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Los Angeles Times

As state lawmakers on Monday dived into the politically turbulent waters of electricity rate hikes, Wall Street threw a lifeline to California’s sinking utilities, saying they appear to have survived their brush with bankruptcy and are worthy of investment.

The state Senate is expected to vote today on legislation that would clear the way for an increase in electricity prices for the majority of consumers who use more than the state considers the minimum “baseline” amount. The increases are only the first part of a package of laws aimed at saving California’s investor-owned utilities and restoring stability to the state’s reeling electricity marketplace.

“I have yet to see how we can handle this in the short and long term without a rate increase,” said Assembly Budget Committee Chairman Tony Cardenas (D-Sylmar), echoing a growing majority in the statehouse.

On a day when California recorded its 14th straight Stage 3 power alert, there also were these developments:

* President Bush appointed Vice President Dick Cheney to head a task force that will “boldly and swiftly” look for solutions to the nation’s energy problems. But Bush renewed his admonition that California must solve its own problems without substantial federal help.

* The urgency of the crisis was reinforced when it was disclosed that California already has burned through $ 400 million that Gov. Gray Davis had allocated for electricity purchases. According to Mike Sicilia, a Department of Water Resources spokesman, the money ran out late Sunday and new funds will come from his department, which “is now operating on the emergency authority of the governor.” It is unclear how long those funds will last.

* Negotiations over long-term power contracts for the state got underway in state offices in downtown Los Angeles. The contracts offer the prospect of much lower energy prices than those the state has been paying on the spot market. S. David Freeman, the general manager of the Los Angeles Department of Water and Power, kicked off the talks with two officials from San Jose-based Calpine Corp., a major power generator. Freeman has taken an open-ended leave of absence to serve as the chief negotiator for California as it attempts to stabilize and reduce electricity prices through long-term contracts.

* The Federal Energy Regulatory Commission ordered California’s nearly defunct electricity marketplace, the Power Exchange, to comply with a Dec. 15 federal order it has so far ignored. That prompted state legislative staffer John Rozsa, an aide to state Sen. Steve Peace (D-El Cajon), to quip that the order was the equivalent of “asking a dead man to sit up straight.”

* A formal audit of Edison‘s books released by the California Public Utilities Commission late Monday said that only stringent cost controls and the suspension of payments on pending bills kept the utility from running out of cash this week.

But the audit also confirmed that between January 1996–two years before the start of deregulation–and last November, the utility transferred about $ 4.8 billion of net income to its parent, Edison International, which used almost all of it to pay for dividends and share repurchases for the benefit of its own shareholders.

The audit’s gloomy projections were offset Monday by Wall Street’s apparent relief that the California Legislature had seemingly embraced a series of measures–including rate increases–to help the utilities repay billions they owe to wholesale electricity suppliers. Under deregulation, the utilities have not been allowed to pass along their financial burden to consumers.

The frenzy of activity in Sacramento and a vote of confidence by a major investment firm sent stock prices of California’s crisis-shocked utilities bouncing higher.

“Buy California; reason may return,” said Kit Konolige, a utilities analyst with Morgan Stanley Dean Witter & Co., in a report to clients.

“With passage of fixing legislation possibly starting today, bankruptcy threat diminishes to near zero,” Konolige said, raising his ratings on Southern California Edison and Pacific Gas & Electric to “outperform” from “neutral.”

Merrill Lynch & Co. analyst Steven Fleishman changed his investment advice Thursday, recommending that investors “accumulate” the utilities’ stock.

Previously, he had advised them to sell. He said the prospect of a legislative solution had reduced the risk of bankruptcy on the part of Edison and PG&E to less than 25% from “50-50ish.”

Shares of Edison International, the parent firm of Edison, rose 89 cents Monday to close at $ 13.08 per share, while PG&E Corp. jumped $ 1.52 to $ 14.02 a share. Sempra Energy, the parent of San Diego Gas & Electric and Southern California Gas, gained 46 cents to $ 20.71. All trade on the New York Stock Exchange.

Both Edison and PG&E declined to comment on their rebounding stock prices, citing company policy, but both noted that their financial problems have not eased.

“The urgency of the situation continues,” Edison spokesman Gil Alexander said. “The financial crisis for the utilities continues.”

“We certainly hope that there is good reason for the optimism of these financial analysts,” PG&E spokesman Greg S. Pruett said. “But if I have learned anything over the last couple of months, it is to keep quiet until something substantial and certain arrives.”

The Senate proposal being crafted Monday does not specify by how much rates would rise, or when. One measure circulating among lawmakers late in the day suggested that individual residential consumers–not commercial users–would bear the brunt of the rate increases.

Business interests, which had feared that the final bill would impose hikes on large industrial and commercial users, had lobbied furiously to beat back the threat of increases.

The proposal under consideration would authorize the PUC to raise rates on consumers who use 130% of their baseline allocation. The baseline is the amount deemed to be the minimum a consumer needs.

Assembly Speaker Bob Hertzberg (D-Sherman Oaks) said about 78% of Californians use more than 130% of the baseline amount. He spoke to reporters during an evening break from a meeting with top state leaders in Davis’ office.

He said no one will know whether a rate increase is necessary until the negotiations for long-term energy contracts are complete.

“We’re trying to be as prudent and conservative as we can,” Hertzberg said.

Sen. Jim Battin (R-La Quinta) said he would oppose the bill, noting that in desert regions, people quickly exceed that level.

“That loses my vote,” said Battin, who represents Palm Springs and much of the desert east of Los Angeles.

“It clearly is a rate increase bill,” said Assemblyman Bill Leonard (R-San Bernardino).

Department of Finance Director Timothy Gage said Friday that “modest” rate increases are likely as California takes the unprecedented step of entering the electricity business. Davis also softened his opposition to rate hikes.

Baseline electricity use varies by region. But most customers use more than their baseline allocation in most months, and pay higher rates for power consumed in excess of the minimum.

A consumer group, the Utility Reform Network, has proposed a similar structure for any rate increases. But under its proposal, only those who use 200% of their baseline allocation would pay higher rates.

“This concept is consumer friendly,” said Bill Marcus of JBS Energy which consults for the group.

One consumer group demanded Monday that power companies be required to sell off their out-of-state properties before California’s residential electricity customers are stuck paying higher rates because of the energy crisis.

“We’re at the moment of maximum peril for the rate-payers of the state,” said Harvey Rosenfield, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

During a news conference at which he urged electricity customers to lobby lawmakers against bailing out utilities, Rosenfield claimed that the companies prospered under the first 3 1/2 years of deregulation.

“They took the money and went on an international spending spree to buy plants throughout the United States and other countries. Now, they’ve run into trouble and they want the rate-payers to bail them out once again,” he said.

“The politicians in Sacramento have gone behind closed doors with the utility companies and the net result will be a $ 10-billion to $ 12-billion rate-payer bailout of the deregulation disaster.”

Rosenfield said residents should tell lawmakers that if a bailout is approved, “there will be a rate-payer revolt at the ballot box in 2002 and it won’t just be a ballot measure. It will be an individual accountability of the politicians who voted to protect the utility companies at the expense of the public.”

The audit of Edison by the firm of KPMG LLP was aimed at determining the real financial condition of the utility and how various regulatory changes might alter it. A separate report on the finances of PG&E has not yet been completed, a PUC spokesman said.

The Edison audit confirmed that only by defaulting on debt payments and power bills earlier this month did the utility avoid running out of cash. Although those measures improved its cash balance as of Jan. 19 from a projected $ 52 million to $ 1.23 billion, that result came with a price: the exhaustion of all of Edison‘s available credit, its inability to borrow any further, and the piling up of hundreds of millions in unpaid bills.

The auditors did not appear to take a stand on the utilities’ contentions that their so-called “stranded costs”–overruns from nuclear plant construction and the cost of uneconomical power from wind, solar and other alternative generators–had been covered as of last August. Under deregulation, the rate freeze will end as soon as that happens.

But the auditors did appear to indirectly endorse a consumer advocacy group’s proposal to apply $ 2 billion in profits Edison has earned from selling power from its own generating plants to the debt of more than $ 4.5 billion it has incurred in buying power at unprecedentedly high prices.

The change would have the effect of reducing the so-called “undercollection” to $ 2.5 billion. It would also delay the point at which the utility could demand an end to the rate freeze, auditors said.

On perhaps the most sensitive issue–how Edison spent billions of dollars in profits it earned before deregulation turned sour–the auditors confirmed that most of the money the utility earned from rate-payers was funneled to its parent company’s shareholders.

From Jan. 1, 1996, through November 2000, the auditors said, Edison paid $ 4.8 billion in dividends and other transfers to Edison International. The amount was “substantially equivalent” to the sums Edison then paid out to its own shareholders as dividends and share repurchases.

In the same period, moreover, Edison became more burdened by debt, with long-term debt rising to 57% of its total capital in September 2000 from 46% in December 1996–another possible sign of how Edison was left with fewer resources with which to manage the unexpected rise in power prices last year.

Signs that the audit may lead to political problems for the utilities emerged immediately.

The report “did clearly show that these guys grabbed the money from here, sent it back to their parent companies, the parent companies made money and sent it to stockholders as dividends,” said Senate President Pro Tem John Burton (D-San Francisco). “When they bought assets, they bonded them, so none are held free and clear and we can’t get our hands on them.”

As Burton and other lawmakers worked toward a solution to the energy crisis, an Assembly committee sought to learn what would happen if the utilities won a pending federal lawsuit against the PUC.

The answer was not pretty: PG&E and Edison could win as much as $ 12.7 billion, the amount they claim to have lost as a result of the PUC‘s refusal to lift rate caps. If so, the court would almost certainly order that the costs be borne by ratepayers in the form of rate boosts as high as 30%.

In testimony before the committee Monday, lawyers for the two utilities warned that if they did not act quickly, the issues will soon be decided in court.

A federal judge in Oakland on Monday denied a request from PG&E for a temporary restraining that would have allowed the utility to pass its energy costs on to consumers as rate increases.

However, U.S. District Judge Saundra B. Armstrong ordered the case transferred to Los Angeles, where it will be consolidated with a similar federal lawsuit filed by Edison, before U.S. District Judge Ronald S.W. Lew.

Besides its electricity woes, PG&E is encountering severe problems on another front: natural gas. The utility said it will seek a hearing Wednesday at the PUC on its emergency request that Southern California Gas be forced to sell gas to PG&E if suppliers stop shipping after Feb. 6. That’s when a federal order expires requiring gas and electricity suppliers to sell energy to cash-strapped PG&E and Edison.

PG&E has said 3.9 million residential and small commercial customers could be shut off from gas then because suppliers are demanding advance payments to keep the fuel coming. Under its proposal, Southern California Gas, whose financial standing is still strong, would act as a “procurer” for gas supplies that would then be routed to PG&E‘s customers.

Denise King, a spokeswoman for Southern California Gas, said PG&E‘s request should be rejected. Her company can’t afford to become, in effect, PG&E‘s banker, she said.

“This is not an issue of inadequate gas supply or constrained capacity. This is purely a bad credit issue, and we simply cannot take on PG&E‘s financial burden without jeopardizing reliable service to our 18 million customers,” she said.

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