Regulators propose surcharge on third-party electric bills. (Up Front).

State regulators, looking to help repay California's power debt, have proposed levying a hefty surcharge on thousands of companies and public institutions that rushed to sign up third-party electric power contracts in the summer of 2001.

The California Public Utilities Commission has proposed a maximum 2.7-cent-per-kilowatt-hour surcharge for the 27,000 companies and institutions and 58,000 residential customers that hastily signed contracts in the summer of 2001 with lower-cost third-party providers, sometimes referred to as direct access.

The retroactive surcharge could hit some companies with a rate hike of up to 40 percent, negating any savings from their contracts.

The PUC is set to make a final decision on the proposal on Oct. 24; if approved, the surcharges could start showing up on electricity bills in time for Christmas.

"This 2.7-cent rate hike is going to be tough for our member companies," said Bill Dombrowski, president of the California Retailers Association.

But consumer groups say that even with the proposed surcharge, those companies and public institutions that signed direct access contracts would be getting a big break at the expense of other California ratepayers. They want to see a bigger surcharge, possibly as high as 5 cents-per-kilowatt hour.

Still getting break?

"It's these big businesses that pushed for deregulation. They should not be allowed to escape paying one penny of the cost of its failure," said Doug Heller, senior consumer advocate for the Foundation for Taxpayer and Consumer Rights in San Diego.

PUC Commissioner Carl Wood echoed Heller's comments, saying that he suspects the cost of these companies leaving the utilities' power grid is higher than the 2.7 cent cap proposed by PUC staff.

"There shouldn't be a cap," Wood said. "Companies that signed direct access contracts should simply be assigned their portion of the bill that they incurred while they were with the utilities."

The sparring over direct access contracts began at the height of the energy crisis in January 2001, although its seeds were sewn much earlier, with the crafting of the state's deregulation law in 1996.

That law allowed companies to bypass the three investor-owned utilities -- Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric -- and enter into bilateral contracts with other providers, like Enron Energy Services and AES Corp. (That same law barred customers of municipal utilities, like the Los Angeles Department of Water & Power, from switching providers.)

Until mid-2000, wholesale power prices were low and tens of thousands of companies, school districts and other entities signed these third-party contracts. Then, as the energy crisis took hold, wholesale power rates shot up, prompting most of these companies and institutions to switch back to Edison, PG&E or SDG&E, whose retail rates were capped by state law.

By the spring of 2001, the number of entities with direct access contracts had fallen to a trickle. The companies that switched back to the utilities, meanwhile, collectively saved several billion dollars.

Meanwhile, the utilities went billions of dollars into the red as they paid more for power than they could collect in rates from customers. With the utilities facing a collective $8 billion in debts, the state stepped in to buy power in January 2001, running up another $6 billion in debts in six months.

By then, the state had locked up significant power supplies in long-term contracts and federal regulators ordered power generators to sell all their power. Also, the PUC had raised power rates for utility customers by 30 percent to 80 percent.

Third party contracts

As a result, wholesale power prices collapsed in June and July of 2001, prompting a flood of companies to sign third party contracts. For months, the PUC had been debating whether to cut off these contracts, but intense lobbying from businesses and other parties forestalled the order until September 2001.

By then, 85,000 customers had signed contracts with third party providers. About 58,000 of those were residential customers; the other 27,000 were companies and public institutions. About one-third of all the power used by direct access customers is consumed by just 1,000 industrial customers.

Once direct access was stopped, the issue became how much the companies that left the utilities' power grid should have to pay as their "fair share" of the billions in debts run up during the crisis. Business groups, especially the California Manufacturers & Technology Association, wanted this "exit fee" to be set at below 1 cent per kilowatt hour, while consumer groups pushed for 5 cents per kilowatt hour or even more.

The Sept. 25 PUC staff proposal essentially splits the difference.

"We feel that, given the circumstances, this is the best we could have done," said Dominic DiMare, a lobbyist for the California Chamber of Commerce. "Now, all those companies that tried to take advantage of direct access will find their savings evaporated."

RELATED ARTICLE: Direct Access

Number of Customers That Left Their Utilities:

* 27,000 companies, non-profits and public institutions

* 58,000 residential customers

Major Users That Signed Third Party Contracts:

* Los Angeles Unified School District 

* All nine University of California campuses

* All 27 California State University campuses

* Kaiser Permanente 

Proposed Surcharge for Users That Left Their Utilities:

Maximum of 2.7 cents per kilowatt hour

State Power Debt to Be Partially Paid With Surcharges: $6 billion

Source: Business Journal Research