A high-stakes showdown looms this week over the right of major industrial companies in California to choose their own power providers.

The California Public Utilities Commission is set to vote June 28 on a measure that would prohibit such choice for large customers, a long-anticipated move that would essentially force those companies to pay higher-than-market rates for their power for years to come.

"If the PUC goes ahead and enacts this ban, the financial consequences could be severe," said Leslie Spahn, a lobbyist for the Building Owners and Managers Association. "Already building owners are being hit with electricity rate increases well in excess of 50 percent. This would lock them and thousands of other businesses into those high rates, even if market rates come down in a year or two."

A concurrent legislative effort to reinstate the right of choice for large customers also faces an uphill battle in the face of concerns from top state officials and Wall Street.

Business groups have been lobbying to save the right to choose power providers since legislation passed earlier this year allowing the PUC to suspend that right. That legislation was part of a larger package authorizing the state to issue $10 billion in bonds to reimburse the state for its power purchases.

A bill that would have restored the right of businesses to sign contracts with third-party providers a process known as direct access failed passage in March. Since then, business groups have focused their efforts on the PUC, trying to convince the agency staff and five-member commission not to follow through with the direct access prohibition.

PUC staff backs suspension

But their efforts were dealt a severe blow on June 14, when PUC staff counsel recommended moving ahead with the suspension of direct access. The reason: it would inhibit the ability of the state Department of Water Resources to recover payments for the long-term contracts it has recently signed. The DWR has spent billions of dollars buying power for insolvent utilities Pacific Gas & Electric and Southern California Edison since the beginning of the year.

There is not unanimous support on the PUC for suspending direct access. One of the five commissioners, Richard Bilas, has issued an alternative recommendation that would allow for direct access. But Bilas is a Republican (appointed by former Gov. Pete Wilson) on a commission controlled by Democrats and even business lobbyists concede he is unlikely to sway his commission colleagues.

Should the PUC follow through on the staff recommendation, the suspension would go into effect on July 1, unless the state Legislature intervened. Whether existing direct access contracts major power users hold with Enron Corp. and other power providers would be abrogated is unclear in the staff recommendation.

In the hopes of seeking a legislative remedy, lobbyists from the California Chamber of Commerce and the California Manufacturers Association are participating in marathon negotiations convened by Assembly Speaker Robert Hertzberg. The purpose of the negotiations is to come up with a rescue package for SCE, which racked up debts approaching $4 billion before the state stepped in to buy power.

The negotiations may also lay the groundwork for the structure of the state's electricity marketplace once the current crisis is over. "The Speaker favors setting up a system where residential users and small businesses are returned to the old regulatory system, with all of its protections, while large users would be free to enter into direct access contracts," said Hertzberg spokesman Paul Hefner.

Bearing the brunt

However, under such a plan, major business power users would pay a hefty price: they would bear much of the burden of Edison and PG & E;'s $9 billion in debts. Hefner said that debt could be recovered either through "exit fees" levied on those businesses that leave the state grid to enter into bilateral contracts with third parties or through a uniform charge on all major business customers.

Of course, an excessively high debt recovery charge might very well prompt business groups to drop their attempt to reinstate direct access.

What's more, there is already considerable opposition in principle to any legislation that includes direct access. One of the chief opponents is state Treasurer Phil Angelides, whose support of a statewide public power authority has increased his political standing.

Angelides sent a memo detailing his opposition to direct access to state legislators on June 12. In the memo, he said that unless there are stringent controls placed on the ability to sign third party contracts, "the remaining ratepayers (generally small commercial and residential users) would be left to shoulder a disproportionate share of the costs incurred by the state Department of Water Resources on behalf of all existing ratepayers."

Angelides also indicated that Wall Street has concerns about allowing direct access. Bondholders looking at buying into the state's upcoming multibillion dollar bond offering to reimburse state coffers for the purchase of power might not get repaid in full if too many customers leave the grid for third party contracts, he said in the memo.

In the face of this opposition, California Chamber lobbyist Dominc DiMare said it's an uphill battle to restore direct access.

"It's 50-50 at best right now," he said. "If direct access is not restored, then the only choice businesses have to escape these rate hikes is to buy generators and essentially become self-sufficient."

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