Socket to Me

There are many things Californians love about Colorado--the mountains, the skiing, affordable real estate. But while Californians have to visit or move here to sample those delights, there's one Colorado pleasure they may soon be able to enjoy without ever leaving home.

Colorado's relatively cheap power supply, a by-product of the state's plentiful coal reserves, has caught the eye of utilities in California. The power market there has been thrown open to competition, and dozens of would-be electrical suppliers are scouring the Western states, looking for cheap electricity to sell to buyers up and down the West Coast. One aggressive new utility known as New Energy Ventures recently scored a deal to supply hundreds of Ralph's grocery stores in Southern California with cheap power from Montana. Since electricity in California costs roughly twice as much as in other parts of the West--largely because of a disastrous investment in nuclear power--suppliers who can get their hands on cheaper power have the potential to make huge profits off the vast California market.

"They're out looking for power; that's the name of the game here," says Paul Klein, spokesman for Southern California Edison, which serves millions of people in the Los Angeles area.

This buying and selling of power over huge geographical distances would once have been impossible. While the technical capacity to move electricity around the nation's western power grid has long been in place, strict regulation of state utilities has, up to now, made it difficult to buy and sell electricity across state lines. In exchange for state-sanctioned monopoly status, utilities like Public Service Company of Colorado have been expected to focus on supplying the local market with reasonably priced power. Today in Colorado, everything from rates to the opening of new power plants still has to be approved by the Public Utilities Commission.

But a major political push by a well-funded lobby has now called into question the utility status quo. Under the banner of competition and the free market, a coalition that includes some of the biggest companies in Colorado is pushing to open up Colorado's power market to out-of-state utilities. In an important political shift, Public Service Company has also thrown its support behind utility deregulation, and the company now says it would be interested in selling power to other states. PSC will support a bill in the next session of the state legislature that would allow it to market power in places like California.

Earlier this year, Public Service merged with a Texas utility, Amarillo-based Southwestern Public Service, to form a new parent company known as New Century Energies. The two utilities made it clear the merger was in preparation for a deregulated electric industry and said they were combining so they could compete more effectively in the power industry's brave new world.

And at the national level, Colorado congressman Dan Schaefer has become the leading advocate of utility "reform." Schaefer has been beating the drum for power restructuring from Washington to California, and his outspoken stance has allowed him to tap into a mother lode of political contributions from energy interests.

Although boosters say that breaking up Colorado's monopoly power supply will benefit all Coloradans by bringing lower costs to consumers, consumer groups and rural electric providers question that claim. They say deregulation will benefit large commercial users with the clout to negotiate bargain rates, while homeowners and small businesses will see their electric bills rise--and watch the low-priced power they once took for granted flow to California.

"If you're deregulated, do you want to sell power to California for fourteen cents per kilowatt hour or to Colorado customers for seven cents?" asks Ken Reif, director of the Colorado Office of Consumer Counsel. "That to me indicates costs would go up here and down there. California is the black hole--it just sucks up power."

Reif says big companies are pushing for the right to buy blocks of power wherever they can find it--a practice often called "retail wheeling"--because they know they can get a volume discount from suppliers that could save them substantial amounts of money. However, if large local users like Conoco or King Soopers are allowed to opt out of the Public Service Company grid, Reif predicts that rates will rise for homeowners and small businesses. That's because those remaining in the power system will have to pay more to make up for the contribution of large customers that have been allowed to drop out.

"Who's going to make up the difference?" Reif asks. "Customers like residential customers that don't have any bargaining power. There will be winners and losers in a deregulated market between big customers and small customers, urban customers and rural customers."

Those pushing for power deregulation contend that the same market forces that have reduced the cost of long-distance phone service and airplane tickets can work magic on Colorado's power system. Now that many formerly regulated industries like trucking and telephones have been opened up to the marketplace, they vow to make power the next industry where suppliers will have to compete for consumer dollars.

"This is the last dinosaur," says Joan Ringel, director of Coloradans for Consumer Choice in Electricity, an industry group that's pushing for utility deregulation. "It's time for it to be set free."

But while most consumers have indeed benefited from deregulation of the airline and telephone industries (though Colorado's residential phone customers have yet to see significant competition to US West), Reif insists that comparing electrical power to those services is just plain wrong. He says potential breakdowns in the power system are far more worrisome than getting bumped off an overbooked flight or hearing an "all circuits are full" message when you try to make a long-distance call. If the power market is divided up among dozens of suppliers--all buying and selling power over thousands of miles--and consumers have to deal with different companies for power generation, transmission, repair and billing, Reif says the potential for devastating power outages will rise.

"The electrical system has become so reliable, people are surprised when the power goes out," he says. "Right now it's clear public utilities are responsible when that happens."

Reif points to the massive 1996 power outage that affected more than four million people in nine Western states as an example of the complexities of moving power over huge distances. If deregulation is approved, he says, Coloradans may soon be asking themselves a new question: Where were you when the lights went out?

If old-fashioned power providers are dinosaurs, as Ringel claims, Stan Lewandowski fears his customers are about to be sacrificed to big-money utilities with the appetite of a tyrannosaur.

Lewandowski is the general manager of the Intermountain Rural Electric Association, a customer-owned utility that serves 76,000 people spread out over 5,000 square miles from Elbert County to Fairplay. The IREA buys power from producers like Public Service Company and then resells it to its members.

With an average of six customers per mile of transmission line, IREA serves rural areas that larger utilities have traditionally shunned. In the small towns fed by IREA's lines, commercial customers like the local Safeway pay a large part of the total cost to run power lines to places like Deer Trail or Conifer. In Lewandowski's nightmare scenario, aggressive new energy companies will sign up all the Safeways in his service area, taking those revenues away from IREA and saddling the remaining residential customers with the cost of maintaining the system.

"If you allow the large industrial customers to leave, the residential users will take it on the chin," predicts Lewandowski. "They'll cherry-pick my large loads--the supermarkets, Martin Marietta, the factory outlets and the school districts. The only thing I'll have left is what nobody else wants. Nobody will be interested in providing power to Jefferson, Colorado. How could I serve those people? The costs would be astronomical."

Whereas huge companies like Coors and Conoco could easily bargain for power with dozens of different suppliers, the homeowners and small businesses that make up the majority of utility customers would have a harder time fending for themselves. Consumer advocates say that's the problem with the whole idea.

"We're very concerned that retail wheeling is an attempt by big companies to get a volume discount," says Dian Callaghan of the Office of Consumer Counsel, a state agency charged with representing consumers on utility issues. "Who's going to make up the difference? Those customers like residential customers that don't have bargaining power."

Callaghan says power can't be thought of as just another consumer item. "There's a reason we regulated electricity and gas for all these years," she says. "We thought it was an essential commodity. This isn't like walking into Target and buying something. It's much more complicated."

Utilities like IREA and Public Service already offer some discounts to their large industrial customers, but under Colorado law, they're not allowed to pass the cost of those discounts on to residential users. In a deregulated power market, such consumer protections would be history, and residential customers could be pitted against Fortune 500 companies bidding for power.

But advocates of deregulation like Ringel say there are ways for homeowners and small businesses to bargain for power in much the same fashion as large users. Under Ringel's scenario, a group of homeowners in Thornton could negotiate with a huge company like Houston-based Enron. The power would enter their homes through Public Service lines, but Enron would be the supplier.

Critics like Callaghan scoff at the idea of homeowner associations bargaining for electricity. "It's hard to get homeowners' associations to agree on having an ice-cream social," she says.

Ringel makes no secret of the fact that the members of her coalition--which includes such corporate powerhouses as Coors, Shell, Conoco and the Colorado Hospital Association--want the ability to shop for power from energy producers all over the country. But she insists that the benefits of competition would also extend to institutions like churches and schools, which could save enough money to add teachers or provide more services.

"If the school districts decided to aggregate, it would make them as big as the biggest industrial users," she says.

The main proponent of deregulating power in Colorado has been state representative Paul Schauer, a Littleton Republican. Schauer has been pushing the idea of opening Colorado's power grid to competition for several years, although so far he has not been able to get his legislation passed. The bill Schauer sponsored in the last session would have frozen Colorado electric rates for several years as competition was phased in. Schauer scoffs at the doomsday scenario painted by critics of deregulation, including the idea that Colorado's relatively cheap power will be snapped up by California utilities.

"I think it's a specious argument," he says. "If you open up the market, I think you'll find independent power providers who will offer power at a lower rate. As you begin to see the ability to move large amounts of electricity, there will be other players that can provide alternatives."

Schauer believes market forces will foster innovations that will make Colorado's low-priced power even cheaper and points to the deregulation of the telephone industry as an example.

"Under the old AT&T monopoly, you were guaranteed a black rotary phone with a dial," he says. "Now look at all the options people have. There needs to be competition and choice for electric-utility users as well."

The debate over deregulating power has created some unusual bedfellows. Rural conservatives have joined with unions representing utility workers in opposing the idea, and environmentalists have sided with big business to support opening the power market to competition.

Utility deregulation has been embraced most enthusiastically by the states with the highest-priced electricity, including California and several states in the Northeast. Legislators in states such as California, New Hampshire and Pennsylvania decided their consumers had little to lose from opening up the marketplace. Oddly enough, though, the main advocate of utility deregulation on the national scene hails from Colorado.

U.S. Representative Dan Schaefer, the Republican who represents Denver's southwest suburbs, chairs the House Subcommittee on Energy and Power. Schaefer has used his chairmanship to push for utility deregulation all over the country, sponsoring legislation that would require retail competition for the sale and generation of electricity in all states by the year 2000.

Speaker of the House Newt Gingrich placed passage of that bill at the top of the Republican agenda earlier this year, but fierce opposition from utilities and rural interests led many Republicans to have second thoughts, and Gingrich said he would postpone action on the bill until next year.

Schaefer's leadership on the power issue has surprised many in Colorado, who believe the state has little to gain from the proposal. IREA supplies electricity to thousands of residents in Schaefer's district, but Lewandowski says Schaefer has refused to let him talk at hearings on deregulation that the congressman has held around the country.

"I've tried to speak at his hearings, and he wouldn't let me speak," he says. "Some of the other people opposed to this weren't allowed to speak, either. I was there to try to talk to my congressman."

Lewandowski even flew to Chicago, Dallas and Atlanta to attend hearings, and he spoke at press conferences in each city. Like others fighting deregulation, he believes Schaefer has been influenced by the huge amounts of money flowing into his campaign coffers from the energy industry.

In the 1995-96 election cycle, Schaefer collected $145,674 from energy-related political action committees and people who work in that industry, according to a study by the nonpartisan Center for Responsive Politics in Washington, D.C. The group said that Schaefer collected more energy-industry money than anyone else in Congress that year, and the congressman's critics say that's why he's been pushing for electric deregulation.

"There's a reason why he's interested in this issue," says Lewandowski. "Dan didn't choose this issue; he was chosen."

Schaefer was out of the country and unavailable for comment last week, but spokeswoman Dana Perino says many of the congressman's campaign contributions actually came from utilities that are opposing his legislation. While Public Service is now advocating deregulation, many other mainline utilities around the country are opposed to changing what for them has been a very profitable status quo.

"Most of the utility companies that have supported Mr. Schaefer are actively working against his bill," says Perino, adding that those companies would contribute to any congressperson with influence over their industry. "This is a subcommittee that's working on an issue they care about."

She says Schaefer is well aware of Lewandowski and his criticism. According to Perino, opponents of deregulation were allowed to speak at Schaefer's hearings, but there wasn't time to accommodate Lewandowski. She believes Lewandowski has turned the issue into a personal vendetta. "He's gone crazy about this," she says. "He's using scare tactics and coming up with stuff that's not true."

Perino says Schaefer simply wants to give homeowners and small businesses the same ability to negotiate for discounts that large users already have. "Times are changing, and we have the opportunity to reduce costs to consumers," she says. "The notion that Coloradans don't stand to benefit is false."

Perino also dismisses the idea that Colorado power would flow to California, hiking prices here. She says new companies would emerge to serve the Colorado market and prices would inevitably drop. "Even Public Service prices will go down, because they'll have to compete," she predicts.

Proponents of deregulation often point to Lakewood-based natural-gas supplier KN Energy as a potential competitor to Public Service for electrical power. That's because technological advances have made it cheaper and cleaner to generate electricity with natural gas than with the coal that's burned in Public Service's network of power plants. But KN isn't making any promises. The fast-growing company is an important supplier of natural gas in the Rocky Mountain region and has made it clear that it wants to compete with Public Service in the retail natural-gas market. But the company has no plans to make the multi-million-dollar investments required to build a massive network of gas-powered electric plants.

"We're not in the electric distribution business at this time," says KN spokesman Mark Stutz. "That's a possibility on down the road." Stutz says his company's involvement in generating electricity has thus far been limited to developing small gas-powered turbines that can produce relatively small amounts of juice. The company is now working on installing such turbines to serve its headquarters building in Lakewood.

Electricity deregulation has garnered support from more than just big businesses looking for the opportunity to bargain for new power sources. Some environmentalists have also endorsed the idea, believing it will allow more people the option of buying power from renewable sources such as wind and solar energy.

"We care about energy efficiency and alternative energy," says Eric Blank, who works on energy issues for the Boulder-based Land and Water Fund of the Rockies. "Public Service has a wind source program, but other than that, they haven't done much."

Blank says that opening up the energy market would allow consumers to select power companies that produce energy in environmentally sensitive ways, even if that power costs more. One such company, Vermont-based Green Mountain Energy Resources, has been marketing power derived from renewable sources to consumers in California. It's still unclear how many Californians will be willing to back up their environmental convictions by paying more for power, but Blank believes the public can give alternative energy a boost by switching companies.

"Something like 70 percent of people in surveys say they'd be willing to pay more for clean power," says Blank. "With a choice, we think people would pick green energy."

With Schaefer's bill stalled for the moment in Congress, it seems the crucial decisions about electricity deregulation will be made at the state level. So far, the Colorado legislature has been skeptical of the idea, with rural lawmakers in particular resisting change. However, Public Service Company's decision to support deregulation could change the political equation when the legislature opens for business next month.

Public Service is working on a proposal it will offer to the legislature early next year. Jim Wexels, the company's manager of government affairs, says details of the company's plan still have to be worked out, but he emphasizes that PSC wants to have the right to sell electricity out of state.

"That's one of the reasons we support moving ahead in Colorado," he says. "California is opening up [to competition] January 1. If we defer this too long, we won't have an opportunity to serve that market."

Wexels says there are still many issues to be settled before Colorado's electricity market can be thrown open to all comers. Foremost is the matter of "stranded assets," an industry term that refers to past infrastructure costs utilities have incurred in building everything from power plants to electric lines. Utility companies say they have a right to be reimbursed for these costs as the market is opened up, and they usually lobby legislators to allow them to pass along those expenses to all utility customers who receive power over their lines--even those who sign up with competitors. "Stranded assets is one of the issues that will need to be addressed," says Wexels.

In California, the state legislature allowed utilities to pass along 100 percent of their stranded-asset costs. That means that in coming years consumers will be required to pay for all the past investments made by California utilities, including the cost of several multi-billion-dollar nuclear-power plants that have proven to be economic sinkholes. Most of those plants were built in the late 1970s, but it will cost billions to pay off their debt and phase them out.

The high-cost states that are now pursuing electricity deregulation most aggressively--California and several states in the Northeast--are the same states that made the heaviest investment in nuclear power.

After the first of the year, California homeowners will have the right to choose an alternate supplier for their electricity. But because of the charge for stranded assets--called a "deregulation transition fee"--most homeowners will see little change in their electric bills, even if they opt to change suppliers.

Consumer advocates in California are irate over the "transition fee," which they see as bailing out big utilities for poor investments that should be paid for by company shareholders. They say that since it was the companies that wanted to take the risk on nuclear-power plants, those same companies should have to pay for the ensuing fiasco.

"It's a $30 billion ripoff," says Nicolette Toussaint, spokeswoman for the San Francisco-based Utility Reform Network. "Basically the stranded assets are bad debts, the money the utilities put in generation plants they don't want. But bad management decisions are supposed to be paid for by stockholders."

Toussaint's group is working on a ballot initiative that would repeal the charge for the nuclear-power plants. And she is skeptical that the sweeping changes in California's power market will ever benefit homeowners and small businesses. "The action is not in serving residential clients," she says.

More than 100 new companies have signed up to sell power in CaliforCR>nia, but Toussaint says that only two are selling to residential customers. One of those companies is Green Mountain Energy Resources, whose "environmentally friendly" power is more expensive than that already sold by the state's traditional utilities. The other is Houston-based Enron, which is charging the same rate as companies such as Southern California Edison; the only apparent bonus to switching to the new competitor is the two free weeks of power Enron is offering as a signup incentive. Enron, which already owns utilities in several states, has said it is willing to take a loss in California, which it sees as a test market for its long-term goal of becoming the country's first national utility.

"The companies that come in and want to serve a new market will gravitate to the big clients," predicts Toussaint. "We expect to see a survival of the fittest, where the big critters will eat highest on the food chain."

Toussaint, who grew up in Boulder, urges Coloradans to take a hard look before signing off on electricity deregulation. "I hope we can save some states from this folly," she says.

The dramatic change in the California market means that huge amounts of electric power have already started to move over the western electrical grid. (Colorado is part of a network of power lines that includes all of the Western states. There are fewer power links between Colorado and states to the east, so selling Colorado power to the East Coast isn't yet feasible.)

The increasing amounts of power being "wheeled" over power lines around the West have also led to breakdowns in the system. The massive power outage of 1996, for instance, was blamed on a single short-circuiting power line near the Columbia River. That incident was widely viewed as an example of the problems deregulation can foster, especially if utilities under competitive pressure decide to cut back on maintenance.

"The pressure on managers will be to cut costs," predicts Reif. Today the Public Utilities Commission can rCR>equire Public Service to invest in maintenance, he notes; that power would likely vanish under deregulation.

Currently, the only Western states with power dramatically cheaper than Colorado's are those in the Pacific Northwest. With their huge rivers generating enormous amounts of hydro power, Oregon and Washington can sell power for as little as four cents per kilowatt hour. Enron recently purchased a major utility in Oregon, with the intent of selling excess power out of state. However, officials in Oregon and Washington have resisted deregulation, and Reif says that even if the market there is eventually opened to competition, most of the electricity would flow to higher-paying customers in California, not to Coloradans.

"I think we can write off the idea that we could ever get cheaper power," he says.

One problem for those opposing the corporate stampede to open Colorado's electricity market is the public's indifference to the issue. Most consumers take power for granted, and the discussion seems like an abstraction to many people.

"The average customer doesn't even know what is being proposed," says Lewandowski. "Ninety-five percent of the people don't even know what you're talking about."

Consumers will likely become interested if they see huge jumps in their electric bills. But by then, Lewandowski says, it will be too late to do anything about it.

"If you have to pay 15 percent more on your electric rates, I don't think that's such a great deal," he says. "If this is lousy for the people, why should we do it?"

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Stuart Steers
Contact: Stuart Steers