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Los Angeles Times

More than 20 million California consumers can soon expect to be hit with bigger electricity bills, Gov. Gray Davis acknowledged Tuesday as the big utilities increased pressure on state and federal officials to rescue them from the ravages of a runaway energy market.

On a day in which the state’s energy resources were once again strained to near the breaking point, Davis said in Sacramento that consumers would have to “bear some of the burden” of saving the utilities, but that he hoped to cushion the blow. It was a message that ratepayers had been assured they would not be hearing this soon after California deregulated its electricity market in 1996.

The utilities, stunned by rocketing wholesale energy prices, have painted a grim picture of the alternative, and have called for a rate increase of more than 10%.

In the strongest warning it has issued yet, Southern California Edison claimed Tuesday that it is teetering on the brink of bankruptcy and will fail financially if it is not granted relief by the state Public Utilities Commission, which is meeting in San Francisco tomorrow.

State officials said the PUC probably will not grant relief immediately to Edison and Pacific Gas & Electric, the state’s two biggest utilities, but might do so next month when Davis is set to appoint a new member to the commission, giving him a three-member majority.

Still, with consumer advocates fiercely opposed to an increase, and the Legislature preparing to get involved, the scene appears set for an explosive political battle before the utilities are granted what one consumer lawyer called “a ratepayer bailout.”

The rate hike would not affect customers of the Los Angeles Department of Water and Power or other municipally owned utilities that are effectively exempt from deregulation.

When it was approved by the Legislature in 1996, deregulation was touted as a ticket to cheaper energy prices for consumers and a recipe for an efficient, rational energy market. Far from living up to its promise, it has gone haywire in the past six months as energy prices have soared 30-fold and the state’s electricity supplies have been stretched to their limits.

Advocates of deregulation say it has been laid low by a combination of bad planning and bad luck. Opponents say it was simply a mistake to leave an essential utility such as electricity to the vagaries of the free market.

Events have spiraled into a crisis in recent weeks, prompting responses on both the state and federal level, including an unprecedented summit of participants in California’s energy market–consumers excepted–in Washington on Tuesday.

In Sacramento, Davis was in talks with representatives of utilities and legislative leaders over the situation. At a rare news conference, he said that although utilities probably will be permitted to raise rates, they will not be able to recoup all of their electricity costs.

“There is no question that everybody has to be part of the solution,” Davis said, in response to a question about bigger bills for consumers.

“The consumers, while having to bear some of the burden, are not going to bear all of the burden,” Davis said. “They are going to have to participate in the solution. But there is nobody who is more uppermost in my mind than consumers. I’ve made clear to all parties that they’re not recovering their costs. They’re only recovering a portion of their cost.”

Serious Disruptions in Case of Bankruptcies

Davis warned of serious disruption in California if one or more of the utilities declares bankruptcy. Once again, he singled out Southern California Edison, which supplies much of Southern California’s electricity, as being particularly troubled.

“My job is to provide stability and certainty in the process,” Davis said. ” Bankruptcy is not my first, second or third choice.”

Edison said in a filing to the Federal Energy Regulatory Commission that it will need to seek protection in bankruptcy court if it is not granted relief–in the form of a cap on electricity prices and a rate increase–in the next few weeks. W. James Scilacci, the company’s chief financial officer, also raised the specter of layoffs, a halt in new construction and “suspension of all but truly emergency customer service.”

If the PUC and the federal commission don’t act quickly, Scilacci said in a sworn statement, “then the company will face default on its January obligations. At that point, in my opinion, Edison will have no realistic alternative but to seek the protection of the bankruptcy court.”

Edison‘s chief executive, Steve Frank, also warned that if the PUC “does not act on our rate stabilization proposal this week, we’re going to be in the position where we’re going to have to make sizable cuts in both people and investments.”

The utility has said it spent $ 3.2 billion more than it could pass along to customers from May to November. Frank said the PUC needs to grant an increase that is more than the 9.9% rate hike Edison had asked for a month ago. He wouldn’t say how much more, but said documents describing it would be submitted to the PUC shortly.

Edison, based in Rosemead, serves 11 million people in Southern California.

Frank said Edison has already put a freeze on hiring, new contracts and community donations. “They PUC members have to make a clear and unequivocal statement about the customers’ responsibility to pay for the electricity they’ve used.”

Although PG&E made no similar claim, company spokesman Ron Low said Tuesday that “the current situation is not sustainable.” Although he wouldn’t discuss the prospects for bankruptcy, he said, “We cannot continue to buy power for 50 cents and sell it for 5 cents. We are very close to the point where we will not be able to go out into the market and purchase power for our customers.”
Consumer advocates scoffed at the claims and expressed outrage at the prospect of a rate increase.

Consumer Groups Doubt Need for Hike

Harvey Rosenfield, founder of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, said Edison was in no position to be seeking a rate increase.

“They just issued a dividend on a preferred stock last Thursday, plus they’re out there now in a multimillion-dollar advertising campaign, plus company Chairman John Bryson himself got a raise last year, plus they spent millions in the Legislature this year on campaign contributions and lobbying expenditures,” he said, barely pausing for breath.

“Our view of this is, it’s economic extortion designed to obtain a bailout from the public officials–a ratepayer bailout–to stick the costs of their mistakes on the public.”

Mike Florio, a lawyer with the San Francisco-based Utility Reform Network, questioned the legality of a rate hike, given provisions in the 1996 deregulation bill that established a moratorium on increases. He also questioned the legality of Davis’ closed-door negotiations with the utilities over a rate hike.

He called the negotiations “absolutely astonishing, without precedent,” and complained that consumer advocates had been shut out of the process.

But PUC Commissioner Carl Wood, in Washington for the energy summit, gave a small hint of the commission’s thinking by saying, “I do believe that the threat of bankruptcy for the utilities is real.” He said he regretted that the federal regulatory commission hadn’t imposed a strict price cap on wholesalers.

“It takes away any breathing space,” he said. “If there was the ability to hold over the heads of marketers and generators that they’d be held to a standard of just and reasonable rates, then we’d have more leverage.”

Davis met into the evening with representatives of the utilities and legislative leaders on the situation.

Although Davis has not said how much he will agree to raise rates, other sources have said the state may be willing to allow a 10% rate hike. In such a case, the state essentially would be lifting a 10% rate cut that residential customers received as part of the 1996 deregulation legislation. That reduction is supposed to remain in effect until March, 2002.

“If we do a rate increase , we can exact a whole bunch of things,” said Senate President Pro Tem John Burton (D-San Francisco), the most influential state legislator. The state might, for example, seek ownership of electric transmission lines, or give ratepayers an ownership interest in the utilities.

The companies, however, say they need rate increases in excess of 10%. Burton noted, however, that the prices of utility stocks have remained relatively stable, despite the crisis atmosphere.

“The utilities claim they are going belly up,” Burton said. “Before we agree to anything, I would want to verify it.”

Another Stage 2 Emergency Declared

In a demonstration of the severity of the problems confronting California and the West, the state was forced to impose a Stage 2 emergency alert Tuesday morning when a failure at a power plant substation in the Antelope Valley knocked out a major transmission line to Northern California, cutting the available energy reserves below 5% of the total demand. The equipment was repaired by early afternoon, an Edison spokesman said.

However, saying that Northern California will face blackouts in the next several days if power supplies aren’t somehow boosted, California’s grid operators asked U.S. Energy Secretary Bill Richardson to use his emergency authority to force dozens of utilities and power companies around the West to send any excess electricity to California. Richardson complied–the first time he has issued such an order, although he threatened to do so last week.

“We could potentially be in these situations for several months,” said Kellan Fluckiger, operations chief at the California Independent System Operator, which controls the flow of electricity throughout much of the state.

Reservoirs Drop Low in Northwest

Reservoirs have been dropped so low in Northern California and the Pacific Northwest to help keep the lights on in California, he said, that “we’ve basically run out of water.”

That doesn’t mean that reservoirs are dry, but they are dropping so low that it is not possible to operate power plants. And the main transmission line bringing electricity from power plants in the desert Southwest to Northern California has been running at capacity for weeks.

In Washington on Tuesday, Richardson spoke to more than 100 people–representatives of utilities, power plant owners, electricity marketers, regulators and the agencies that oversee California’s market and electricity grid–who gathered at the headquarters of the Federal Energy Regulatory Commission for an “informal” conference on the crisis.

The aim was to increase the speed and number of long-term contracts signed by utilities. Utility officials and regulators say this would free them from having to purchase so much electricity in the volatile spot market, where prices this week topped $ 400 per megawatt hour compared with $ 30 a year ago.

Richardson, speaking before the session was closed to the public, said he had spent two hours on the phone Monday evening with Davis, U.S. Sen. Dianne Feinstein, (D-Calif.) and an unidentified utility executive.

“We’re facing a situation that requires immediate action,” he said.

Richardson called an order issued last week by the federal commission “a good start,” despite strong criticism from California officials that it did not go far enough in restricting prices. The order set a “soft cap” on the prices wholesalers can charge utilities, above which they have to demonstrate that they are facing higher costs.

The energy secretary said he would like to see regional price caps to hold down electricity costs across the West and to minimize the amount of electricity flowing out of California for higher prices in other states. That concept is expected to be debated today at a meeting of Western governors in Denver. Davis is scheduled to participate by telephone.

Energy Summit in Washington

The gathering in Washington on Tuesday was the first to assemble so many players in California’s newly deregulated market at once. But few held high hopes for an end to the finger-pointing that has so far marked efforts to shift electricity purchases out of the spot market and into contracts of a month to five years.

Generators say they are eager to sign deals but call utilities skittish. Utilities say they need more reassurance that the California PUC won’t punish them in years to come for locking in a price that will look expensive should market prices drop.

Still, by the end of the day, there were glimmers of optimism that deals could be struck, and the meeting was to resume today.

“I feel we’re making some progress,” said Administrative Law Judge Curtis Wagner, who was serving as moderator of the meeting. “We’re hopeful to get some actual contracts before it’s through.”

Under the 1996 deregulation law, customers of three utilities–Edison, PG&E and San Diego Gas & Electric–had their rates rolled back 10% and frozen there. The law stated that the rate freeze would last until March 2002 or until the utilities finished paying off billions of dollars of past debts from investments in nuclear and alternative energy, whichever came first.

SDG&E paid off its past debts early, so customers there were lifted out of the rate freeze in 1999. Residents paid the market price of electricity until prices got so steep last summer the Legislature intervened and capped rates.

Edison and PG&E argue that they paid off their past debts as early as this summer and could therefore ask the PUC to end the rate freeze protecting their customers at any time. But utility executives have refrained from doing so, saying that they do not want to unleash another situation like that of San Diego last summer, when monthly bills doubled and in many cases tripled.

Under the deregulation law, the PUC would have to first declare that Edison‘s and PG&E‘s past debts from nuclear and alternative energy have been paid off before it could end the rate freeze.

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