," he says.

Correction

The statistics used in the article "IRS Reform: It's Not Over Yet for This Senator" (April 1, 1998, Page 4) were out of date. Newer figures from the Internal Revenue Service show that during the 1998 filing season, the agency is receiving 538,000 calls a day, of which 91 percent are answered and 7 percent - about 37,600 - receive incorrect information.