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California CEO's Assessment of the Problem
04/11/2001
Stephen Frank (pictured right), president and CEO of Southern
California Edison, on March 28 addressed Kentucky co-op representatives during a special
presentation where he discussed the current electric utility industry in California.
Frank first reiterated that Kentucky needs to be very careful about electric restructuring to avoid the same mistakes California has recently made and that his state's electric crisis is threatening "serious harm" to the American economy.
"The potential impact of California is huge," says Frank, whose company is teetering on the verge of bankruptcy as one of the state's three major electric suppliers. "We have exported a lot of things. We could export real harm to the economy."
The day after Frank addressed a packed room at the Kentucky Association of Electric Cooperatives in Louisville, the California Public Utilities Commission
(PUC) approved the largest electricity rate hike in state history. In addition to co-op managers from across the state, all the members of the Kentucky Public Service Commission attended Frank's speech.
As a result of California's PUC decision, some customers will pay as much as 46 percent more in California. Three years ago, California became the first state to restructure its electric markets. Frank cited the following major reasons for bringing about the crisis:
Capacity Shortfalls Almost no new generation has been built for a decade in California, while electric demand has skyrocketed. Even with rolling blackouts last week, activists continued to oppose new construction in their communities with some calling for a state takeover of power plants.
Pricing Wholesale prices have soared, while utilities in investor-owned markets have had to sell at retail prices fixed by law. Frank
says his company had to sell its plants with a limit on their return on investment.
Regulation Until the end of March, Frank says regulators have been slow to react to the mounting crisis. Frank
says the fallout from the crisis is spreading, including the following:
*Financial ratings of California Investor Owned Utilities (IOUs) have gone from the highest levels to junk bonds, making borrowing almost impossible.
*With the major IOUs struggling to survive, substantially less money is being spent for their system maintenance.
*Customers have generally been unwilling to conserve because, until now, retail prices have remained stable in most areas. Frank said Southern Cal Edison is paying no dividend for the first time in a century.
"No one is expanding business because they don't know if they will have power," Frank says. "There is no guarantee that when you flip on the switch, the lights will come on."
Frank says that he and other utility executives are very concerned about summer peaking capacity. He
says the Independent System Operator in California is predicting a 6,000-megawatt shortfall this summer.
Accusations have been especially harsh against the entities that purchased the power plants from Southern Cal Edison and other
utilities during restructuring. "Those plants are worth their weight in gold today," Frank
says. "Their debts have been paid off.
"We support a market-based system, but we need to be cost-based until this is workable," he
says.
Frank says the lessons for Kentucky from the California experience are several. First, he
says there is a lack of evidence that you get cheaper, more reliable service from deregulation.
"I'd go real carefully before you go down this track," he told the audience. At the same time, he warned co-op managers and the PSC, saying, "You can't stick your heads in the
sand because restructuring could happen anyway."
Employees of utilities are going through the worst times in their careers, he said. Many are working around the clock and on weekends to keep the lights on.
"It's horrible," Frank concludes. "I can't begin to tell you what the last three to four months have been like."
