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Global Power Report

The California Public Utility Commission March 27 voted 5-to-0 in favor of a rate increase of between 42% and 46% in an effort to raise the money needed to help resolve the state’s energy crisis.

The PUC approved a 3 cents/kWh rate increase with a 1 cent/kWh surcharge to back a planned $ 10-billion bond issue. The increase is over and above a temporary 9% to 10% rate hike passed in January. Southern California Edison‘s retail rate, including transportation and transmission costs, will increase 42% to 10.5 cents/kWh. Pacific Gas & Electric’s rates will climb 46% to 12.5 cents/kWh.

The increase is not retroactive. It does nothing to help the state’s investor-owned utilities with the nearly $ 13-billion overhang in charges they owe generators and suppliers. ”The state’s legislature will have to address those past power sales,” said Neil Stein, an analyst with Credit Suisse First Boston.

Nonetheless, most analysts were pleased at the prospects of higher rates. ”This should be an incremental positive for the generators and traders,” said Stein, ”in that they would now have a little better idea of how they will be getting paid going forward.”

”It seems the [PUC] may have stepped out of denial with this decision,” said Stein. ”They needed to do it. They had tried to avoid it, but power prices have just been too high, too strong.” With wholesale power prices running as much as ”700% above last year, there really was no mathematical equation the PUC could use to make up the difference between wholesale and retail prices, and it could no longer avoid a rate increase” said Stein.

Executives at Duke Energy, Reliant, Dynegy/NRG Energy and Mirant also welcomed the rate increase, delayed though it may have been. ”We agreed with SoCal and PG&E last December that a rate hike was needed,” said a Reliant official. ”I think almost everyone in the industry feels that price signals need to be sent to consumers for the market to reach any semblance of stability.”

Politically, the PUC‘s action was stunning. The decision ”looks like a major capitulation,” said an official at the California Power Exchange. When the PUC signaled its intentions to raise rates on March 26, Gov. Gray Davis (D) issued a statement saying he had no prior knowledge of the plan. Most analysts in California assumed the governor was trying to distance himself from the PUC.

According to a senior industry source, the about-face by Davis and the PUC may have been precipitated by key state finance officials, such as state treasurer Philip Angelides, who told reporters on March 26 that the state was growing increasingly concerned that it was not realistic to expect a 5% to 10% reduction in demand from the governor’s conservation efforts.

Angelides and officials in the state’s comptrollers office have been worrying for the past few weeks about the significant drain on the state’s coffers posed by the cost of power purchased for the state by the California Dept. of Water Resources. The state has spent over $ 3-billion from its general funds in just two months to cover the ”net short” amount of electricity the utilities need to keep the lights on. Angelides added that the state may need a $ 5-billion bridge loan just to cover power purchases into early May.

Still, the realization that the state’s efforts, expensive as they have been, were not enough must have come home to roost when the state suffered rolling blackouts on March 19 and 20. Last week a Sacramento Bee editorial called the blackouts ”Gray-outs,” directly linking them to the governor’s handling of the crisis.

The blackouts were caused by plant outages, as well as by a rash of shut-downs by small qualifying facilities that have not been paid in months. On March 20, Davis told the PUC to fix the QF problem since it did not look likely the state legislature could, or would. At its March 27 hearing, the PUC also approved a plan to restructure the QF contracts (see story, page 18).

Despite the sea change at the PUC and the governor’s mansion, California must still sort out several weighty and complicated problems that will determine how the state will pay for power it will need, as well as power it has already consumed.

The PUC must still decide how much of the revenues that the IOUs receive from rates will be used to reimburse the DWR. There are two competing methods for determining this, and the PUC must reconcile them.

The original legislation that empowered the DWR as a power buyer stated that the IOUs should first cover their costs and then use any amounts above that to pay DWR for power purchases made on behalf of the utilities. That amount is estimated to come to only about $ 250-million.

The DWR contends that a different formula applies that allows it to collect a percentage of the retail rate equal to the amount of power it provides the IOUs. By some estimates, that amount, for ongoing purchases since mid-January, would come to about $ 2.5-billion.

The PUC must also decide if the 1 cent/kWh surcharge will be sufficient to back the planned $ 10-billion bond offering, which originally was designed to fund long-term power contracts between DWR and large generators.

The state must also grapple with the problem of allocating the proceeds from the planned bond offering. In short, the state will have to decide how much should go to cover long-term contracts, as originally envisioned, and how much should be used to replenish the state’s general fund, which has been drawn down by the DWR’s power purchases.

In addition, some analysts now say that a $ 10-billion bond offering may not be sufficient to meet the state’s needs and that the state may need to raise as much as $ 16-billion.

CSFB’s Stein said he believes that the bond issue the state has asked JPMorgan Chase to arrange is now ”more likely” to meet success, even if it will take some time for the new rates to generate enough revenue to adequately back the bonds.

Overall, analysts agreed that the tide has turned in California. The PX source suggested that this is ”third party validation that the governor’s efforts have been a failure.”

The governor, he noted, has routinely denied there would be any rate hikes, and that the state would reduce its demand for power through conservation. Blackouts last week, however, ”may have led him to be a bit more realistic about what the situation really is,” said the official.

”The state has spent a considerable amount of money for power. It hasn’t purchased near what it will need on the long-term contract markets. There has been little in the way of really corrective legislation. It’s looking like the last few months have been a huge waste of time, spending tax-payers’ dollars, and not accomplishing anything. And then a rate hike is announced anyway,” said the PX source.

”If the governor has understood the economic dynamics of this whole situation all along, why didn’t he move earlier, why not raise rates earlier, before putting us through all of this? Did he do it in order to get a better deal on long-term contracts that now don’t exist anyway? I think all of this weighs very heavily against the governor,” said the PX official.

Welcome as the rate hike was in some sectors, it is likely to meet stiff resistance. ”I think calling this a ‘dramatic capitulation’ is putting it mildly,” said the PX official. ”I have no doubt that consumer groups will be apoplectic. A ballot initiative, led by any one of the usual suspects, is almost a sure bet. The governor began all this by calling the out-of-state power generators ‘Robber Barons’ and saying that they have dealt the state a ‘severe blow.’ But I think it is clear now that others will be saying that the governor has been an abject failure on this. You can’t just label your suppliers ‘Robber Barons’ and leave it at that.”

In fact, the public outcry against the hikes began at the PUC meeting, which was frequently interrupted by protests. Harvey Rosenfeld, president of Foundation for Taxpayer and Consumer Rights, said, ”We are being held hostage by a handful of energy companies that, under deregulation, got control of our electricity supply.” He called the hike ”a shameful rip-off.”

Consumer Watchdog
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