Outsiders

Deregulation of the electricity market in California was supposed to set off a modern gold rush among out-of-state energy companies. But it’s turning out to be fool’s gold at least for now. When word of the state’s deregulation plans first surfaced, those out-of-staters had their eyes fixed on California drawn largely by the state’s electricity rates, which are 30 percent higher than the national average. Luring customers away from their local utilities seemed like a no-brainer, especially in the competitive market that deregulation promised. But that was before California utilities cut their rates by 10 percent, and state regulators imposed a surcharge that makes the potential payout from selling electricity less attractive. As a result, some plans are being scaled back. Portland, Ore.-based PacifiCorp is a case in point. Expecting to dive headlong into providing electricity on the retail level in California, PacifiCorp established a strong early presence. But that changed once the deregulation rules were put in place. In response, PacifiCorp has lowered its ambitions to focus on wholesaling energy to other marketers. “The way the rules were set up makes it more difficult than anticipated,” said Robin Diedrich, an analyst with Edward Jones in St. Louis. The Competition Transition Charge (CTC) is seen as the real culprit. The CTC is essentially a surcharge that state utilities are allowed to collect from all customers, regardless of who supplies their power. As a result, resellers will find it hard to offer meaningful savings to customers because the surcharge directly reduces their profit margins. “The competitive energy market is as phony as a three-dollar bill,” said S. David Freeman, general manager of the L.A. Department of Water and Power. The amount of the surcharge will be pegged to the price of energy on the open market; it will not be set by the utilities. The CTC expires after four years, except for nuclear generation charges, which will be spread out over six years. Even so, the non-competitive nature of the market in its early years has caused a shakeout among the energy providers that originally rushed in. When companies realized that they would not “make money from the get-go,” they pulled back, said Arthur O’Donnell, editor of the San Francisco-based California Energy Market newsletter. Enron Energy Services Inc. is an exception to the rule. As the marketing arm of giant Enron Corp., EES has the backing and deep pockets to withstand losses for up to five years to establish itself as a major player in California. It is willing to lose money in the short term to gain market exposure and sign up residential customers for the long term. Gary Foster, an Enron spokesman, confirmed that the Houston-based company is aggressively entering the California market. And Enron is going after all segments from major users, like Pacific Telesis Group in San Francisco, to single-family residences. Already, Enron has sent out 2.5 million mailers to residential and small-business customers throughout California. In all, it is spending between $10 million and $20 million on its current California marketing campaign, which began last November and extends through 1998. Enron says it has signed up 20,000 residential customers and 200 businesses, including the $280 million deal it inked to supply electricity to Pacific Telesis’ 8,000 facilities in California. Some out-of-state players have devised innovative approaches to entering the California market. Montana Power Trading & Marketing Co., a provider of low-cost hydroelectric power, has formed a partnership with the California Manufacturers Association. Under the arrangement, power will be bought from Montana Power’s parent utility company, and then resold to customers, including member companies of the association. The partnership has already signed a deal with TRW Space & Electronics Group’s facilities in Redondo Beach. Vermont-based Green Mountain Energy Resources is pushing its own environmentally friendly power, which uses renewable energy sources like wind, and is working with national retailer Amway Corp. in its pitch to garner residential customers in California. Other out-of-state energy companies are setting themselves up as energy wholesalers, selling power only to resellers, as well as offering energy services to end users. Southern Company Energy Marketing, a joint venture of Southern Co. and Vastar Resources of Houston, is looking to be a power wholesaler in California and a provider of energy-efficiency and energy-management services to end users. Duke Energy Corp. of Charlotte, N.C., scaled back its retailing plans for California after a deal unraveled with the Los Angeles Department of Water and Power. But it has purchased three power generating plants for about $500 million from PG & E; Corp. Duke is also keeping a toe in the retail market through its marketing subsidiary DukeSolutions Inc., based in San Ramon. That company is focusing on large commercial/industrial energy users, and offering energy-efficiency and management services. David Cesio, vice president of DukeSolutions’ Western region, said his is the first step in what the company hopes will be a national expansion. “You’ve got to make it work in California if you are going to make it work anywhere else,” he said.