San Diego Union-Tribune
SACRAMENTO — State electricity regulators ended a four-month deadlock with the Davis administration yesterday, paving the way for a $12.5 billion bond to repay the state for power purchases and a possible rate cut before the November election.
Consumer groups, however, complained that the proposed rate agreement between the Public Utilities Commission and the state power-purchasing agency, the Department of Water Resources, removes leverage to renegotiate long-term contracts that are likely to cause the state to overpay for power for years.
PUC President Loretta Lynch said that since the commission, controlled by appointees of Gov. Gray Davis, rejected the original rate agreement in September, momentum has been building for renegotiation with power generators.
Lynch said the Davis administration and Attorney General Bill Lockyer have joined the PUC‘s drive to reduce prices in contracts worth $43 billion.
“I’m less concerned about locking down the long-term contracts,” said Lynch, pointing to renegotiation talks. “From my perspective, it’s less of a worry to ratepayers.”
Lynch said the new proposal allows the state to get out of the power-buying business, makes it less likely that bond money will be used to pay for the long-term contracts and gives the PUC access to more state power financial data.
But she acknowledged that rates requested by the Department of Water Resources will not be reviewed for “reasonableness” by the PUC. Consumer groups say the PUC is giving up its regulatory power and will automatically approve water department rate requests.
Lynch said the PUC has no choice because the law authorizing the state to begin buying power last year forbids a reasonableness review of state requests to pay for power. The state took over power purchases when utilities crippled by a failed state deregulation could no longer borrow to make the payments.
Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica said he fears the end of the PUC holdout is an attempt to allow Davis, who is running for re-election, to announce a rate cut that would improve his standing with voters.
“I’m afraid that this is part of a plan to ram this rate agreement down the public’s throat, so the governor can more quickly have bond money available to temporarily lower rates next summer,” Heller said.
But Lynch said a rate cut depends on a number of unresolved issues: cutting fat from electricity costs, getting bankrupt Pacific Gas and Electric to agree to a PUC reorganization plan and making progress on contract renegotiations.
“Would that it were so,” Lynch said of the prediction of a pre-election rate cut.
Lynch said “the whole idea” of PUC approval of a rate agreement now is to allow the state to issue the bond needed to repay the general fund for power purchases by the end of the fiscal year June 30.
From there, power purchases would be paid for by rates charged consumers, something that has started happening to varying degrees.
A key component of the rate agreement is how the rate revenue is divided between the utilities and the state.
The PUC is asking for comment by Tuesday and plans to vote on the proposal Feb. 21.
“This is a significant step in the right direction to get energy bonds sold,” the governor said in a statement. “We look forward to approval of this agreement by the full commission at its next meeting.”
The state general fund spent more than $6 billion on power before obtaining a $4.3 billion short-term “bridge” loan last June. The original plan was to repay the general fund and the bridge loan with a $12.5 billion bond that would be paid off by ratepayers over 15 years.
But the PUC‘s initial reluctance to approve the rate agreement, followed by outright rejection in September, left the state unable to repay the short-term loan in October, triggering penalties and a conversion into an expensive three-year loan.
A state consultant, Navigant, estimates that interest on the three-year loan could cost ratepayers $780 million if it is not paid off early.
Under the proposed rate agreement, the amount originally planned for the bond, $12.5 billion, may be changed. The water department and State Treasurer Phil Angelides would develop bond numbers that would be reviewed by the PUC.
Angelides issued a statement welcoming the proposed rate agreement and outlining several things, in addition to formal PUC approval, that must be done before the bond can be issued.
He said a nationally recognized law firm must issue a legal opinion approving the financing structure, Wall Street must give the bonds an investment-grade rating and any court challenges must be resolved.
A spokesman said PG&E, which has threatened to file a lawsuit if it is shorted by the rate agreement, is studying the agreement and had no immediate comment.
Angelides previously has expressed doubt that the bond can be sold by the end of this fiscal year. He warns that failure to repay the $6 billion owed the general fund will force cuts in “education, health care and public safety.”
State Controller Kathleen Connell disagrees. If the general fund is not repaid for the power purchases, she said, the state can carry the debt on its books as a “receivable” and maintain its cash flow with short-term borrowing.