Elements of a plan to ease California’s electricity crisis include a 10 percent rate hike, coupled with long-term cost protections for residential customers and a requirement that two huge utilities absorb a large chunk of their losses from this summer’s wholesale energy purchases.
Private negotiations between Gov. Gray Davis and the utilities are far from completed, but participants said Saturday that the pieces of a compromise were beginning to emerge.
The core of a potential agreement is to extend across the state a rate-averaging scheme similar to a plan that was launched earlier in San Diego to cushion ratepayers against sharp price spikes.
That plan, supported by Davis but rejected by consumer groups as a deferred bailout for utilities, spreads costs out over time to keep monthly bills stable.
Details are not likely to be available until next week, when the Public Utilities Commission holds two days of hearings in San Francisco.
“The bottom line is, look to the San Diego legislation and what was hammered out there. That’s where this is going,” said a state official familiar with the negotiations.
The San Diego rate-averaging plan was intended to reduce the typical residential electricity bill to $68 per month, down from an average of $120 per month. But there are mixed reports of its success, plus complaints that in January 2003, after the rate-averaging plan expires, San Diego ratepayers may face a “balloon payment” to cover San Diego Gas and Electric’s wholesale energy costs.
The proposed statewide compromise also is likely to include cost breaks for residential users in a two-tier rate system in which homes and businesses would be charged differently, although both types of customers would participate in the rate-averaging scheme.
And unlike the San Diego plan, the statewide version likely would include a rate increase of at least 10 percent, a hike that would be locked in and not subject to spikes in wholesale prices.
There is no indication that the mandatory 20 percent rate reduction contained in California’s original deregulation law – a provision that proponents used to sell the law to the Legislature in 1996 – is addressed in the negotiations.
A key sticking point is how much of the $8 billion paid by Southern California Edison and Pacific Gas and Electric since June to meet spiraling wholesale electricity prices will be covered by the agreement. The amount represents the costs they have been unable to pass on to ratepayers because of their rate freeze.
Those losses prompted the utilities to declare publicly – and repeatedly – that they feared insolvency.
“The recovery of the past costs is a very, very big deal to us,” a utility executive said.
Utilities say the cost should be passed on to ratepayers; consumer groups say none of it should be. Davis favors splitting the difference, saying about $4 billion should be borne by the companies and $4 billion by ratepayers.
The issue is of special concern to Wall Street, which believes PG&E and SoCal Edison need to recover the revenue from ratepayers to stay fiscally sound. If the utilities can’t make good the losses, they face a dramatic credit downgrade.
“We’ve made our position known at the highest levels of the (Davis) administration,” said Richard Cortright of Standard and Poor’s. “We need a solution that will allow the capital markets to reopen their doors.”
Negotiations between Davis, the utilities and – to a lesser extent – the consumers, have been stormy.
During the talks, Warren Christopher, President Clinton’s former secretary of state and now a utility company board member, told Davis, “It’s time for leadership,” the San Jose Mercury News reported Saturday.
At that point, Senate Leader John Burton stood up and threw a crumpled dollar bill on the table, saying the buck had to stop somewhere, the newspaper said.
Consumer groups are skeptical of Davis, and contend a San Diego-style rate-averaging scheme would constitute a sellout to utilities. They oppose any attempt to recover the $8 billion from ratepayers.
“We absolutely will not tolerate a retroactive back billing,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights.
“He’s clearly leveraging us against the utilities. The fear I have is that the 10 percent (increase) won’t be lifted until the utilities are completely bailed out, until the entire burden of this deregulation fiasco of $30 billion is paid off by the ratepayers,” Rosenfield said.
For months, California’s electricity grid has been stressed by high demand, scant reserves and soaring wholesale prices.
The state’s deregulation law, as approved in 1996 by the Legislature and implemented by the Public Utilities Commission, required investor-owned utilities to sell off their generating facilities and buy power on the open market by March 2002.
When their facilities were sold, the utilities could operate without a rate freeze. The goal was to get lower rates for consumers through increased competition in the market place.
SDG&E was the first to complete its transition to deregulation.
PG&E and SoCal Edison say they, too, have completed the transition, and they want their rate freezes lifted. The PUC said it is likely to grant rate hikes, and will formally take that action on Jan. 4.
The size of those increases is unknown, but is likely to reflect the negotiations between the utilities and Davis, who after Jan. 1 will control a majority of the PUC‘s membership through his appointments.