Report

CONSUMERS UNION OFFERS BLUEPRINT FOR PROTECTING RESIDENTIAL AND SMALL BUSINESS ELECTRICITY CONSUMERS

Following Deregulation Debacle, State Should Return Small Users to Regulated Market That Offers Utility-Provided Choices, Let Large Businesses Navigate Competitive Markets

SAN FRANCISCO, CA - After suffering the consequences of California's ill-advised experiment with deregulation, residential consumers and small businesses should be protected from the price spikes and instability of the market through a return to electricity service regulated by the state's public utilities commission, according to a new report issued by Consumers Union. The report recommends that large businesses should be allowed to buy electricity directly on the open market, as long as they are first held responsible for paying off their share of the long-term energy contracts negotiated by the state last year.

"California's deregulation law was an unmitigated disaster for consumers and failed to provide the cheaper electricity supply and choices promised by its proponents," said Bill Ahern, Senior Policy Analyst with Consumers Union's West Coast Regional Office, who wrote the report. "Given the volatile nature of the market and the essential nature of this commodity, we believe that residential consumers and small businesses would be better served by a return to electricity service more strictly overseen by the California Public Utilities Commission. Large businesses can protect themselves and should be allowed to operate in an unregulated marketplace if they wish."

The report recommends that, under California Public Utilities Commission (CPUC) regulation, the state's utilities should offer consumers a standard offer rate constructed from a mixed portfolio of short- and long-term power supplies that provides stability, reliability, and reasonable rates. The retail power rates would be based on the cost of supply to the utility.

The utilities would use their own power generation sources and obtain additional needed supplies through a competitive bidding process overseen by the state agency. In addition, the report maintains that the state's utilities should be required to provide the energy reserves necessary to avoid emergency shortages and blackouts. The report recommends that the utilities be responsible for obtaining a 15 percent reserve for meeting peak monthly demand.

Consumers Union's report recommends that utilities should offer choices for consumers who want energy supplies different from the standard portfolio, such as extra environmentally-friendly and renewable resources. The utilities would use a bidding process approved by the CPUC to select the providers of these electric energy choices.

Under this proposed system, there would be no direct retail competition and residential consumers and small businesses would not have direct access to any energy provider of their choosing. However, consumers would benefit from wholesale competition and have the option of choosing from different electricity portfolios made available by the utility. The CPUC would oversee the accuracy of the information sent to consumers by the utility about these alternate choices.

"Retail competition simply failed to materialize in California, and there is little evidence from the other states that deregulated their electricity markets that energy providers are clamoring to serve small consumers," said Ahern. "The experience in California and elsewhere has also demonstrated that consumers are ill-equipped to evaluate complicated pricing information on electricity choices, especially when they are forced to rely on questionable marketing materials offered by energy providers."

Consumers Union recommends a different market design for large industrial consumers. They would again have direct access to a full range of competitive providers at the retail level, at a time deemed appropriate by the legislature and CPUC. However, they would continue to be held responsible for their share of the high cost of energy secured by the long-term contracts negotiated last year by the California Department of Water Resources. Large users would have the option of choosing the standard portfolio offered by the state's utilities for small users, but there would be constraints and charges on any subsequent switch to an alternate provider.

"California consumers have paid dearly for the state's experiment with deregulation," said Ahern. "Deregulation has exposed small consumers to price volatility and the boom and bust cycles of the market and has produced none of the benefits promised by it's defenders. It's time to scrap California's misguided attempt to deregulate the electricity market and provide consumers with the protection they need to enjoy an affordable and reliable power supply."

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Consumers Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.