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Los Angeles Times

The state Public Utilities Commission on Thursday moved to rescue the state’s largest electric utilities from soaring power costs by clearing the way for rate hikes as soon as Jan. 4.

Meeting amid a power crisis that has threatened blackouts throughout the state, the commission balked at flatly eliminating a 4-year-old rate cap that was created to protect consumers at the start of deregulation. But, in a 5-0 vote, commissioners laid the groundwork to repeal that limit.

The state’s two biggest power companies said rate hikes are necessary for them to recover the skyrocketing costs of electricity in California’s deregulated power market. Although 1996 legislation creating that market was intended to cut energy costs, it has had the opposite effect this year.

Details–including the amount–of the rate increase will be decided by the PUC after hearings next week and after commissioners receive the results of an audit to verify the power companies’ claims of financial distress. Utilities could be allowed to raise rates immediately, without first notifying customers.

The rate hike would not affect residents of Los Angeles, Pasadena, Burbank, Riverside and other cities that rely on public power utilities.

With consumer rates locked in by the deregulation law at 1996 levels and the price of electricity soaring to new highs in 2000, Southern California Edison and Pacific Gas & Electric Co. faced possible bankruptcy if the PUC did not act, Wall Street analysts warned.

But with their credit ratings hanging in the balance and their stocks plunging during heavy trading Thursday, Edison and PG&E were circumspect about the PUC‘s decision.

Edison issued a brief statement calling the PUC action “encouraging.” PG&E Senior Vice President Dan Richard pledged to be responsible in implementing rate hikes and said he hopes to see a reaction from rating agencies today.

“We’ve got proposals we’ll put on the table to smooth out rate increases,” Richard said. “We need to stabilize our financial situation so PG&E and everyone can focus on job No. 1–getting wholesale electricity prices under control.”

But consumer groups expressed concern about the move, saying that the PUC should take steps to protect taxpayers, such as granting public ownership of the utilities’ main transmission system or requiring the companies to dedicate the power plants they own to serving customers at low, stable rates.

They also urged the PUC to weigh the utilities’ current debt of several billion dollars against about $ 20 billion in revenue the two companies collected in the first few years of deregulation.

“Consumers have already paid a hefty price for deregulation,” said Matthew Freedman, an attorney with the Utility Reform Network in San Francisco.

Even commissioners were openly unhappy about their position.

“There aren’t going to be any good decisions that come out of this commission,” Commissioner Carl Wood said. “There is going to be some kind of bad decision. We are going to do something that will affect people’s rates, that will affect the well-being of the utilities.”

Audit to Check Companies’ Claims

Before approving the hike next month, the commission will tap an independent auditor to comb through the utility companies’ books and ensure that their claims of poverty are legitimate. The results are expected before the final vote.

To accelerate the process, the commission Thursday waived its requirements to give the public 10-day notice of its meetings and scheduled two public hearings next week to determine whether to lift the rate cap. It left little doubt about its intention: Its order stated, “We believe that retail rates in California must begin to rise.”

Along with determining the size and form of the hike at its Jan. 4 meeting, the PUC is scheduled to consider whether to allow utilities to sell their remaining power plants to outside companies, including unregulated subsidiaries.

Before granting the hike, the PUC would have to find that the two utilities had collected enough money to cover investments in nuclear and alternative energy made before deregulation. Such a finding in 1999 allowed San Diego Gas and Electric to lift its rate freeze and pass on to customers the soaring prices it paid for power this summer. The Legislature froze those rates in August after a public uproar.

Gov. Gray Davis has pushed for a 10% hike, while utilities have said they may need 17%. Davis spoke with President-elect George W. Bush on Thursday morning, pledging to work with the new administration–which is laden with energy-company executives–on the electricity crisis.

In an indication of the national scope of the issue, the governor spoke with Federal Reserve Chairman Alan Greenspan about it Thursday afternoon. He will meet with the chairman in Washington on Tuesday.

Aides to Davis had warned that Edison might have to ration power soon if the company does not get rate increases. In a statement issued after the PUC decision, Davis seemed to back off from that concern, saying that the commission showed that “it will rule in a fair, reasonable and balanced fashion to keep the lights on in California.”

Law Included 10% Rollback

Although it appeared inevitable as the Golden State’s energy crisis became increasingly dire, a rate hike was the last thing on policymakers’ minds when the seeds of the current crisis were sown.

When California’s much-ballyhooed deregulation was launched by then-Gov. Pete Wilson, his appointees on the PUC and the Legislature in 1996, the step was supposed to cut costs for consumers and utilities.

That was more than a promise. As a concession to consumers, the deregulation bill included a 10% rate rollback for the 27 million people who receive their electricity from the big three utilities.

Rates also were frozen until March 31, 2002, or until those companies paid off past investments, including nuclear power plants. By that time, the energy market was supposed to be flush with new players and competition would keep power cheaper for everyone.

But just as deregulation got underway, the gap between California’s demand for electricity and its supplies widened rapidly. The state has built no new major power plants in the last decade, and shortfalls became severe last summer.

Cooler temperatures have not improved the situation, with the cost of power increasing fivefold in the last three weeks. The state was on the verge of rolling blackouts last week when U.S. Secretary of Energy Bill Richardson stepped in and ordered all Western energy generators to sell surplus power to California.

Even with that order in place, energy reserves are so low that the state declared a Stage 2 power alert Thursday, the 35th of the year. The alert urges businesses to voluntarily shut off power to conserve electricity.

“We’re just in a resource crunch. There’s no question about it,” said Patrick Dorinson, a spokesman for California Independent System Operator, the state agency charged with ensuring that the lights stay on across the state. “The federal order does help, but at the same time there’s a shortage” throughout the West.

Consumer groups and some officials are suspicious of those shortages, pointing out that suppliers have seen profits soar as much as 600% this year and accusing them of holding back energy to drive up costs. Five separate investigations have been launched into the shortages.

PUC Commissioner Wood unleashed a scathing criticism of those companies at Thursday’s meeting.

“Billions of dollars are being siphoned out of the California economy in order to feed the greed and avarice of corporations who have no respect whatsoever for their obligations under law,” Wood said.

Northwest Feels Pinch

California consumers can take comfort in that they no longer are alone in their power woes. Pacific Northwest residents, who traditionally have enjoyed some of the lowest electricity rates in the nation because of abundant hydroelectric power, are beginning to feel the pinch.

The city of Tacoma, Wash., this week approved an immediate 43% surcharge on electricity. Seattle residents will see an 8.9% increase beginning Jan. 1. Just north of Seattle, the Snohomish County Public Utility District approved a 33% hike last week, the second highest increase in the utility’s 51-year history.

In addition to escalating rates, the region faces a supply crunch similar to that in California. Thanks to a cold, clear autumn that brought little snow or rainfall and unusually low temperatures, and an inability to import power from California, the Northwest faces a potential energy shortfall in January.

Among all this news Thursday, consumer groups did find a silver lining in the California PUC‘s order–the audits of the two utility companies. The utilities said they have fallen billion of dollars in debt because of rising energy prices, but consumer groups allege that the corporations have benefited financially from deregulation by investing in subsidiaries that own power plants elsewhere.

“The steps toward calling the utilities’ bluff by auditing their finances is the first time Gov. Davis has been willing to stare down the utilities in this brinkmanship,” said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

Still, the mood was bleak among activists. “There’s nothing to be happy about here,” said Mike Florio, an attorney for the San Francisco-based Utility Reform Network. “We dodged the bullet for two weeks, but it sounds like two weeks from now we’re going to be back here with a gun to our heads, held by Wall Street.”

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