California Commission Proposes to Increase Electricity Rates

Published on

San Jose Mercury News

 Seeking to calm the state’s turbulent energy markets, a state commission on Wednesday proposed boosting residential electricity rates by an average of $ 5 a month for three months, but the plan appeared unlikely to persuade lenders to keep California’s two largest utilities financially afloat.

The proposal from the California Public Utilities Commission would boost rates 9 percent for residential customers, 7 percent for small businesses, and 15 percent for big businesses, while the agency studies whether more increases are needed. If approved by the commission today, which appears likely, it would go into effect immediately.

But the proposal was swiftly panned by some consumer advocates, and utilities warned it could drive them into insolvency and force them to begin rationing power. While PUC President Loretta Lynch said she’s not convinced that will occur, a leading Wall Street analyst was concerned.

Standard & Poor’s David Bodek said the measure probably won’t provide enough money to accomplish its main purpose: ensuring the financial health of Pacific Gas & Electric Co. and Southern California Edison.

The message the proposal sends “suggests that the regulators are not supportive of the utility or interested in maintaining its financial viability,” he said. “That could give capital markets cause for concern.”

Bodek said approving such a plan could result in the utility companies having their credit ratings lowered, which would make it harder for them to borrow what they need to pay their bills. Unless some other emergency measure is taken, he added, the result of such a credit crunch could be to drive one or both companies into bankruptcy.

The stocks of both utilities fell to new 12-month lows Wednesday, dragging down most other utility stocks with them. The stock of Edison International — Southern California Edison‘s parent company — plummeted $ 2.75 to $ 12.25 while PG&E Corp. — the parent company of the San Francisco-based utility — dropped $ 2.56 to $ 17.

Grim-faced officials with PG&E and Southern California Edison, who have lobbied for months for a sizable rate boost to stave off bankruptcy, also reacted to the proposal with disappointment.

“Banks will not lend on the basis of this proposed order,” PG&E chairman Robert Glynn told the four members of the commission, predicting that his company will be forced into default on some of its debts within days.

Edison attorney Henry Weissmann went further, saying the plan gave him no choice but to ask the commission to officially excuse his company from its legal obligation to provide power for all its customers, because power suppliers may no longer be willing to sell on credit.

“We are deeply disappointed by the proposed decision,” Weissmann said. “We are extremely concerned that this decision will lead to shortages of electricity in California and blackouts for our customers.”

Edison spokesman Gil Alexander said the company’s chief financial officer, James Scilacci, had been on the phone with Wall Street rating firms in the evening. They told him they intend to downgrade both utilities if the PUC‘s proposed decision is enacted on Thursday.

“Exactly what we predicted in these hearings, which the commission appears to have ignored, will apparently come true,” Alexander said. While the rating firms have a range of lower credit grades that they could assign to the utilities, Alexander said any of them “represents dire consequences.”

A lower rating means the amount of interest a utility is paying on some bonds they have already issued will go up. Second, the terms of some bonds allow the bondholders to force the utilities to pay off the entire amount immediately if their credit ratings sink. And finally, Southern California Edison and PG&E would have an even harder time issuing new bonds or convincing banks to lend them money they need to cover their costs.

Lynch, PUC president, didn’t seem convinced the utilities would be forced to ration power.

“I think there’s a variety of actions that the state of California could take, as well as the utility itself could take, as well as what the utility holding company could take before you cross that bridge,” she said.

She also suggested that many of the dire predictions the commission had heard were overstated.

“You know, all sorts of folks — as we’ve seen throughout this process — trade on all sorts of rumors and all sorts of pressure,” she said. “What I’m going to do is look at the facts.”

Both utilities have been decrying their financial plight for months, since the amount they can charge their customers under the frozen rate is far less than they pay for power on the wholesale markets. As a result, the companies, which were encouraged to sell many of their own power plants under the state’s 1996 deregulation law, claim they have sunk nearly $ 9 billion in debt this year.

Although utility officials had wanted the commission to make consumers pay that $ 9 billion tab, the plan made public Wednesday doesn’t go that far.

“We intend to ensure the continued ability of PG&E and Edison to provide reliable service at just and reasonable rates,” the proposed order said, noting that, if it is approved, the commission will begin more hearings next Wednesday on what to do after the three-month-period ends. Much of what the commission decides in the future will hinge on the outcome of an independent audit of the two utility firm’s finances that the commission has ordered.

But the way the proposed decision is worded suggests PG&E and Southern California Edison will have a hard time convincing the agency to satisfy all of their requests for money.

“We are very troubled by the utilities’ assumption that ratepayers must bear the burden of significant rate increases without the shareholders sharing in the pain,” the proposal said.

Moreover, it pointed out that the utilities have sent billions of dollars in profits to their parent corporations since deregulation began. In PG&E‘s case, it said, that amounted to $ 9.6 billion, much of which was spent on stock dividends and paying off old debts. The proposal noted that PG&E had issued a dividend in its third quarter this year, instead of “establishing a contingency fund” in case its financial situation worsened.

Some consumer advocates found the commission proposal encouraging.

Michael Shames, of the San Diego-based Utility Consumers’ Action Network, liked the idea that poverty-level families would not face a rate increase under the plan and that it would only be in place for three months. “It is a decision that will make no one happy, but leaves the door open for the legislature and governor to effect permanent fixes to a very flawed energy policy,” he said.

But others found little to like. Some threatened to challenge its legality because it would grant a rate hike — termed an “interim surcharge” — without ending the state’s three-year-old freeze on retail rates. Other’s voiced fears that if passed, many more increases could follow later.

The proposed rate hike — which would boost the average resident’s monthly bill from $ 54.50 to $ 59.40 — would be “just the first installment,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights, who urged state lawmakers to overrule any such increase. “Unless the legislature steps in, your utility bill is going to look like your mortgage.”

One prominent state business group state also was disgruntled over the proposal, complaining that it unfairly targets large commercial and industrial customers for a higher rate hike.

“Everyone knows that the most efficient users of electricity is the industrial sector and the most inefficient is the smaller companies and residential users,” said Jack Stewart, president of the California Manufacturers and Technology Association.

Given the commission’s makeup, passage of the proposed increase appears likely.

Commissioner Carl Wood said he would be “very surprised” if the ruling adopted today has any “drastic changes” from what was proposed on Wednesday, adding that he believed it was sufficient to allow the utilities to continue borrowing money in the near future.

The plan was drafted by two administrative law judges working under the direction of commission President Lynch. Unlike Wood and Lynch, who were appointed by Gov. Gray Davis, commission members Henry Duque and Richard Bilas are holdover appointees from the Wilson administration. But they said they do not expect to submit any alternative proposals.

And Davis — who had been negotiating privately with utility company officials, lawmakers and consumer advocates in an attempt to broker a rate increase that might appeal to them all — took steps Wednesday to insure that he has a majority on the five-member commission.

Davis selected his chief energy adviser, John Stevens, to temporarily fill the vacancy left by departing member Josiah Neeper. A statement issued by Davis’s office added that Stevens will vote on the commission today and will serve as “interim commissioner, with a permanent commissioner to be named later this month.”

On Wednesday, Davis also ordered the legislature to begin focusing intensely on electricity issues in a special energy session that will run concurrent with the regular session. He urged lawmakers to take limited action on a several fronts to fix what many people regard as a issue of near-crisis proportions in the state.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

Latest Videos

Latest Releases

In The News

Latest Report

Support Consumer Watchdog

Subscribe to our newsletter

To be updated with all the latest news, press releases and special reports.

More Releases