San Diego companies aren't the only ones getting shocked by huge hikes in their power bills. At least 75 major companies in L.A. County all customers of Southern California Edison have seen their electric power bills skyrocket over the last couple months, in some cases tripling over last summer.
Ironically, most of these companies signed up in previous years often at the encouragement of state or local officials for special incentive programs intended to reduce their power rates. Those programs also were designed to persuade companies to take advantage of what was then expected to be lower prices on the emerging open market created by deregulation.
Among the companies being hammered is CRM Co. LLC of Compton, which operates a tire recycling plant. Last summer, the company paid an average of $35,000 a month for electricity; this summer, the bills are coming in around $96,000 a month. "You have no idea what the magnitude of the rate hike is doing to us," said vice president Michael Harrington.
Not surprisingly, the affected companies are now looking for a way out of their power agreements, and lawmakers are scrambling to hold together the backfiring deregulation plan.
And all this is taking place before much of the L.A. market is fully deregulated. "What you're seeing now with these L.A. companies is likely a precursor of things to come when the L.A. market is fully deregulated," said Claudia Chandler, spokeswoman for the California Energy Commission, which tracks energy usage and sets energy policy guidelines.
Right now, Southern California Edison customers are in a transition mode, with the vast majority opting to stay with the traditional state-regulated rates. But those regulated rates are scheduled to disappear in the spring of 2002, leaving residents and businesses alike stuck with paying market prices, as their San Diego Gas & Electric counterparts are now doing in San Diego and southern Orange counties.
(Municipal power districts, like the L.A. Department of Water & Power, can choose to remain monopolies with regulated rates. The DWP, while it doesn't have to decide on the matter until 2003, may remain a monopoly, as advocated by the agency's General Manager David Freeman.)
Skyrocketing rates aren't the only problem plaguing many L.A. companies. Hundreds have been hit with tens of thousands of dollars in penalties after signing up for a peak-use power conservation program, in exchange for lower rates the rest of the year.
But it hasn't worked out that way. Many have been unable to cut their power to the agreed-upon levels and face stiff penalties as a result. A number of those companies are likely to withdraw from the program at the first opportunity, which comes up this November.
As the scope of the electric power crisis has become clear over the last couple months, state regulators and lawmakers have scrambled to come up with fixes. Proposals have ranged from rate freezes to scrapping the entire deregulation scheme. As the close of the legislative session approached late last week, numerous bills were on the table to deal with the crisis, although it appeared unlikely that any comprehensive overhaul would emerge before session's end on Aug 31.
Last week, the state Public Utilities Commission rejected a rate rollback for San Diego Gas & Electric customers, instead voting to cut rates for customers who keep their power usage below 500 kilowatt-hours a month. On Aug. 23, President Clinton earmarked $2.6 million for SDG & E; customers who can't afford to pay their electric bills.
And there is no relief in sight for L.A.-area companies caught up in what is essentially a classic supply-demand squeeze. Demand for electric power has surged in recent years as California's economy has revved up and become more computerized. Making matters worse, this summer is shaping up to be the sixth hottest in the last 100 years. On the supply side, no new power plants have come on line in California since the late 1980s, while the state's ability to draw on power from surrounding states has been sharply curtailed as demand in those states has also surged.
The result: Market prices for electricity have shot through the roof, leaving L.A.-area companies with contracts tying them to those market prices with huge power bills.Can't make ends meet
Two years ago, tire-recycler CRM was trying to decide whether to locate its plant in Compton or Atlanta. As an incentive to entice the company to locate here, Edison offered to enroll the recycler in a Public Utilities Commission program offering a sliding discount off the market rate posted on the California Power Exchange. The company was required to sign a seven-year contract, with a 25 percent discount for the first year, 20 percent for the second year, and so on.
Of course, two years ago, the Power Exchange, or PX, rate was much cheaper than the traditional regulated rate Edison would have charged CRM. "This was presented to us as a way to save money," said CRM's Harrington.
But now, CRM is getting burned. The market rate has exploded, pushing CRM's monthly bill to $97,000 for June and $94,000 for July, almost triple the year-earlier monthly bills. What's more, in an attempt to save money, CRM has been forced to reduce operations during peak afternoon energy use hours and forego business in the process. "We're faced with a $60,000-a-month increase in fixed overhead; we cannot continue to function with bills like this," Harrington said. "If this keeps up, we're going to have to close our doors here and move, most likely to Atlanta."
Both Harrington and Edison are trying to get a waiver from the PUC allowing CRM to return to Edison's regulated rate of $37,000, so far to no avail. (A PUC spokeswoman offered no immediate response, saying she was still checking into the situation.) According to Edison, about 40 other companies in its service territory are enrolled in this program, about half of them in L.A. County. Because they all signed seven-year contracts, they can't voluntarily opt out. Another 40 companies had been enrolled in another economic development program that included rates tied to the PX market rate. Unlike the PUC program, though, companies can opt out at any time, and about half have done so in the last two months, according to David Ned Smith, vice president of Edison's major customer division. Thirty more major local companies had signed up for another Edison program which subjects them to the PX rate; this program, though, was simply offered as a cost savings for major customers and had no additional economic development component. It grants discounts to companies that can cut power usage during peak consumption periods.Shunned power exchange
One of those companies is California Portland Cement, a cement manufacturer in Glendora. At its Mojave plant, rates are 30 percent higher than the regulated rate the firm would have been paying had it not chosen to participate. "Because we have such high demand for our products, our ability to alter operations has been limited," said Tom Lynard, director of purchasing for California Portland Cement. However, Lynard said, the open-rate contract only applies to its Mojave plant. Its other L.A.-area plants remain under Edison's regulated rates. "We saw the handwriting on the wall for tying deals to the power exchange and chose instead to stick mostly with the regulated rates," Lynard said.
But 30 additional Edison customers mostly mid-sized businesses thought they could navigate the open market and signed up on one-year contracts for what is known in the industry as "real-time pricing," based directly on the PX price. "These companies thought they could manage their own power usage well enough so they could save money relying on market rates," Edison's Smith said. "They are now seeing much higher prices." Many of these one-year contracts are now starting to come up for renewal, and Smith said he expects the majority of these firms to revert to the regulated rates. With so many big companies opting out of the programs, the entire rationale for deregulation to give big power users a chance to cut their power costs by giving them access to an open market and competing power providers is now being questioned. "Everybody perceived the Power Exchange as being a price reducer, and that was the basic premise," said Arthur O'Donnell, editor and associate publisher of the California Energy Markets newsletter. "A lot of people made a miscalculation. They failed to anticipate that the Power Exchange price could go up." As a result, O'Donnell expects companies to turn more and more to fixed-price contracts to avoid the volatility of spot market prices. But companies will have to be prepared to pay a premium for such stability, said Dan Nix, deputy director of the energy information and analysis division of the California Energy Commission. "After what they've seen this summer, many firms will be willing to pay slightly higher prices in return for price certainty," Nix said. "It will allow them to budget their electric bills."Feeling the heat
Both Nix and O'Donnell said it's too early to predict exactly what will happen when full deregulation is slated to hit in the spring of 2002. For one thing, they said, there may be significant legislative and regulatory changes to the entire deregulation scheme, especially if power prices spike again next summer.
Meanwhile, another power program not directly tied to the open market is also coming under fire. Some 1,700 Edison customers all major power users are on what is called an "interruptible power" program. These companies voluntarily made contractual commitments to reduce in their power usage when called upon to do so by the Independent System Operator, the statewide entity charged with ensuring reliable power supplies under deregulation.
In exchange, the companies receive a 20 percent discount from the regulated power rate. The power cuts are required when the ISO declares a stage-two emergency, when statewide power reserves dip below 5 percent of total available power on the grid. There have been 14 such emergencies declared so far this year, up sharply from just one last year and four in 1998. But there is a catch for those companies participating in this program, besides the obvious need to make do with less power on very hot days. If, for some reason, a company can't meet its agreed-upon power cuts, it gets hit with steep penalties. What's more, a company now in the program can't opt out until November, the so-called "enrollment" month.
That's exactly what has happened six times so far this year to one building owner in the L.A. Airport/El Segundo area. "We've been hit with penalties that total in excess of $100,000 for our buildings," said a spokeswoman for this building owner, who did not want to be identified. Edison's Smith said he expects many if not most of these 1,700 companies to opt out of the interruptible power program in November.
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