Utilities grid for battle against deregulation initiative.

The state's utility industry and major business groups began mobilizing opposition last week after an initiative that would gut the state's electric utility deregulation law qualified for the November ballot.

Qualification of the initiative has also set in motion a high-stakes legal battle that will determine the fate of deregulation in California, and with it, the hopes of companies seeking lower energy costs.

"I am concerned that once you start unraveling the deregulation process, as this initiative attempts to do, you can't stop it," said Michael Burke, executive vice president of New Energy Ventures, a Los Angeles-based electric service provider formed two years ago in anticipation of deregulation. "This may snowball into scrapping the whole plan altogether, setting deregulation back at least another five years."

The initiative, sponsored by consumer activist Harvey Rosenfield and the consumer group Toward Utility Rate Normalization (TURN), would eliminate much of the so-called "transition charge" that allows the state's three investor-owned utilities to speed up recovery of their investments in nuclear power and alternative energy contracts. That provision in the 1996 law was the inducement for the investor-owned utilities - Pacific Gas & Electric, Edison International and San Diego Gas & Electric - to sign on to the deregulation package.

The initiative also would void the issuance of more than $6 billion in bonds sold by the utilities earlier this year to finance a 10 percent rate cut for residents and small businesses that took effect Jan. 1. The bonds are to be paid back over 10 years by electric utility ratepayers.

Finally, the initiative mandates an additional 20 percent rate cut for residential and small-business customers.

"This initiative would give us a truly competitive marketplace and would lower electric prices 18 to 30 percent for businesses and residents," said Rosenfield. "Right now, it's not a free market because this bailout of the utilities for their bad past investments prevents competition."

But the initiative has drawn opposition from a powerful coalition of business and utility interests, which last month took the rare move of filing suit in the state Court of Appeals in Sacramento to invalidate the initiative before the November vote.

The coalition, known as Californians for Affordable and Reliable Electric Service, consists of the three investor-owned utilities, as well as business groups like the California Chamber of Commerce, the California Manufacturers Association and the California Business Roundtable.

CARES is challenging the initiative on two fronts. First, it argues that voters cannot take away the power of the state Legislature to regulate utilities unless they change the constitution (which this initiative would not do). Second, it contends that the initiative, if passed, would violate repayment agreements on the rate-reduction bonds that have already been sold.

"This initiative would be a recipe for chaos in the electric market," said Allan Zaremberg, president of the California Chamber of Commerce. "There would be a substantial amount of litigation - probably several years worth -which would lead to increased uncertainty in the marketplace."

If the initiative passes and is upheld, Zaremberg said, it would indefinitely delay deregulation of the electricity industry.

"In order to ensure competition, you would have to go back and change the original law that set up the structure for deregulation and get a two-thirds approval in the state Legislature," he said. "It would be virtually impossible to get consensus among all the parties on a new competitive structure."

Officials with Edison International - parent company of Southern California Edison -would not speculate on the impact of the initiative.

"The initiative in its current form is so poorly written that to find the implications for our utility is very hard to quantify," said Edison spokesman Clarence Brown. "There are so many factors that are not clearly addressed in the initiative that the courts will have to decide."

A spokesman for Houston-based Enron Corp., which itself has expressed opposition to the transition charge, was more blunt about the impacts.

"While we have problems with the existing structure, this initiative is much too drastic," said Enron spokesman Gary Foster. "It would tie up the direct-access system (whereby customers can get electricity directly from power generators) for years. We would rather work within the existing structure to effect changes."

So far, industry observers do not foresee drastic impacts on deregulation from the initiative; rather, they think it will be declared unconstitutional in short order.

"I don't think you can do what the initiative does without a constitutional violation," said Arthur O'Donnell, editor and associate publisher of California Energy Market, a newsletter that follows the state's electric industry. "Also, I think the courts would be very unlikely to risk overturning the mechanism for repayment of the rate-reduction bonds."

O'Donnell's view is echoed by Wall Street. In the last two weeks, both Fitch Investor's Service and Duff & Phelps Credit Rating Co. issued updates saying the initiative has not changed their "AAA" ratings of the rate-reduction bonds.

"It is highly unlikely that the potential referendum, if approved by voters in November 1998, will survive a constitutional challenge by the California utilities," a statement from Duff & Phelps said.