big users seen hardest hit

Retail Services Report

California’s Public Utilities Commission, claiming it needed to act to prevent blackouts this summer, Tuesday approved a 3-cent/kWh rate increase for all Pacific Gas and Electric and Southern California Edison customers. The action drew fierce protest from consumer groups, which promised opposition in court and at the ballot box, and from the utilities, one of which said the hikes were illegally done.

The PUC also made permanent a 1-cent/kWh surcharge it imposed on customers in early January. Taken together, the two increases represent increases of from 26% to more than 40% in rates, which had been frozen at June 1996 levels under the state’s electricity restructuring law. Large customers could see perhaps 90% hikes, they said.

Just how the increase will be apportioned among customer classes is still unclear and the commission promised to hold hearings on that issue during the next 30 days. But the burden is expected to fall heavily on industrial and large commercial users, who currently pay substantially less per unit of power than smaller customers, and on households that consume the most power.

Still, despite the rate hike and Gov. Gray Davis‘ plan for a bond issue, California’s balance sheets will show a deficit as early as October, state Controller Kathleen Connell said Wednesday. ”Another cash-flow crisis is looming on the horizon,” she said. She also projected that the state will pay about $ 26.8 billion for energy in the next 18 months, more than the funds recoverable from Tuesday’s rate hike, $ 7 billion, and the bond sale, $ 12.4 billion, during the same period. ”This analysis does not even include the $ 9 billion expected by the state’s administration to purchase the [utilities’] power grid,” she said.

The PUC rejected an administrative law judge’s recommendation to deny the rate hike on grounds that the utilities had not demonstrated that it was justified. Instead, at a raucous public hearing in which four consumer advocates were ejected for heckling, the commission unanimously adopted PUC President Loretta Lynch’s alternative decision, which was finalized only minutes before the meeting.

The two commissioners appointed by former Republican Gov. Pete Wilson stressed that if the PUC had heeded their call and raised the utilities’ rates last fall, it could have avoided such a large increase now. ”Today’s rate increase is long overdue. We are finally transferring some blood into the utilities,” said Commissioner Richard Bilas. ”Absent an immediate rate increase, the utilities will be in bankruptcy court.”

The commissioners heaped blame on out-of-state generators, who they charged have earned billions of dollars of excess profits from gouging consumers in California’s dysfunctional wholesale power market, and on the Federal Energy Regulatory Commission for refusing to curb price gouging and market power abuses by those companies.

”When we gave up cost-of-service regulation, we set the stage for what is happening today. I hereby call for re-regulation in California,” said Commissioner Carl Wood, the PUC‘s staunchest consumer advocate. ”If the New York stock market was regulated as loosely as the energy markets, it would be subject to the same lawlessness and would have collapsed by now,” he said. ”As long as the cop is asleep on the beat, we can either have no electricity or we can raise rates. There’s nothing in between,” said Wood.

Lynch expressed confidence that the rate hike, the largest in California history, will give the two cash-strapped utilities enough money to cover the state’s power needs and pay more than $ 5 billion they owe qualifying facilities, the Dept. of Water Resources, and California Independent System Operator for power already supplied to their customers.

A PG&E spokesman said the utility would not know if the rate increase was large enough to cover its power purchases until the DWR supplied information about how much power it had bought for PG&E customers and at what price. ”The bottom line is it depends on how much power the state is purchasing and how effective conservation programs are,” said PG&E spokesman Ron Low.

PG&E President and CEO Gordon Smith, in a written statement, blasted the PUC for adopting an accounting method proposed by a consumer group last fall that will impel the utility to balance its wholesale power costs and its own generation revenues in a single account.

While authorizing the rate increase, the PUC nonetheless Tuesday determined that PG&E and SoCal Ed had not met the legal requirements for ending their electric rate freezes.

The action violated California’s electric restructuring law, which mandated that utilities’ electric rates be frozen until their stranded costs are fully recovered and market valuation is completed for their generating assets, Smith said, declaring the utility will challenge the PUC‘s decision. Both PG&E and Edison have filed federal lawsuits against the PUC for failing to end their rate freezes and authorize them to recover an estimated $ 14-billion in uncollected wholesale power costs from ratepayers.

Smith charged that the PUC was arbitrarily rewriting its ratemaking rules in order to artificially extend the rate freeze. ”Rather than acknowledge utility arguments that the rate freeze conditions have been met, the commission attempts to order the company to retroactively change the recovery of stranded costs, going back to January 1998, and then to account for those costs in a manner contrary to state law,” he said.

Smith charged the PUC with destabilizing the utilities’ precarious financial situation by ordering PG&E and Edison to pay the DWR retroactively for buying about one-third of the power for their customers since January. ”This order mandates a payment that upsets the company’s efforts to treat all creditors in a non-discriminatory manner,” he charged.

Smith also criticized the PUC‘s decision ordering PG&E and Edison to pay their QFs for the power they deliver within 15 days of receiving an invoice or face fines equal to the amount they owe. ”The actions do not offer a comprehensive solution, fail to resolve the uncertainty of the crisis, and may even create more instability,” he said.

A SoCal Ed official said the hike may not provide enough money to enable the embattled utility to pay its power bills and ward off its creditors, including hundreds of small power producers who haven’t been paid since November for. ”I’m concerned. This is no guarantee at all,” said Bruce Foster, SoCal Ed’s vice president of regulatory affairs.

Instead of a fixed rate increase, Edison would like the PUC to let it increase its electric bills to keep pace with soaring wholesale electricity prices. ”To the extent that wholesale electricity costs go up, we should be able to collect it from ratepayers,” Foster said.

The rate increase will take effect immediately but will not appear on customers’ bills until May. The utilities’ current rates will remain in effect until the PUC completes its rate design proceeding within the next 30 to 45 days. In the interim, the utilities will credit the higher rates in their balancing accounts.

The rate increase will apply only to future power purchase costs and not retroactively to an estimated $ 14 billion that PG&E and Edison claim ratepayers owe them for uncollected wholesale power costs beginning last summer.

Under Lynch’s proposal, industrials would face a 90% rate hike on top of the 25% increase the PUC adopted in January, said William Booth, counsel for the California Large Energy Consumers Assn., or CLECA. While the hikes may force some manufacturers to move out of state, others will pass on their higher production costs in higher prices for consumer goods, he predicted.

”We’re going to work very hard in the next 30 days to avoid a 90% rate increase” and dissuade the PUC from shifting the burden from residential to industrial customers, Booth said. ”That’s bad public policy. It’s a very political response to an economic problem.”

Lynch’s decision establish a tiered rate structure for residential rates in which customers who use the most electricity would pay higher prices, particularly during peak demand periods and anticipated power shortages this summer. PG&E‘s current residential rates are 10.7 cents/kWh, while Edison charges residential customers 11.4 cents.

The tiered rate structure is designed to provide a financial incentive for households to cut down on their peak energy usage in order to ensure reliability and avoid rolling blackouts. Households that use 130% or less than the baseline, which is the minimum established household usage for their region, would avoid any rate increase by conserving power. Assembly Bill 1x, which authorized the DWR to purchase the utilities’ ”net short” power supply, established a safe harbor to exempt baseline customers.

Lynch’s proposal would also exempt low-income customers who receive state subsidies for electricity under the CARE program. Lynch estimated that 45% of residential users would not have any rate increase this summer.

Consumer activists denounced the PUC for making ratepayers pay for the failure of state and federal policy makers to go after the out-of-state generators that have profited from California’s dysfunctional wholesale electricity market.

”Deregulation has been a license to steal. In the face of the largest economic ripoff in California history, the government is increasing our rates,” charged Doug Heller of the Foundation for Taxpayers and Consumers Rights. ”We’ll scour this to find a way to derail it. We’ll take it to the courts, to Sacramento, and to the ballot box,” he vowed.

”The generators are like sharks in the water. As soon as they smell money, they go after it,” charged Nettie Hoge, executive director of The Utility Reform Network. Unless FERC acts quickly to put the brakes on wholesale prices, future rate increases are inevitable, she predicted. She called on Gov. Gray Davis to exercise his power of eminent domain to take over power plants from out-of-state generators and impose capital gains taxes on their excess profits. ”I don’t understand why the governor would stand back and let the state’s economy collapse,” Hoge said.

Staff in Davis’ office said the governor would likely decide whether to support the rate increases ”in the next ten days or so.”

The governor issued a statement late Tuesday that said he does not support any rate increase at this time because the ”appropriate financial numbers” are not available. ”From the beginning, I’ve said that my main goal was to solve this problem while protecting the consumer from undue rate hikes.

”The PUC‘s action today was premature because we do not have all the appropriate financial numbers necessary to make a decision. Until we do, I cannot support any rate increase,” Davis said. ”While I have opposed rate increases, if it becomes clear that a rate increase is absolutely necessary for the good of the state, I will support one that is fair and do my duty to convince Californians of its necessity.”

Davis’ staff reiterated that he had been unaware of the PUC‘s proposed 3-cent hike, and refused to speculate as to whether the governor would eventually support the hike, or how it would affect negotiations with the state’s utilities — the two near-bankrupt companies and San Diego Gas & Electric — over the purchase of their transmission assets. Davis’ staff said that until the DWR supplies the governor with information on the amount of money it will need to cover past power purchases, as well as future purchases, the governor cannot determine whether or not the rate hike is warranted.

According to one senior industry source, the governor and the PUC‘s move toward possible a rate hike may have been precipitated by key state finance officials, such as Treasurer Philip Angelides, who said recently that concern has grown that the governor’s 5% to 10% demand reduction through conservation efforts may not be realistic.

Moreover, 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 from the DWR’s power purchases. The state has spent more than $ 3 billion in two months to cover about one-third of the PG&E‘s and SoCal Ed’s power needs. The state treasurer observed the state may need a $ 5 billion bridge loan from banks just to cover power purchases into early May.

The financial community greeted the rate hike proposal as step in the right direction. ”It seems the [PUC] may have stepped out of denial with this decision,” said Neil Stein, analyst with Credit Suisse First Boston. ”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 us to make up the difference between wholesale and retail prices, and [it] could no longer avoid a rate increase,” Stein argued.

Stein cautioned that the rate hike would not absolve the state Legislature from addressing the nearly $ 14 billion in debt racked up by the utilities in past power purchases over the last several months.

That sentiment was echoed by an official at the state’s Power Exchange. ”The state has spent a considerable amount of money for power. It hasn’t purchased near what it will needs 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 taxpayers’ dollars, and not accomplishing anything. And then a [proposed] rate hike is announced anyway,” said the PX official.

At the same time, the PUC authorized spending nearly $ 138 million a year through 2004 to help residential and business customers offset the cost of onsite renewable and clean distributed generation systems and to fund new load reduction programs.

A state law enacted last year requires the PUC to establish new programs to promote demand reduction and customer-owned renewable and clean distributed generation systems. The legislation (AB 970) directed the PUC to authorize a surcharge on retail bills to cover the program costs.

The incentives will be available to customers who install photovoltaic systems, fuel cells and internal combustion engines, microturbines, small gas turbines, and wind turbines to provide some or all of their generation.