Higher charges will be sought, but CEO says they would be spread out

San Jose Mercury News

PG&E may seek to lift a state cap on Northern California’s electric rates later this year, the company’s top official said Wednesday, potentially exposing consumers to rate hikes months earlier than the utility company had indicated last week.

But Gordon Smith, chief executive officer of Pacific Gas & Electric Co., promised in an interview with the Mercury News that his firm will do all it can to protect customers from the rate shock that greeted San Diego residents this summer. San Diego Gas & Electric became the first utility in the state to be freed from the rate cap, and electric rates immediately doubled.

“We do not wish to put our consumers in the boat that consumers in San Diego ended up in,” said Smith. “Dropping 4.5 million electric customers into the boiling waters of the broken wholesale market is nothing we want to do.”

Smith said PG&E favors a deal that would spread out the rate hike over a long period, so consumers aren’t suddenly forced to pay market rates for electricity. Under the 1996 law that deregulated California’s energy market, the state Public Utilities Commission would have to approve any plan to unfreeze rates. But even if it does, Smith warned that one of the main causes of high power prices — California’s severe shortage of electricity — will remain a problem well into next year.

“I would say there is no question that there’s going to be rolling blackouts next summer,” Smith said. “There’s going to be more demand. And unless there are going to be major energy conservation programs to offset that, we would be in a critically short period . . . next summer.”

While the freeze in Northern California is still in effect, PG&E has been absorbing the cost of high power prices, because it’s unable to pass them on to consumers. Since June, PG&E says it has paid $2.2 billion more for electricity than it has recovered under the frozen rate.

Nonetheless, PG&E may have a tough time getting the rate freeze lifted — at least on its current timetable. Several Public Utilities Commissioners who were told of Smith’s comments reacted cautiously.

“We don’t want to jump into something too quickly,” said Commissioner Richard Bilas, who predicted that “nobody is going to be happy about this.”

“If we were out from under the rate freeze today, my monthly bill would double, it would go from $90 to $180,” said Bilas, who lives in Mendocino. “My goodness, doubling one’s electric bill is a real shock. And I can tell you this, there are a number of small businesses up there, if their electric bills double, I think a lot of them would be out of business.”

Critics rip PG&E Some consumer activists had an even harsher assessment.

“PG&E is really like a monster that’s out of control,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights, which has threatened to back a statewide ballot initiative that would re-regulate the energy industry. “The legislation created a Frankenstein and this Frankenstein has come to life, and they have their hands outstretched saying, `gimmie, gimmie, gimmie.’ ”

Under the state’s deregulation law, which went into effect in March 31, 1998, rates were frozen until March 31, 2002. That would allow companies that hoped to compete with utility firms such as PG&E time to obtain their own power plants and start generating electricity. The four-year period also was intended to give the utilities time to pay off their old power-plant debts so they could compete fairly too.

But if those power-plant debts were paid off sooner than March 31, 2002, the law said, the Public Utilities Commission could declare the freeze over. That’s what happened to San Diego Gas & Electric last year and at the time no one thought it would be a problem. For years, most experts had assumed that this newly competitive market would cause electricity rates to drop once the freeze was lifted.

That’s not what happened in San Diego. Instead, with supplies of power barely keeping pace with demand, prices soared.

Last week, PG&E reported to the federal Securities Exchange Commission that it would be able to pay off its power-plant debts and thereby satisfy the conditions for lifting the freeze as soon as it sells its vast hydroelectric system.

At the time, energy specialists predicted that such a sale might be concluded by spring, if the Public Utilities Commission approved PG&E‘s proposal to sell the system’s 68 powerhouses and 140,000 acres of watershed land to one of its subsidiaries.

But on Wednesday, Smith said the company may not have to wait until the hydroelectric system is sold. Instead, he said, the company may ask the commission to declare the freeze over this year based solely on the system’s estimated market value, which the company has put at between $2.4 billion and $3 billion — sufficient to recover PG&E‘s remaining debt.

Slow thaw promised “It’s one of our considerations,” said Smith. “When you look at just the strict accounting of what the hydro system is worth, boom, we’re at the point where we can say the transition period seems to have had all its conditions met” for ending the freeze.

He stressed, however, that consumers needn’t panic. Even if the freeze is declared over, the impact on electricity bills could be lessened by letting consumers pay off unusually high summertime costs over a long period, in much the same way that homeowners pay off a mortgage.

Moreover, he said, the federal government — which is investigating this summer’s price spikes — could find that power-generating companies took unfair advantage of San Diego’s consumers and order the firms to return the big profits many of them made. That presumably would ease the price pressure in Northern California once PG&E‘s rate freeze is lifted.

But some observers doubt that PG&E can persuade the commission to terminate the rate freeze before the hydroelectric system is actually sold.

“It’s an interesting theory,” Public Utilities Commissioner Henry Duque said, but he added that he would probably need more than PG&E‘s estimate of the hydroelectric system’s worth before he took any action on the freeze. “To me, it would have to be more than valuation. I need money in the bank. Then I know it’s there.”

Commission President Loretta Lynch said she wouldn’t act on the freeze until a thorough review of the environmental impact of the proposed hydroelectric sale has been completed, a process that she estimated could last well into the spring. “It will take a while,” she said. “It’s not as simple as snapping your fingers and coming up with a deal.”

Nettie Hoge, executive director of The Utility Reform Network, a consumer group in San Francisco, agreed.

“It’s preposterous, it won’t wash, it’s not going to happen,” given what occurred in San Diego this summer, she said. And if PG&E insists that it has a legal right to pursue Smith’s proposal, she warned, “it will be war over their interpretation of the law.”