Following publication of the commission staff's report in 1993, numerous hearings, further proposals, and still more public hearings, the California legislature took control of the restructuring process in 1996. By August 1996, legislators had bargained with numerous interest groups and passed unanimously a bill, signed by the governor in September, that would allow retail customers to choose their suppliers of electricity by January 1, 1998. (At first, only large customers were allowed to shop for power; later modifications were to open the competitive market to all customers by New Year's Day, 1998.) As this deadline neared, however, unsettled technical issues remained. The date for opening the system to competition was pushed back to April 1998 to allow more time for tests to ensure system reliability.

The California law should not necessarily be viewed as a model upon which other laws will be passed. Rather, it is described in some detail because it deals comprehensively with several of the major issues being debated around the country. Laws in other states can deal with the same issues in different ways.

New Infrastructural Institutions

Due to the need to ensure a level playing field, the law created a new infrastructure for transmitting and selling electric power so that no one company would have excessive "market power"--the power to inhibit transactions and make competition among other companies difficult. Conceivably, a formerly regulated utility company could charge high rates to other firms for transmitting power over its transmission lines, thus giving itself a major advantage. The California law remedied this potential problem by establishing an "Independent System Operator," which would control utilities' transmission networks (without actually owning them), coordinate scheduling of power supplies, and ensure open access of the lines to all power providers.

Simultaneously, the state created a "Power Exchange" for maintaining a competitive marketplace where suppliers could offer electricity and where buyers would come to purchase power. Both institutions would operate without discriminating against any party, and both would be overseen by a board composed of members nominated by state regulatory bodies and by members of the state legislature.

Divesting Assets

Competitive markets only work when there are lots of sellers and lots of buyers. To help ensure that an existing utility does not have too much control over the market, California power companies were required to divest some of their assets. In other words, the companies needed to sell some of their generating stations, for example, so they would not dominate the market of those who wanted to sell power to the Power Exchange. By divesting these assets, market share would be spread among a greater number of players, thus leading to a more competitive environment that would benefit buyers of electricity.

Freedom to Choose Suppliers

The California restructuring law had something for all types of consumers, which perhaps explains why it won unanimous support in the legislature. First of all, it allowed customers in all classes to choose their suppliers of power. This provision benefited large industrial customers particularly, since they eagerly sought the opportunity to buy power from independents or utilities anywhere within or outside the state. But before getting the full benefits of competition, these customers (and any others leaving their previous utility supplier) would be required to pay a "competition transition charge"--something like a tax that would go to pay for utilities' stranded costs (estimated at up to $30 billion) and other publicly valuable programs. This feature of the law pleased utilities, which would undoubtedly lose some of their most prized customers.

Retention of Popular (but non-competitive) Programs

The law also recognized that utilities previously provided several functions that were viewed as socially valuable but which would not be provided by competitive companies. These functions included encouragement of conservation and energy-efficiency efforts, spurring technological advances on alternative (and low-pollution) technologies, and providing electrical service for low-income residents.

As a result of these concerns, the California law required continued spending of almost $900 million to spur energy-efficiency work until 2001--work that budget-trimming companies sought to eliminate because it made the cost of their electricity more expensive (and hence, less competitive). Meanwhile, $250 million would finance research and development on new technologies that were not yet commercially viable, but which might be within a few years. Renewable resource technologies would get another $540 million. At the same time, low-income customers would retain subsidies and assistance so they could maintain electrical service--something cut-throat competitors might be loathe to provide.

Residential Rate Cut

Meanwhile, residential customers who feared that the benefits of competition might pass them by would obtain an immediate 10% rate decrease and another 10% discount by 2002. After then, legislators hoped the restructured utility business would have found mechanisms, such as firms that aggregated residential customers and brokered lower rates for them, so that small electricity users would profit from competition without government mandates.

Other States Pass Restructuring Laws

Even before California passed a law restructuring its utility system, other states had made similar efforts. But none was as comprehensive as California's. Moreover, due to the Golden State's economic clout and position as a trend-setter, its new law would have a tremendous impact on events in other states. By the spring of 1996, all but 10 states had started consideration of bills and regulatory actions intended to introduce competitive principles into the electricity supply business. Several states had pilot programs, while eight had already passed laws, by July 1996, setting up the rules for restructuring. In some states, stranded costs--a big issue to currently regulated utilities--were to be paid for by customers leaving their traditional utility company. In other states, companies and their stockholders were told to absorb those costs.

Go Slow Attitude

Despite this flurry of activity, many state legislators and regulators have consciously decided to move slowly toward a totally competitive utility system. While they see advantages to partial deregulation in theory, they also wonder--especially in low-cost states--how much competition can truly help all their citizens. In Virginia, for example, customers already pay significantly below the national average for electricity. Will competition help industrial users, who have the most market clout, at the expense of small residential customers? That unanswered question and similar ones have stalled some restructuring efforts, perhaps until after California begins retail competition in 1998.

New Hampshire

Interestingly, the state of New Hampshire was the first state to develop a pilot program of actual retail competition. With the highest retail rates in the country, largely because its major regulated utility built the hugely expensive Seabrook nuclear power plant, New Hampshire had little to lose by allowing 11,000 residents to choose their electricity supplier, starting in May 1996. About thirty companies descended upon the state, eager to gain experience in the retail competitive market, and they offered lower prices along with inducements such as rebates, bird feeders, free ice cream, and the promise to sell only electricity generated with no or little environmental degradation.

Federal Legislation?

At the same time, the promise of benefits to restructuring have convinced some federal lawmakers that a national law needs to be implemented for requiring the states to restructure their utility systems. While Congressmen have held hearings around the country dealing with a host of proposals, no consensus has yet been achieved. Many representatives feel that restructuring should remain a state-by-state activity, so that various models can be evaluated and incorporated into other states' laws. In any case, it appears that no federal legislation will emerge at least until 1998 at the earliest.