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Los Angeles Times

California’s two biggest public utilities began pressing their case Wednesday for electricity rate hikes of up to 30%, the costly legacy of their ill-starred plunge into deregulation.

As the California Public Utilities Commission opened two days of hearings into the requests by Southern California Edison and Pacific Gas & Electric, consumer advocates mounted a full-court press against the proposed increases, saying the companies had gambled with deregulation and lost, and now must face the consequences.

“Utilities knowingly took a risk, and it’s their problem that it didn’t work out,” said Mike Florio, a senior attorney with the Utility Reform Network in San Francisco.

Wholesale power costs, unfettered by state regulation since 1998, have surged uncontrollably since May, pushed upward by increased demand, the higher cost of raw materials and, some argue, price gouging by producers and middlemen.

In Washington, Gov. Gray Davis pleaded the state’s case before President Clinton and conceded that the state’s energy crisis would not be settled soon. The day before, he had discussed the crisis with Federal Reserve Chairman Alan Greenspan.

“I think it’s going to be a good two years before we can have enough initial supply to balance out the demand,” Davis said after emerging from the White House. “When we have that, deregulation may work. But it’s clearly not working now. It’s an experiment that, at best, was prematurely launched in California.”

Davis said he had lobbied Clinton for an extension of an emergency order from Energy Secretary Bill Richardson that ordered wholesalers to sell power to California utilities. The extension was granted.

In San Francisco, three of the PUC‘s five commissioners attended Wednesday’s six-hour emergency public hearing, held before two administrative law judges. For the most part, they listened quietly without questioning witnesses, who included angry activists and defensive utility executives.

But at one point during the mostly subdued meeting, commission President Loretta Lynch lashed Edison attorney J.P. Shotwell when she learned that the utility had begun mailing special notices of rate increases to its 4 million customers–without waiting for PUC approval of the notice, as is customary.

“It is quite astonishing that you would choose to ignore our rules and procedures on such an important matter,” said Lynch, who accused Edison of “just willy-nilly” mailing “whatever you want to mail.”

Edison officials said they have spent $ 533,000 on the notices so far, but will stop mailing them in order to get PUC approval.

Edison general counsel Stephen E. Pickett said the utility sent the mailings because law requires the utility to notify customers within 45 days of any application to the PUC to raise bills.

Passing Costs to Customers

Edison and PG&E, which together serve the majority of Californians, estimate that they have paid $ 11 billion more for electricity than they have received from customers this year. Edison officials, in particular, have said they will go bankrupt in a matter of days if they do not get relief.

San Diego Gas & Electric, the other major investor-owned utility in the state, may also soon seek to raise rates, President Debra Reed told the PUC. Earlier in the year, the utility’s rates were capped. That came after SDG&E was allowed to pass along to consumers its higher electricity costs.

Municipal utilities, such as the Los Angeles Department of Water and Power, were never deregulated and have weathered the power crisis with relative ease.

The PUC appointed independent auditors Wednesday to examine Edison‘s and PG&E‘s finances and determine whether they need the rate hikes they have requested–30% for Edison and 26% for PG&E.

The commission’s independent consumer arm, the Office of Ratepayer Advocates, submitted an analysis opposing any rate increase, arguing that the rate freeze passed by the Legislature in its 1996 electricity deregulation law should last until its prescribed end on March 31, 2002.

“This would result in PG&E and Edison continuing to bear the high costs of procuring electricity for their customers,” wrote the Office of Ratepayer Advocates in testimony submitted Wednesday, “a risk the utilities recognized and agreed to accept years ago.” The advocate’s office offered a fallback position of a 10% rate hike if the commission believes one is absolutely necessary.

The advocacy office’s role is purely advisory, and the commission frequently does not follow its recommendations.

Even with the requested rate increase of 30%, a Southern California Edison official said, the utility giant will be losing money every day.

“If we were going to recover our costs, we’d need about an 82% increase,” Senior Vice President John Fielder said in an interview. Even that high amount would only ensure against future losses, not reimburse the company for the money it has spent so far, he added.

Company officials realize that an 82% increase wouldn’t be politically feasible, Fielder said. But although a 30% rate increase wouldn’t cover Edison‘s increased costs, he said, it would send a reassuring message to wary Wall Street analysts and allow the company to borrow enough money to remain solvent.

“This is not science,” Fielder said when asked how he arrived at 30%. “If it’s 29%, is that going to be a killer? Probably not.”

If the PUC grants Edison only 10%, “we’ll be unable to obtain new credit and it will be only a matter of time before our available cash will be exhausted,” said Stephen E. Pickett, a vice president and general counsel.

“The choices at that time are limited and very unpleasant,” he added, and could include electricity rationing in the form of rolling blackouts for Edison customers.

The PUC is expected to rule Jan. 4 on the rate hike requests, which the utilities say they need as soon as possible. Consumer advocates, meanwhile, tried to persuade the commission Wednesday to take its time.

“This is a setup,” said Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights in Santa Monica. “How can you do an audit of two $ 35-billion corporations in five days? It’s a whitewash.”

William Powers, legislative director of the Congress of California Seniors, told the PUC that the governor should consider declaring an emergency and seizing control of power plants. He said seniors with fixed incomes will be especially hard hit by rate increases.

“They need the heat, and they need the cooling,” Powers said. “They don’t have any choice if they’re going to lead healthy lives.”

The ultimate outcome for both the utilities and its customers is fraught with unknowns.

How to Apply Hike Is Not Clear

It is unclear whether the PUC, if it grants the rate hikes, would allow them to last for only a certain time or make them open-ended–effectively ending the current rate caps that were supposed to be in place for two more years.

Then there’s also the possibility that the PUC might put strict directions on how the utilities can spend the additional cash–say for power they have already bought but not fully paid for, or for power they plan to buy in the future. The utilities might balk at that, dragging the process out further.

There also is the unknown future of wholesale electricity and natural-gas prices. Those soaring costs–and the sticker shock felt by customers when they get their new bills–could so dampen demand for electricity that supplies would immediately start to swell and market prices would start to fall on their own.

Even if the PUC lets the utilities raise prices, consumers won’t feel the effect for another month, and Edison and PG&E wouldn’t see that extra cash for several weeks, said David Bodek, a utilities analyst at the bond-rating firm Standard & Poor’s Corp. in New York. So in the short run, the rate hikes would not make a material difference to the utilities’ financial statements.

It could be that the symbolism of the rate hike would be as important as the dollars generated.

That is something the utilities sorely need right now. On Wednesday, Edison‘s main Southern California Edison division said it has been shut out of the markets for bank loans and short-term debt securities that the company wants to issue to raise more cash. Edison said in a regulatory filing that, among other things, it has been unable to secure a $ 1-billion revolving line of credit.

“The important thing is not only what the commission does, but the extent to which it provides confidence to the capital markets . . . to open the spigots to the utilities,” Bodek said.

And that also remains unknown until the PUC acts, he added, because banks and other major credit lenders will first need to know exactly what the PUC plans. “We’ll need to hear from the banking community” to gauge their confidence with the PUC decision, he said. Right now, “there are many different possibilities flying around.”

Among the proposals being made was one offered by Assembly Speaker Pro Tem Fred Keeley (D-Santa Cruz), who suggested that, in lieu of rate increases, the PUC begin negotiating with PG&E and Edison to buy their hydroelectric plants, valued at between $ 4 billion and $ 6 billion.

That could give the utilities the cash they desperately need, and would give the state a lever to exert some control over the energy market. It would hardly make the state a dominant player, however. The two utilities’ hydroelectric plants can generate 5,100 megawatts of electricity, slightly more than one-tenth the state’s peak summer demand.

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