California Energy Regulators Give Up Power to Question Rate Hikes

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San Jose Mercury News

State energy regulators have reluctantly signed away one of their most fundamental consumer protection roles: the right to question and reject requests for higher power rates.

Under a proposed rate agreement with the state Department of Water Resources released Wednesday, the Public Utilities Commission promises to pass all the state’s power-buying costs directly to consumers.

Unlike its relationship with utilities such as Pacific Gas and Electric, the utilities commission will not be able to audit the department’s books or question its expenses. And it will have just 90 days to raise rates if the state concludes it needs more money.

“Previously, we had discretion to raise rates or not raise rates,” said Commissioner Jeff Brown. “Here, we’re in a situation where it’s a bill–pay it.”

The rate agreement, which the commission is expected to approve next month, marks a sea change for the agency.

The commission has acted as a check against exorbitant energy rates by reviewing utility costs and setting rates it deemed reasonable.

But now the state has stepped into the power-buying business, purchasing a third or more of the energy used statewide. The state wants to finance its costs with $ 13.4 billion in bonds, but says it needs to guarantee investors that ratepayers will repay them.

The rate agreement comes as no surprise. A state law passed in January says the commission must set rates to cover the water resources department’s bills.

Nonetheless, some consumer groups are fuming.

“It is effectively a blank check for the state,” said Doug Heller, of The Foundation for Taxpayer and Consumer Rights. “Any costs the state incurs– whether it be consultants for Gray Davis or trips to Texas–anything they pass on is considered just and reasonable. That’s deregulation on crack.”

Under the 17-page agreement, the Department of Water Resources will periodically send a “revenue requirement” to state utilities regulators. The regulators will use the document to set rates within the 90-day time frame.

If the department starts to run short of cash–because of dramatic spikes in the price of power, for instance–the commission could be forced to adjust rates within 30 days.

The commission would have minimal discretion to challenge the state’s revenue requests, according to the agreement, beyond pointing out “arithmetic error” or costs not related to paying off the bonds or buying power.

State officials said they cannot sell the bonds if investors believe the commission might reject any of the state’s power-buying costs.

At the same time, they said, officials are scrutinizing every contract they negotiate with power generators to make sure consumers are getting the best deal.

“Every contract is critiqued within our department,” said Oscar Hidalgo, spokesman for the water resources department. “And a lot of the administrative costs are handled the same way.”

Under the new arrangement, utilities would still have to justify their costs when asking for a rate increase, but the state would not.

Robert Finkelstein, an attorney with The Utility Reform Network, said the commission’s oversight of utilities has been far from perfect. But he said the mere threat of action has forced utilities to keep their costs in check.

“Here, with the DWR, you’ve removed that threat,” Finkelstein said.

Whether rates will need to go up again soon is not clear. The commission has already voted in two big rate hikes this year, one in January and another in March. The state is expected to give the commission its latest revenue requirement on Friday. State officials say that, with falling power prices, they do not see a need for higher rates.

But the utilities, which still provide more than half the power for the state, are just now starting to negotiate with the commission over their costs.

Consumer Watchdog
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