Major businesses throughout California already nervous about the impact of pending electricity rate hikes are up in arms over state legislation that could end their ability to sign contracts with outside electricity providers and leave them stuck paying high electricity prices locked in by the state.
The lock-in provision, buried in the massive $10 billion bond authorization signed into law in February, would allow the state Public Utilities Commission to ban such third-party contracts at its own discretion, effectively ending the state's experiment with competition in the retail electricity market. Business groups including the California Chamber of Commerce, the California Manufacturers & Technology Association and the California Retailers Association have banded together and are pushing for legislation that would ensure their members have the right to enter into third-party contracts with electricity providers, a process known as "direct access."
But last week, their effort was dealt a setback. A bill that would allow for direct access SBX1 27 by state Sen. Debra Bowen, D-Marina del Rey did clear a key committee.
But that bill would not institute two changes that business leaders consider crucial: taking away the PUC's discretion to end direct access, and reducing what could be prohibitively high "exit fees" that businesses must pay to the state if they opt to leave the power grid and sign contracts with third parties.
"This is of extreme concern to our members," said Jack Stewart, president of the California Manufacturers & Technology Association. "With the forthcoming rate increases, the state will be locking in high prices for our members for the next 10 years. If manufacturers have no choice but to shell out these huge payments for power year after year, they will be forced to shut their doors, move out of state or cut back their operations."
It was the CMTA back in the early 1990s that pushed for direct access because its members were paying rates for electricity up to 50 percent higher than in surrounding states. This, of course, was the initial pressure for the state's entire deregulation experiment that has gone so awry over the last year.
Now, state legislators are reluctant to open the door again for direct access, in large part because they fear a mass exodus of major power users from the grid would leave the remaining ratepayers and state taxpayers holding the bag.
Right now, of course, going to direct access is not very financially attractive, since the state is buying power at inflated wholesale prices and only passing on a portion of those costs to end users. But as business rates go up this summer possibly as much as 87 percent that calculus will begin to change.
And, if wholesale market prices go down in two or three years, as more supplies come on line, direct access will look even more attractive when stacked up against the long-term contracts that the state has locked itself into at an average price of 7 cents per kilowatt hour.Alarming scenario
If major power users did decide down the road to leave the state grid and sign long-term contracts with third-party providers, it would cut down on the state's revenue stream. And that prospect so alarmed Wall Street analysts that, back in January, as the state was cobbling together its $10 billion bond package, they told legislators that the bonds would need substantially higher interest rates if a stable revenue stream could not be guaranteed, according to Lawrence Lingbloom, staff consultant to Sen. Bowen.
So, legislators inserted language into the bond package restricting the right of power users to go to direct access, Lingbloom said. They left the actual decision in the hands of the PUC, so that body could weigh the competing interests of ratepayers, power providers and the state.
Business groups at the time were unhappy with that decision, but let it pass in the larger interest of getting the bond package off the ground. In return, legislators promised to go back and reinsert the right to direct access.
But now, legislators are insisting that businesses that leave the grid pay a so-called "exit fee" to reimburse the state for its power costs.
"Right now, business power users are shielded from market rates because the state is paying millions of dollars each day for power on the wholesale market and only passing along a fraction of that cost to ratepayers," Lingbloom said. "These same business power users want the right to leave the state grid when it suits them, when market prices are lower, without fully compensating the state for its subsidy. That's just not fair. Businesses cannot be allowed to get totally off the hook and leave other ratepayers to pick up the tab."
But business leaders argue that, if they can find lower-priced third party contracts, they should be allowed to sign those contracts without paying a fee so exorbitant that it essentially wipes out all the potential savings.
"What the Legislature is doing is patently unfair. It is asking businesses to pay for contracts the state enters into, regardless of our ability to negotiate better contracts for ourselves," said Robert Bahl, western region vice president of engineering for Marriott International, which manages or franchises 33 hotels in L.A. County and 157 statewide.Seeking 'reasonable' fee
Bahl and other business leaders say they are not opposed to paying an exit fee, so long as that fee is "reasonable." And they cite the relatively dismal track record of direct access during the first two years of deregulation as proof.
"About 20 percent of my members signed up for direct access when deregulation started, but only a handful stuck with it because the 'transition charge' that the original deregulation bill required to be placed on bills was so high that it made it unappealing for people to make the switch," said Bill Dombrowski, president of the California Retailers Association. "And this 'exit fee' they want to impose is just like that 'transition charge.' It will discourage people from trying direct access."
The association represents major retail chains like Macy's, Robinsons-May, Sears Roebuck & Co., Ralphs Grocery Co. and Vons.
At last week's hearing, the Senate Energy, Utilities And Communications Committee that Bowen chairs did make a concession: It agreed to allow the exit fee to be paid in monthly installments along with power bills, instead of requiring a single, up-front charge. But the committee held firm on the idea that the exit fee must cover the entire difference between what the state was paying for power on the wholesale market and the price it was charging to retail customers.
Following what is expected to be an intense round of negotiations, the Bowen bill is slated to go before the Senate Appropriation Committee within the next two or three weeks.
For reprint and licensing requests for this article, CLICK HERE.