By -- Source, The Oregonian
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The meatiest part of the Oregon law, painstakingly crafted by the 1999 Legislature and implemented at ratepayers' expense, allows businesses for the first time to buy electricity directly from nonutility suppliers and, theoretically, to take advantage of competitive prices.
But a hangover from a year's worth of high power prices, fallout from California's botched deregulation plan and backwash from the Enron bankruptcy have squelched any desire to try what has been labeled "direct access."
So far, three nonutility suppliers, known as "electricity service suppliers," have received state certification to offer electricity to Oregon businesses. All three said an analysis of rates and talks with businesses have shown they likely won't sign up any customers this year, despite their eagerness to crack into retail markets throughout the West.
"Everyone's dressed up with nowhere to go," said Aaron Thomas, a vice president with AES NewEnergy, the retail marketing subsidiary of AES Corp., a global energy company.
The other two state-certified suppliers are IdaCorp Energy of Boise and Powerex of Vancouver, British Columbia. Enron Energy Services began the certification process but suspended its application after the collapse and bankruptcy of its parent, Enron Corp.
AES, IdaCorp and Powerex officials blame Oregon's two main utilities, Portland General Electric and PacifiCorp, for stifling outside suppliers' ability to offer competitive rates.
The law allows the two utilities, which account for 70 percent of all electricity consumed by the state, to tack a portion of their own power costs onto competing rates. The transition, or "exit," fees -- linked to wholesale electricity purchases and power plant valuations -- are designed to protect utilities from sudden jumps in costs should large customers depart. But the outside suppliers contend that the fees are higher than expected and wipe out any cost advantage competitors might otherwise be able to offer.
As long as the surcharges remain, Thomas said, "They will continue to hamstring the market."
Utility officials said the fees are justified, considering the wild spikes in wholesale electricity prices that occurred in 2000 and 2001. In subsequent years, prices and fees should settle down, they said.
"Short term, there's some pain to get to the long-term benefit," said PGE President and Chief Executive Officer Peggy Fowler. "It's a good design, if people give it a chance to play out."
Advocates of the law call the plan "restructuring," not "deregulation." The tame approach to open and competitive markets allows businesses to stay with their traditional utility if they choose, and, with proper notice, to move back and forth among various rate structures.
Residential customers must remain with their utility, although, also beginning March 1, they may pick from a variety of rates. The options are linked to types of power, such as renewable resources and wind, and to the times of day the electricity is used.
The law applies only to investor-owned utilities. Consumer-owned utilities, which serve the rest of the state's electricity customers, don't come under the purview of the Oregon Public Utility Commission.
Overall, the plan bears little resemblance to California's disastrous bout with deregulation, Oregon regulators stress.
Many commercial and industrial companies supported the restructuring plan as it wound its way through the Legislature and into the real world. They wanted the choice and, potentially, the lower prices that would come as a variety of suppliers competed for customers.
But with the implementation date approaching, IdaCorp Energy, the marketing subsidiary of IdaCorp Inc., spent months wooing some of the state's largest companies, only to discover that PGE's transition fee spoiled the deals.
"There was no way to be competitive," said Michael Gerhard, IdaCorp Energy's vice president of energy marketing.
"The fairly high exit fee makes it uneconomical," echoed Eli Sha, a spokeswoman for BC Hydro, the parent company of Powerex. "It's unfortunate."
Large industrial companies often are copious electricity consumers and, therefore, prime targets for direct access.
Blue Heron Paper of Oregon City, one of PGE's largest customers, took a long, hard look at going elsewhere for electricity, especially after the utility increased rates by more than 50 percent in October. But with the exit fees, no supplier could beat PGE's rate, said Eric Jensen, Blue Heron's operations manager.
"The way PGE has structured things, it makes it nearly impossible to go with anyone else," Jensen said.
Intel, also a big energy user, faced the same situation.
"We don't see it as advantageous to go to a third-party provider at this point," said Bill MacKenzie, Intel spokesman.
PGE officials said the transition fees partly reflect the difference between the prices they paid for power when they locked in supplies for the upcoming year and market prices today.
If prices had remained stable and business customers had decided to use other suppliers, PGE could have sold the freed-up electricity and covered its costs. But prices fell. The transition fees are intended to fill the gap.
If prices had moved the other way and PGE was able to sell at a profit, the transition fees would have been a credit, utility officials said.
Business groups object even more strenuously to the portion of the fee intended to help compensate utilities for the value of their generating plants. Melinda Davison, an attorney for Industrial Customers of Northwest Utilities, said the valuation should be a one-shot cost, not an annual calculation, which businesses say foils efforts to sign multiyear contracts with other suppliers.
The utility commission, responsible for fine-tuning and implementing the law, said it is looking at ways to address the industry concerns.
PGE has been the focus of most of the criticism because it was first to post its transition fees -- in mid-January. PacifiCorp makes its posting this week.
PacifiCorp generates most of its electricity from company-owned power plants, relying less than PGE on market purchases. Its transition fees, therefore, should be lower, said Don Furman, PacifiCorp's senior vice president of regulation.
PacifiCorp hasn't increased rates as dramatically the past year as PGE, another reason independent power providers might have difficulty luring business customers away from the utility, Furman said.
Utility executives and state regulators said other factors are adding to businesses' reluctance to move away from the comfort of a 75-year-old regulated system.
The experience of California, where a deregulation plan sent the state's major utilities careening into bankruptcy and upended electricity markets throughout the West, continues to pile on uncertainty.
"In the Western states, it's had a very negative backlash," AES' Thomas said.
California worries contributed to Oregon's decision to delay the debut of its plan until March 1.
As for Enron: "People are spooked," said Roy Hemmingway, chairman of the Oregon Public Utility Commission.
At Enron's peak, the company held a 20 percent market share in electricity trading, competitors estimate. When Enron collapsed into bankruptcy, its trading operations shut down, although they are expected to start up again after a takeover by Swiss bank UBS Warburg.
Hemmingway said the loss of Enron caused barely a blip in Western markets, as other suppliers moved in to grab relinquished market share. Even so, the perception of disrupted markets has made businesses edgy, he said.
Despite the uncertainties, some businesses are dipping a toe or two into wholesale markets. Roughly 80 businesses, or 290 metered accounts, have told PGE that beginning March 1, they will go with pricing systems indexed to wholesale markets rather than the traditional retail rate structure.
These businesses use about 135 megawatts of power annually, or about 6 percent of all of the electricity consumed by PGE customers.
Only businesses large enough to use 30 kilowatts of electricity at any given time are eligible for indexed rates. Those include not just large industrial companies but also grocery stores such as Fred Meyer and large retailers such as Costco Wholesale.
Smaller business can't choose indexed rates. But they can buy from independent providers. And, if they stick with their utility, they can select rate options similar to those available to residential customers.
All told, PGE and PacifiCorp say they each will spend roughly $70 million to implement the law. For PGE, the costs included $28 million for a new computer system.
"It's a big, complex organism," said David Van Bossuyt, PGE's general manager of industry restructuring implementation.
Ultimately, ratepayers foot the bill. Some of the costs were included in recent rate increases of both utilities.
Despite the slow start, regulators said restructuring is proceeding as planned.
"It's a first step toward providing competition," the PUC's Hemmingway said. "We didn't expect everyone to join hands and jump at once."
