Buy low sell high. That's the way most of us believe business transactions should be conducted. Then what would happen if a major corporation tried to do it the other way around?

Just ask California's two major utility companies, Southern Cal. Edison and PG&E. For several months, the two companies have been buying electricity at 27 cents per kWh (kilowatt hour) and selling it for 4.5 cents per kWh to their  customers. Hard to believe but that's just what one of the unexpected outcomes in California's newly deregulated electric power industry. 

The result? After just three or so months of trying to do the fiscally impossible, the utilities now say they may have to go to bankruptcy court to seek relief for the $9 billion of debt they have run up in "suspended costs". If that's not wacky enough, many executives are wondering aloud if credit problems from all the red ink may hinder their ability to supply power to the 25 million customers who depend upon them.

None of this would have become necessary of course were it not for California's badly wounded electric power deregulation plans. Just about two years ago, taxpayers in the state gave the utility companies $30 billion dollars to get out of the power generating business and leave it instead up to the hands of independent operators. 

Unfortunately though, someone forgot to mention that the state hadn't built any grid connected generators in ten years. In the meantime the surging growth of demand has left buyers scrounging to find electricity at any cost. 

In a period of just three months,  consumer electric bills doubled then tripled, causing the state to hastily impose a retail rate cap at 6.5 cents. At the same time however, electrons became a scarce commodity and the utility companies were forced to buy electricity for more than 4 times what they were allowed to sell it for. 

On January 5, Southern California Edison announced massive layoffs for over 13% of its workforce. The company says that nearly 1,450 employees will be handed pink slips over the coming months as part of a desperate cost cutting move. So, what's a utility company to do? 

Stop the Madness

Actually, say experts, there is a simple answer to this and its one learned by most of us in childhood. Its a variation on the old idea "if you can't stand the heat get out of the kitchen." 

This simple theory is clearly good for those of us who crave chocolate or spend to much time at the race track but how does an electric utility company stop selling electricity? The answer to that question is so advanced its simple. They don't. Instead though, they encourage us to start using more of the kind of electricity that we can all afford. Its the kind they don't have to pay for because its the same kind that we make for ourselves. 

The idea behind this plan is technology known as "distributed generation" and it is as simple as putting solar panels over the area's parking lots and rooftops. Used successfully for years in municipal utility districts like Los Angeles and Sacramento, many experts say that its now time for the state's other utilities to step up to the plate. 

"DG" has long been considered a beneficial alternative for end users. In the current economy though, "DG" may prove itself equally valuable for energy providers as well. Not only can this practical technology enable troubled utility companies to avoid the buildup of "suspended costs", but DG could prove itself a profitable proposition for utility companies in its own right by positioning them in a new long term growth market. 

From a marketing standpoint the time for DG has certainly arrived. Local contractor and nationally recognized alternative energy expert, Mark Snyder says the cost of installing solar power systems on our rooftops has become cost competitive with what customers soon will be asked to pay California utilities when billed for power priced at the 6.5 cents per kilowatt rate cap. Says Snyder, 

"It's the tariffs! That's what they call the fees charged by utilities to deliver electricity to a customers electric meter. At the present rate customers may be paying as much in distribution and transmission fees as they are for energy."

But since they no longer generate energy, tariff revenue is what deregulation is all about for utilities in California. Customers love the idea of owning their own power sources but is it possible for a utility company to avoid paying for energy on the power exchange and still receive a fair income stream for their investors? Snyder says, "Absolutely!" He adds,

"With current laws for net metering, any unused electricity that is produced by DG becomes property of the utility company for sale and distribution. They don't have to buy it from the grid or from anyone else at all for that matter."

That's great! The customer uses as much of the power produced on his or her rooftop and allows the surplus to reenter the grid where it can be used help alleviate the power shortage brought on by the state's inadequate supply of generators. 

Specifically stated, to a customer's delight, their meter is literally spun backwards by the power generated by the DG, the utility acquires the surplus at no cost to themselves and they then distribute it to other customers at the prevailing retail rate. No need to buy power for 30 cents on the power exchange and so no "suspended cost" problem for the utility company.

Snyder says utilities should start by encouraging customers to use their power with more efficiency. Mechanical Engineer and efficiency expert Sam Pierce agrees. Pierce operates his own energy consulting company and has been advising business owners about the use of more efficient technologies years before the deregulation crisis. Pierce says,

"Customers get more bang for the buck, less electricity needs to be purchased by utilities at a loss, and the available resources can be distributed to where its needed the most."

Pierce recommends that customers allow experts to audit their properties to see where they are winning or losing in the battle to avoid unnecessary power costs. His clients say that in many cases, surprising savings have been achieved by replacing incandescent lights with more efficient florescent models, replacing older electric motors and pumps commonly found in refrigerators and other appliances, updating insulation, and through the use of Pierce's innovative conservation strategies. 

A kilowatt saved is a kilowatt earned. But what about the tariff revenue lost to the utilities when an old customer stops buying his power from the grid and starts to simply make his own? Snyder says,

"DG isn't intended to supplant the grid just supplement it. In all likelihood, the utilities will benefit though from PV installations because they will be able to acquire the power while most residents are at work during the daylight hours. The won't pay anything for it but they will be able to sell it during the peaktime when the price and demand are at their highest."

Meanwhile, in filings before the Securities and Exchange Commission, PG&E noted that they must pay $438 million by January 5  and then another $528 million by February 1 for energy purchases already made on customers behalf. In other published reports, PG&E warned that natural gas suppliers are skeptical of the company's ability to pay for future deliveries and may demand cash up front before releasing new stocks for consumers. 

Electric power deregulation is being planned in 25 other states. Many are studying California's plan as a model.

Related Stories in ELSI's Energy Page

The problem of finding a buyer for small power producers is but one of many major disincentives making it all but certain that "mom and pop" will never even dream about challenging the entrenched special interests let alone tipping their multibillion dollar a year electric power applecart. Among the other disincentives? Producers of green power find that their products are sold arbitrarily at above market prices on the power exchanges, making them less attractive to bargain seeking bulk power buyers. The logic is that only environmentally conscious buyers will be interested in the cleaner alternatives and so its use has been relegated to boutique status and to just a smaller, niche market share. This contrasts with the motivation of successful start up businesses that fight to see that their products are brought to the marketplace at the most competitive prices available and bought by as many users as possible.

Also curious? While they surely knew about supply problems from the beginning, it is unlikely that SDG&E will do anything to improve the situation before the year 2004 when it may be possible for SDG&E to import more power from the power exchanges. And, although the base rate for electric service has recently been as low as 3 cents per kilowatt, consumers in San Diego however, are reporting paying SDG&E bills nearly five times as high. 

In an apparent effort to sway public opinion, SDG&E has recently asked the California Public Utility Commission to refund customers from a special account set up to keep prices down during the transition to deregulation. At the same time, ratepayers will be receiving checks reflecting the proceeds from the sale of "stranded assets", a plan also adopted several years ago as part of the transition. Many local residents though have mistakenly taken this to mean that price rollbacks are underway to permanently bring down their energy bills. In fact though,  the refunds will change nothing and  electricity prices, currently as high as 14 cents per kilowatt hour will continue to be set as the result of supply and demand.

In the meantime, SDG&E customers may have to suffer with intermittent power disruptions, uncertainty about the future availability and cost of natural gas and other fossil fuels, and  higher electricity prices passed through to ratepayers by SDG&E. Until the problem of SDG&E's inadequate transmisson facilities are corrected 4 or more years from now, even if sources of usable power are available to the brokers elsewhere on the grid, SDG&E may be unable to deliver it to customers during peak load periods -at any price! The result? Load shedding, rolling blackouts, and brownouts.

In this newly restructured market, corporations like SDG&E who once monopolized their service area, have redefined themselves as ''electric service delivery providers", for the most part leaving the generation of power to third party operators. The electricity traveling over the grid is bought and sold freely on behalf of customers and is then pooled and redistributed by the Independent System Operator for transfer to the delivery companies who own and maintain the power lines.

 Opening up the electric power industry to small entrepreneurs and independents is welcomed by many as a great step towards establishing true free enterprise as envisioned by our nations founders. Jim Bell notes,

"Truly, electric power deregulation is merely in its infancy. If there is a problem, let's simply fix it. As long as we still have hammers and nails, the solution is only as far off as our own rooftops. We must start though to remove the disincentives and demand that our legislators extend the present laws which will ultimately lead to reasonable electricity rates and freedom from power disruptions."

Advocating against pulling the plug on the emergent electric power restructuring efforts, Bell adds, 

"Let's not throw the baby out with the bath water."