California's Competitive Electric Market at Crossroad.

LOS ANGELES--(BUSINESS WIRE)--Aug. 19, 1999--

The California Public Utilities Commission and State Legislature have questions before them that are crucial to the future of California's competitive electric markets, and which will decide whether existing barriers to competition will be eliminated and whether consumers will enjoy the fullest extent of savings and innovation possible in a competitive environment.

"California is at a crossroad, and the decisions made in the next few months will be critical for all Californians," declared Nancy Day, senior vice president of Regulatory & Government Affairs for NewEnergy. A coalition of energy service providers, including NewEnergy, recently provided expert testimony to the PUC on this matter.

"When the California market opened, we entered a four-year transition period during which utilities were allowed to recover their stranded costs.

"The rules governing the post-transition period are now being written, and these decisions will determine whether California will move forward to create a vibrant market or accept an environment where once again customers are left with no real choices because energy service providers are unable to effectively compete in the market.

"Fewer competitors mean fewer choices for Californians, leaving them with no real alternative to utility service."

NewEnergy, along with other members of the coalition, advocates a framework that will stimulate competition, provide greater savings to customers who leave their utility, and restrict the utility's ability to exercise unfair market power as a provider of default electricity services.

"We believe the former monopoly utility should be prohibited from exercising its extreme influence in the market to the detriment of market competitors and ultimately consumers," said Day. "This vision is unfortunately in sharp contrast to the several specific proposals forwarded to date by the utilities."

Acknowledging that while approximately 15 percent of the utilities' electric load is being served by energy service providers, NewEnergy notes the overwhelming majority of load in the competitive market is from large commercial and industrial consumers. More than 98 percent of the utilities' customers, and virtually all residential customers, are still receiving what can be called "default service" from their utility.

"Obviously, if a customer doesn't pick an energy service provider they still have to receive electricity, and right now the utilities enjoy a monopoly on that default service," said Day. "Default service needs to be carefully defined for the post-transition market so as not to give utilities an unfair advantage over energy service providers.

"Default service should be, for lack of a better term, plain vanilla -- one simple price that incorporates all the costs incurred in providing retail electric service and entails the least amount of risk-taking on behalf of customers," said Day.

"If a customer wants a better price for electricity or a different kind of risk exposure, they can contact energy service providers for competing offers. Strict default service rules ensure consumers have access to affordable and reliable power, and prevent utilities from directly competing with energy service providers.

"California will never have meaningful competition if utilities are allowed to offer choices to the consumers beyond default service. Default service should be fair to consumers but allow room for competition. This approach has led to greater success in other states' competitive markets than has been seen to date in California.

"The reason default utility service has prevailed to date is simple: under the present system, the administratively set 'cost' for electricity to consumers does not reflect the total cost incurred in providing electricity to customers," explained Day.

"There are various retail costs involved in providing power to consumers beyond the basic wholesale price for electricity, signing up customers, forecasting customer electricity requirements, scheduling and balancing electricity purchases, and providing customer service, just to name a few.

"Under the present system, utilities recover the cost of those retail services not by marking up the wholesale electricity price, but rather through the fees they collect for distribution of electricity. And utilities collect those fees from all consumers, even those that no longer buy power from the utility.

"In contrast, energy service providers have to recover those retail costs -- the costs for them to do business -- through marking up the wholesale price," said Day.

"That discrepancy makes it difficult for energy service providers to attract customers, because it gives the utility a decided advantage in price offerings. And even if an energy service provider manages to be competitive with the default offer and the customer switches, the customer pays for the retail services twice, since the utility has those costs buried in their distribution rates.

"One important change required for a vibrant market is to clearly identify these retail services, determine the cost for them, and incorporate those costs into the default service rate.

"California should also continue the requirement for utilities to buy all their electricity for default service from the Power Exchange. This allows a single benchmark against which consumers can measure their energy service provider's performance and determine not only savings, but individual risk exposure as well," Day added.

"The requirement that utilities buy power to serve default customers from the Power Exchange is essential to prevent utilities from exerting undue control over the marketplace, due to the sheer volume of customers still receiving default service."

Day pointed to the Pennsylvania competitive market, which this year became the most successful competitive market in the country in terms of customer participation, as one that effectively managed these issues.

"Pennsylvania recognized that consumers benefit from having the most choices possible and that the cost of doing business would be a barrier to companies providing alternatives to utility service. Their market is less than a year old, and over 10 percent of Pennsylvania customers switched to energy service providers in comparison to less than 2 percent of California customers.

"There is no denying their market is much more vibrant and offers consumers more choices than California's.

"California has made great strides in bringing competition to its wholesale electric markets," concluded Day. "Regulators and legislators can now bring the vibrancy of the wholesale market to the retail level, so that every California consumer can enjoy greater choice, better service and lower prices.

"NewEnergy will continue to work with policy makers and other market participants to deliver the benefits of competition to all Californians."

NewEnergy Inc. (formerly New Energy Ventures) is an AES company. AES Corp. (NYSE:AES) is a leading global power company that currently owns or has an interest in 105 power facilities totaling more than 31,000 megawatts in the United States, Canada, Australia, Argentina, Brazil, the Dominican Republic, Panama, Mexico, Pakistan, India, Bangladesh, the Netherlands, Hungary, Kazakhstan, China and the United Kingdom.

AES also distributes electricity to nearly 14 million customers. In addition to having assets in excess of $10 billion, the company has more than $5 billion of projects in construction or late stages of development. AES is dedicated to providing electricity worldwide in a socially responsible way.

NewEnergy is America's largest energy service provider. Formed in 1995 to serve customers in every state where a competitive energy market is emerging, this rapidly growing technology-based energy company is active today throughout the United States.

With headquarters in Los Angeles, it has regional offices in Austin, Texas; Boston; Chicago; New York; Philadelphia; Phoenix; Tucson, Ariz.; and the San Francisco Bay area.

NewEnergy strives to help its customers increase their profitability through integrated, high-value energy solutions. Its services include energy buying for its customers, energy efficiency services, site generation, and low-cost supply of energy-related equipment and supplies. More information on NewEnergy and its products and services is available at www.newenergy.com.