Sacramento Bee

Sparking accusations that it’s abandoning its watchdog role, the Public Utilities Commission took the first step Wednesday toward promising to raise rates as much as necessary to pay the state’s electricity bills.

PUC President Loretta Lynch released a proposed version of the promise – a legally binding document known as a rate agreement. Although the agreement doesn’t say there will be more rate hikes, it does commit the PUC to raising rates when requested by the state Department of Water Resources.

The agreement is essential to the state’s plan to sell $13.4 billion in bonds in September to cover the water department’s power purchases. The department has been buying electricity for California’s three troubled investor-owned utilities.

The bonds are to be repaid with money from customers of the three utilities. Investors would shy away from buying the bonds unless the PUC adopted the rate agreement, said Zane Mann, editor of the California Municipal Bond Advisor newsletter.

“Everyone’s been kind of waiting for it,” he said of the agreement.

State Treasurer Phil Angelides, who is in charge of marketing the bonds, said in a prepared statement Wednesday that the rate agreement “must be adopted so that the (state’s) general fund can be repaid, and to protect the state’s fiscal solvency.” Angelides has been promising potential bond buyers that the rate agreement would be adopted.

The full PUC is scheduled to vote on the agreement Aug. 23.

It’s unclear whether the agreement will lead to a rate increase any time soon. The water department, which will release updated revenue requirements this week, says it doesn’t think the new numbers will generate another rate hike beyond the 30 percent increase the PUC approved in March for Southern California Edison and Pacific Gas and Electric Co.

Still, consumer advocates said the rate agreement would represent a surrender of the PUC‘s traditional job of protecting ratepayers.

The agreement would permit “an unaccountable state agency, riddled with conflicts of interest, to unilaterally order rate hikes,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

The water department has been accused of conflicts of interest because some of its consultants and energy traders own stock in energy companies.

Rosenfield said the PUC should reject the rate agreement and “preserve their historic role and responsibility to protect ratepayers.”

Geoff Dryvynsyde,(CQ) Lynch’s legal adviser, said the “consumer groups are raising some good policy issues,” but the commission’s hands are effectively tied by legislation that put the state in the power-buying business and set in motion the bond sale.

“The bonds are really driving this,” he said. “The bonds need to be sold.”

Nevertheless, Eric Woychik(CQ), a consumer advocate with the Oakland-based group Strategy Integration, said ratepayers shouldn’t be held responsible for high-priced power bought by the water department.

“They shouldn’t pay for poorly negotiated contracts and market power abuses,” Woychik said. State officials contend they were gouged by wholesale generators, while consumer groups have criticized the water department for entering into long-term purchase contracts at prices that exceed current spot-market prices. Woychik noted that the state is pursuing billions in refunds from the power generators.

The state has committed more than $8 billion from the treasury for power purchases, causing Wall Street to downgrade the state’s credit rating. The bond offering – the largest government bond sale in U.S. history – is designed to replenish the treasury and finance future purchases.

Despite some uncertainty about the state’s finances and the effects of the energy crisis, the bonds should sell well, Mann said.

“Mutual funds have been accumulating money to buy the bonds,” the newsletter editor said.