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Power Play 

California's troubles slowed deregulation here, but Ameren is preparing to turn up the juice

When the power died in California, so did Missouri Sen. Peter Kinder's hope of passing legislation this year to deregulate Missouri's electric utilities.

Kinder, a Republican from Cape Girardeau, says California's well-publicized troubles opened the door to "demagogues of all stripes" who watched a textbook study of how not to deregulate an industry. Forget that Missouri's proposed deregulation bill was different than the legislation adopted five years ago in California; ignore the fact that Missouri's energy needs are different than California's: The bottom line was, with California in crisis, no utility-deregulation bill would pass the General Assembly in 2001. "It muddied the situation," Kinder says.

Just six months ago, it was a different story in the Show-Me State. Deregulation seemed to be on a fast track, with Missouri primed to join 23 other states that had already restructured the power business. Ameren Corp., parent of AmerenUE of Missouri, and some of the state's industrial giants, including the Anheuser-Busch Cos. and Boeing Co., were squarely behind S.B. 455, the dereg bill. Kinder, president pro tem of the Republican-controlled Senate, was the main sponsor; one of Jefferson City's top lobbying firms, John Bardgett & Associates, was peddling the bill.

What the utility and its allies were selling was straight Econ 101: Introduce competition to electric power, and consumers get more choices. Competition forces businesses to provide better service and become more cost-competitive. And if more competition worked for the once heavily regulated airline, railroad and telecommunications industries -- and that's a big if -- why not electric power?

The problem is that it hasn't worked -- in California. That state's bill -- Assembly Bill 1890, adopted in 1996 -- offered a partial restructuring of utilities: California utilities were forced to sell their generation facilities to independent power suppliers, then turn around and purchase electricity from suppliers at a deregulated wholesale price. The state stopped regulating wholesale prices, but to protect residential customers from price increases, California's utilities were bound by the legislation to charge a fixed rate approved by the Federal Energy Regulatory Commission until March 2002 or until they paid off their "stranded costs" -- debt from the building of power plants, power lines and other generation-related assets -- whichever came first. What California lawmakers didn't bank on was a sharp jump in wholesale costs, which rose by approximately 900 percent last year, fueled in part by climbing natural gas prices (nearly 40 percent of California's power generation comes from natural gas). Utilities also blamed tough environmental regulations -- California's restrictions are among the strictest in the nation -- for hindering the construction of plants to meet the state's growing demand for power.

California's utilities responded by rationing power; in late January, the state suffered its first major blackout since World War II. Unable to pass along wholesale price increases to customers, some utilities warned that they were heading to bankruptcy court, and, on April 6, the biggest, Pacific Gas & Electric, sought protection from creditors. California's Perfect Storm swept across the country, forcing a debate about energy policy and knocking deregulation off track in at least 16 states.

In Missouri, S.B. 455 never made it off the Senate's informal calendar, the graveyard for controversial bills going nowhere fast, and prospects in the House were even dimmer. "'Deregulation' in the Missouri House of Representatives -- regardless of Democrat or Republican -- is a dirty word," says Carolyn Smith, director of Missourians for Affordable Reliable Electrical Services, a Springfield-based consumer coalition.

Yet even with the deregulation bill dead in committee, Ameren's lobbyists were out in force during the waning days of the session, pushing a resolution re-authorizing a legislative study committee that's expected to provide the muscle for next year's final deregulation push. The stakes for Ameren are high -- deregulation would allow the utility to sell excess power generated by its Missouri plants to customers outside the state. It's a step that Ameren says will lead to construction of new plants, generating new jobs.

The Joint Interim Committee on Telecommunications and Energy was first established in 1997, but with the shift in power in the Legislature, some lawmakers and lobbyists already complain that the committee's membership will likely be tilted toward the interests of Ameren and its biggest customers. Kinder, a conservative newspaperman who writes a regular column for the Southeast Missourian, will name seven Senate members of the committee; House Speaker Jim Kreider (D-Nixa) will pick seven House members -- though it is unclear when Kinder and Kreider will select the 14 members of the committee.

Until Republicans took control of the Senate this year, Sen. Wayne Goode (D-Normandy) had headed the committee that overseeing utilities. Rep. Carol Jean Mays (D-Independence) chairs the equivalent House committee. Whereas Goode has been an outspoken critic of deregulation, the same isn't true of Mays, who sponsored the deregulation bill in the House. Critics say there's a reason for Mays' position.

According to the Missouri Alliance for Campaign Reform, a watchdog group supported mainly by research-foundation funds, Mays has been one of the biggest recipients of electric-utility contributions -- her 2000 campaign received $4,098, more than five times the average contribution of $790 given to House members. "It's putting it charitably to say she is unhealthfully close to the industry," says Patrick Harvey, alliance director. "If she winds up as the co-chair of the study committee, their work is likely to be really contaminated." The study alleges that electric-utility interests contributed $216,086 to House and Senate candidates in the 2000 election, with Ameren giving about 20 percent of that total. Mays says the utility contributions aren't significant enough to sway her. "It's totally ridiculous," she says. "If he [Harvey] had bothered to read my contribution list, he would have discovered that the utilities were not a large part of that donation list.... He's somebody who wants to make a mountain out of a molehill in order to support his own theory."

Whoever is named, Goode says the language authorizing the study committee already betrays a pro-utility bias. "When you read the language, you'll see it was basically written to encourage more production of electricity and also to make findings that we [Missouri] need more electric power," Goode says. "I am not sure we would necessarily make these findings."

Ameren's bill would allow investor-owned utilities such as AmerenUE and Kansas City Power & Light Co. to transfer their power plants to a subsidiary generating company, known as a GENCO. Unlike California utilities, which were forced to sell plants to independent power suppliers, AmerenUE's plants would stay in the Ameren family. Those GENCOs would sell power back to AmerenUE and other utilities, which would, in turn, retail the power to Missouri customers.

With the proposed restructuring, the GENCOs could also sell power on the open market, supplying power-hungry markets such as California and Mexico. And, under the proposal, the largest industrial and commercial consumers would be allowed immediately to negotiate agreements to buy electricity with providers other than Ameren. The bill leaves unsettled if and when residential customers would get that option.

The Missouri proposal is similar to the way Ameren Corp.'s Illinois subsidiary operates in that state, which adopted deregulation in 1997. Ameren in the last year-and-a-half has brought online seven combustion-turbine plants, natural-gas power plants, to generate an excess 800 megawatts of electricity. "Ameren has basically been building power plants in other states on its unregulated side where the structure encourages it and offers incentives," says Susan Gallagher, an AmerenUE spokeswoman.

The same thing needs to happen on this side of the Mississippi River, says Kinder: "My bill is about avoiding the catastrophe that has hit California. My bill is about inducing, spurring the building of necessary generating plants in Missouri to meet rising demands for power."

If demand is growing, what's stopping Ameren from building power plants now? Nothing, says Martha Hogerty, head of the Office of the Public Counsel, an independent state agency that represents consumers. Without the bill, Ameren is not barred from building new plants; with its proposed bill, its GENCOs would not be required to build additional plants. In fact, a natural-gas plant is under construction in Columbia. "There's no relationship between this legislation and building power plants in Missouri," Hogerty says. "They build plants where they are needed and where they can make money."

The PSC says Ameren's nine Missouri plants, which generate 7,631 megawatts total, are more than enough to meet current demand. "We do have a slight excess capacity in addition to the reserve levels we want to maintain," says Warren Wood, PSC energy-department manager. "Barring a large plant being kicked offline or having a large tornado wipe out some lines, we should be OK."

Bea Covington, executive director of the Missouri Coalition for the Environment, questions the need for any additional power plants in Missouri. Although the group has taken no position on the restructuring bill, Covington says the coalition believes the state should emphasize energy efficiency and conservation instead of building new power plants. "We would like to see alternative power sources explored; if deregulation were to occur, we'd like to see a plan that encourages and reward folks for those kind of activities," Covington says.

Beyond the debate about Missouri's future energy needs, there's concern that Ameren's bill will strip the state of its rate-approving authority. Under restructuring, cost-based rates submitted by AmerenUE would be approved by FERC, not the PSC. To protect consumers from California-type rate hikes, AmerenUE offers to agree to a five-year rate freeze, but that's not enough to allay critics' concerns. "It's my view that the Missouri PSC is more stringent in determining what costs should be passed on to the ratepayers and what costs should not be," says Goode.

Goode wants assurances that Missourians don't get stuck with the bill for building plants that generate power for customers outside the state. The Office of Public Counsel and consumer groups such as MOFARES share this concern, insisting it is the major similarity between California's deregulation bill and Ameren's proposal.

"The very first part of the California deregulation bill -- and that is to remove generation plants from state oversight and give it to the federal government -- that's exactly what Ameren's GENCO bill would do," says Carolyn Smith of MOFARES. At the end of 2000, Missouri residents paid an average of 7.08 cents per kilowatt-hour on top of a $7.25 customer charge, making Missouri No. 16 for cheapest electricity in the country. If a federal agency gets oversight over wholesale rates, Missouri customers could end up paying more. "FERC's role is to protect the marketplace, not Missouri consumers," Smith says.

Ameren contends its proposed five-year freeze would address that concern, but the Office of the Public Counsel says that the real beneficiary of a freeze would be Ameren, because it would lock in what the agency estimates are "excess" earnings of about $100 million a year. Missouri customers could end up paying an extra half-a-billion dollars under the rate freeze if Ameren's deregulation bill passes, the agency estimates.

"We've got low-cost power here in Missouri; there is no reason why we should give that up so that they can meld it with some unregulated affiliate and sell it elsewhere," Hogerty says.

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