San Jose Mercury News

SAN JOSE, Calif._Intensifying pressure on state officials, a leading Wall Street rating firm said it will drastically lower the credit status of California’s two largest electric utilities unless the state approves a consumer rate increase this week.

Wall Street needs to see action in the next two days, Standard and Poor’s analyst Richard Cortright said on Wednesday. But consumer advocates promised to file a lawsuit if the state Public Utilities commission approves a rate increase when it meets today, since there has been no public examination or discussion of any proposals. And state officials said it won’t be possible to approve a rate increase by Friday.

Gov. Gray Davis, who has said consumers will have to accept some form of rate hike, spent the day on the telephone with financial analysts _ “trying to reassure them that the sky is not falling,” said Steve Maviglio, the governor’s press secretary.

“He’s trying to send the signal to Wall Street that they should keep the money flowing,” Maviglio added.

The announcement by Standard & Poor’s analysts threatened to cripple the utilities by making it virtually impossible for them to borrow money they say they need to stay afloat. It came as Davis continued efforts to negotiate with utility executives, while consumer groups stepped up their own efforts to block what they characterized as an unjustified corporate bailout.

“The utilities and other players in the financial markets are creating a stampede, using the threat of bankruptcy as a form of extortion or economic blackmail, to force our elected officials to enter into a bailout,” charged Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights.

The state’s two biggest utilities _ Pacific Gas & Electric and Southern California Edison _ say they have racked up $8 billion in deficits this year because their wholesale costs have exceeded the rates they are allowed to charge customers under the state’s 1996 deregulation law. Both utilities have filed federal lawsuits aimed at forcing the state to let them raise their retail rates. Edison also notified federal regulators this week that it may be forced to declare bankruptcy if it is not granted some relief.

By late Wednesday officials said no deal had been reached on a specific rate-hike proposal and that it was unlikely the PUC would act on such a plan today, although the commission may take some procedural steps that would clear the way for a future rate hike.

The PUC could then take up a proposal when it meets again in January, according to one source familiar with the discussions. Davis is hoping to have legislative support by then, although it’s unclear whether there would be time for legislators to formally ratify the proposal.

The president of Pacific Gas and Electric Co., however, said the S&P warning “sends a message to Governor Davis and California’s leadership that now is the time for action.

“The solution to this problem is now in the hands of the governor and the California Public Utilities Commission,” said PG&E president Gordon R. Smith, who said his company had “virtually exhausted its financial resources.”

Maviglio agreed that the consequences of S&P downgrading the utilities’ credit rating would be “dire.” He said the governor could potentially respond by declaring an emergency or even appropriating state funds to support the utilities.

Utilities have seen their wholesale costs rise dramatically this year because power demands have repeatedly exceeded supplies. State officials declared yet another stage two alert Wednesday, which means power reserves dipped below 5 percent.

Even as Davis worked to convince Wall Street analysts that utilities will be allowed to pass on some of their costs to consumers, legislative leaders also signaled their reluctance to rush into a bailout.

Aides to the Legislature’s Democratic leadership said they are concerned that granting an immediate rate hike would remove the utilities’ incentive to negotiate longer-range solutions to the state’s energy crunch.

“It’s a strategic problem,” said one legislative aide involved in discussions. “If you start with the premise that no matter what the cost is, we’re going to pass it through (to consumers), you lose the incentive” to come up with a big-picture solution.

Echoing the skepticism of consumer groups, legislative leaders also said they want an independent analysis of the utilities’ financial claims.

“They are still looking at ways to _ I don’t want to say ‘verify’ _ but to examine in detail and with some specificity the financial situation of the utilities,” said Paul Hefner, press secretary to Assembly Speaker Robert Hertzberg, D-Sherman Oaks. Hertzberg and state Senate President Pro Tem John Burton, D-San Francisco, met with Davis and utility officials on Tuesday. Their aides held further discussions Wednesday, and those talks are expected to continue.

If an independent analysis proves the companies are in financial trouble, Burton said, the focus then will shift to utility consumers, who would then be forced to pay higher rates.

“If ratepayers are asked to pick up the check, what are they gonna get for it _ public ownership of the transmission lines?” Burton asked. “They have to get something.”

Though Davis has not said publicly how much of a rate increase he would support, Burton said the governor promised not to go over 10 percent.

But some legislative aides said they had heard reports that rates would rise anywhere from a total of 10 percent to 10 percent a year for five years. Maviglio said those were just numbers that were tossed around in discussions.

“There is no agreement on numbers,” Maviglio said. “But from the governor’s perspective, the less, the better. We don’t want rate shocks because of the impact on the economy _ and consumers’ pocketbooks.”

Standard & Poor’s analysts, however, said they believe the utilities need at least a 20 percent rate increase to stabilize their financial situation.

“We’re looking for the California PUC to grant a rate increase well north of the 10 percent that the state is offering,” said Cortland.

State and federal officials have also discussed imposing a cap on the wholesale price of electricity sold in the Western United States. But the S&P analysts said that wouldn’t go far enough to solve the utilities’ financial problems.

Consumer advocates maintain that the utilities have other financial resources, including billions of dollars that the utilities have collected by selling power from their own generating plants and other revenue that was earmarked for paying off investments that were expected to become unprofitable in a deregulated market.

“The utilities want it both ways,” charged Nettie Hoge of the consumer group known as The Utility Reform Network. “We have to ask why would anybody believe these companies when they say they’re near financial catastrophe.”

Rosenfield accused Davis of selling out consumers and promised a “political firestorm” of retribution. “We predict there will be broad and massive support of legislation to stop this bailout,” he said.

A spokesman for Southern California Edison said his company would have no comment. But Smith at PG&E reacted to the consumer advocates:

“It is astounding that only hours after Standard & Poor’s warnings, TURN and others are still questioning the severity of this crisis,” he said. “The time for pointing fingers has passed.”