Retail Services Report

California lawmakers and consumer advocates breathed a collective sigh of relief early this week when a federal district court in Los Angeles denied Southern California Edison‘s request for a preliminary injunction against the state Public Utilities Commission that could have resulted in a massive rate increase to recover the utility’s towering wholesale power debt.

The Feb. 12 decision handed down by Judge Ronald Lew buys the state more time to negotiate a deal with both SoCal Ed and Pacific Gas & Electric to pay down their debt and buy a hard asset — most likely the utilities’ transmission systems — in return.

Gov. Gray Davis Wednesday gave his strongest endorsement to date of a legislative plan that would authorize that deal. He said he would make a major announcement Friday this week. Had SoCal Ed won the injunction, sources in and around Sacramento agreed that the decision would have granted the utilities substantial clout in these negotiations.

”The court ruling takes away some of the urgency,” a consumer advocate said.

Speaking to reporters at a cogeneration plant owned by the University of California at Davis Medical Center Wednesday, Davis said it is essential that the state acquire the transmission system. He also said he supports two bills he said will ease the state’s power crunch by encouraging development of distributed generation, cogeneration and renewable energy projects.

One bill, SB 17x, would provide $ 50 million to increase rebates for renewable and on-site generation systems under Kw. It would also provide a 50% tax credit for renewable and distributed generation of up to 200 Kw.

The other measure, AB 53x, would establish a $ 50 million commercial loan-guarantee program for renewable energy, on-site generation and cogeneration plants. It would provide $ 20 million for environmental upgrades to distributed generation systems owned by municipal water districts. It would eliminate utility standby charges for owners of distributed generation systems below 1 Mw in size. ”It’s quicker and cheaper to draw on the industrial capabilities of the state than to build new power plants,” Davis said.

At the same time, the Senate Energy Committee Tuesday approved a bill, SB 5x, that would provide $ 1.275 billion to expand energy efficiency programs, enhance low-income energy assistance programs and increase capacity from distributed generation, especially in state and municipal buildings.

The bill would fund efficiency programs that cut peak demand, can be completed by summer and are less costly than adding generation. It would provide $ 66 million in incentives to induce investor-owned utility customers to buy high-efficiency appliances and $ 20 million in incentives for municipal utility customers. It would also provide $ 287.5 million to subsidize new clean on-site generation and incentives to retrofit existing generation operated by state agencies.

Regarding SoCal Ed’s suit against the PUC, filed in November, the company is charging the commission acted unconstitutionally in refusing to end a rate freeze imposed when the state deregulated its electricity markets in 1996. The utility claims to have lost billions of dollars because it has been unable to recover its wholesale power costs from ratepayers.

The PUC in January approved a 90-day rate increase for both SoCal Ed and PG&E ranging from 7-15%. The utilities, however, argue that the hike falls far short of what’s needed.

Although Judge Lew refused to grant the utility’s request for an injunction — an action that would have forced the PUC to raise SoCal Ed’s retail rates within seven days — the decision was not a total loss for the utility. The judge scheduled a March 5 hearing on the company’s suit, which will now center on whether the utility’s wholesale power purchases were reasonable. The PUC has claimed that SoCal Ed could have spent less for power than it did, making large retail rate increases unnecessary.

Ronald Olson, SoCal Ed’s lead attorney, entered the courtroom prepared to supply the judge with a three-year rate plan. A utility spokesman said the plan envisioned a 3.3 cents/Kwh rate increase over three-and-half years to pay off $ 2.49 billion of the $ 4.4 billion in undercollections the company is claiming. Had it been accepted by the court, the plan, along with the earlier increases approved by the PUC, would have raised residential rates in SoCal Ed’s service territory by 18% and commercial rates by 30%.

Lew also denied both PG&E‘s request to join SoCal Ed’s motion, and a request by the state Attorney General that the hearing be postponed to give lawmakers and utility officials time to work out an alternative.

The judge’s order was welcomed by California government officials, who were worried that if it had succeeded in winning an injunction, SoCal Ed could have used the ruling to win concessions in negotiations on a plan to relieve the company’s debt burden.

With the court ruling in tow, the focus of the state shifted back to Sacramento, where the Senate Committee on Energy, Utilities and Communications Tuesday approved two bills introduced by Sen. John Burton. One measure, SB 6x, would create a ”California consumer power and conservation financing authority” that would build, finance, own or buy power plants, finance energy efficiency programs and environmental upgrades, ensure adequate natural gas supplies and achieve sufficient power reserves by 2006.

The other measure, SB 33x, would authorize the state treasurer to issue revenue bonds to finance state purchase of the utilities’ 25,000 miles of transmission lines. The state payment would restore the companies’ financial solvency.

The bills must be approved by the Senate Appropriations Committee, which had not set a hearing date at press time.

State ownership of the grid has moved from one of a number of solutions to deal with the crisis to arguably the front-runner, outdistancing options like issuance of stock warrants in the utilities and a state takeover of the utilities’ hydropower assets. The transmission-takeover concept is largely championed by consumer groups, and has gained strong momentum in the government.

After a series of meetings last week with Davis, SoCal Ed executives appeared to be warming up to the concept. CEO John Bryson said the idea was ”conceivable” so long as the purchase came at a fair price, a company spokeswoman said. ”This isn’t a fire sale,” she said.

PG&E officials declined to comment on the proposal.

Typically, when a state seizes an asset, it pays two to three times book value. The book value of Edison‘s transmission grid is estimated to be $ 1.2 billion. But Bryson put the value of the system at closer to $ 6 billion, saying it is unique and could not easily be recreated.

Trans-Elect, a Washington, D.C., company that wants to buy transmission systems around the country, has offered the utilities $ 5.25 billion for the part of the grid they own, according to a principal of the company. The depreciated value of the grid set by the PUC is $ 3.8 billion. Roughly $ 1.9 billion of that is Edison, $ 1.5 million is PG&E and $ 400 million is Sempra Energy in San Diego.

But the state takeover of the grid may still have problems becoming law, as it is already being opposed by some Republicans and there are doubts as to how readily it will be received by the Federal Energy Regulatory Commission. Lawmakers want the grid, one source said Monday, only so they can say they received something — anything — in return for paying down the utilities’ massive debt.

”The state…is looking to say, ‘We got something for fixing this problem’,” a power seller said. ”Why get into this business if that’s a business you don’t need to be involved in?” The source said lawmakers have ”overstated” the benefits of owning the grid because that ownership entails all the investment and needed improvements that come with it. Although consumer groups and lawmakers claim state ownership will make expansion of the grid easier, the state will have to follow the very same guidelines and environmental restrictions that many have criticized for being too overbearing.

Further, because power transmission is considered to be in interstate commerce and therefore subject to federal oversight, FERC will need to sign off on the deal, though some consumer groups believe otherwise. FERC officials have thus far been quiet on the proposal, but have pointed to a similar situation in New York, where the Long Island Power Authority owns and operates the transmission system that used to belong to the defunct Long Island Lighting Company. In that case, FERC okayed the transaction under the condition that LIPA file an open-access transmission tariff.

One FERC aide said the commission would consider whether such a transaction is to the public benefit and how it would affect development of a Western regional transmission organization. The idea of a state-run transmission system ”doesn’t hurt,” the staffer said, but ”the question is what are the terms and agreements.”

Meanwhile, a coalition of California consumer, labor and environmental groups, complaining that they are being left out of the talks between the state and the two utilities, have been working to craft a consensus position it hopes will increase its chances of being heard.

According to a draft document, the group believes legislative solutions to California’s energy crisis must preserve environmental protection and jobs, protect low-income consumers from rate increases, establish a ”tiered” rate scheme based on cost of generation, subtract generation revenues from the amount utilities say they are owed in ”undercollections,” force the utilities to shoulder a ”substantial percentage” of their debts, include conservation and renewable energy in future planning, and revamp voluntary interruption rules to protect large customers.

The groups are calling on the Legislature to create a public power authority and state ownership of transmission lines as a condition of financial help for the utilities, which the coalition said should not be allowed to fall into bankruptcy. Further, the groups said state and federal authorities must investigate whether there was any collusion in price fixing among generators, while the PUC should be allowed to inspect plants shut down for maintenance and do a more in-depth audit of the parent companies’ books before the state provides any assistance to the utilities.

”The failure of deregulation has been a failure of having the sellers be disciplined by the buyers,” White said. ”There has been an unequal evolution between the predator and the prey.” The coalition includes the Sierra Club, The Utility Reform Network, the League of Conservation Voters and the California Labor Federation.

Notably missing from the coalition is the Foundation for Taxpayer & Consumer Rights, the group that is threatening to place a referendum on the 2002 ballot calling for a publicly owned and controlled electricity system. ”There are parts of the plan that we think everybody should be fighting for, some strong words, but a lot of it seems to be window dressing for a bailout,” said the group’s Doug Heller.

”That says something on a larger level, which is real distressing — namely, that the government is saying to Wall Street that shareholders and companies won’t be totally responsible when they mismanage their companies, when they siphon money off from subsidiaries, when they advocate for bad public policy that comes back to haunt them.”

Meanwhile, Gov. Davis late last week signed a set of executive orders aimed at expediting development of new generation for both this summer and the next couple of years. He said they will allow the state to add 20,000 Mw of generation by July 2004.

One order directed the California Energy Commission to use its emergency siting authority to issue permits within 21 days for natural gas-fired or renewable energy peaking plants that can be brought on-line in time to meet demand this summer.

The governor also signed an order that will provide an ”acceleration bonus” to developers that bring new generation into service by July. The size of the bonus will vary with the size of the plant.

Another executive order would direct state and local agencies to streamline the review and permit process for new baseload generation that can be in service by the 2002 peak season. Davis said the directive reinstates the 120-day expedited permit process that expired in October. The governor said he has written President Bush asking him to order federal agencies to issue any needed federal permits within the same time period.

In addition, Davis signed an order that allows existing power plants to increase their hours of operation and to waive what he described as ”cumbersome time lines” for retrofits and restarts. The order applies only to those generators that sell their additional power to the CDWR at ”reasonable rates.”

Also late last week, Assembly Democrats introduced a series of bills aimed at increasing the state’s generating supply while reducing demand.

”It’s important that we look for ways to end this energy crisis on all fronts — both using short-term solutions to ‘keep the lights on’ — as well as long-term solutions to stabilize the energy market,” said Assemblywoman Christine Kehoe, one of the leaders of the group that developed the package. ”By providing incentives to make California’s homes, schools and businesses more energy efficient, we can save in just a couple of short years enough energy to supplant two or three new and expensive power plants.”

Hertzberg said the bills should save 750 to 1,200 Mw over the next two years, and Kehoe predicted that the demand-side initiatives could save 500 Mw by the summer.

The lawmakers said the bills would provide short- and mid-term solutions to increasing supply and cutting demand. The four supply bills would, among other things, allocate $ 50 million to the CEC to promote ”clean” on-site generation; appropriate $ 150 million to establish a ”loan guarantee program” for renewable energy projects; raise to 100 Mw from 50 Mw the current threshold for a power plant to require local approval; and condition plant development on an agreement to ensure that a ”significant amount of the energy output is available to the state.” The bills, the lawmakers said, should add 7,654 Mw over the next four years to the power system.

Five bills make up the energy efficiency part of the bill package and lawmakers claimed they could shave 1,235 Mw from the state’s demand. The measures would provide $ 375 million to the state’s residential and small business energy efficiency program; appropriate $ 250 million to upgrade efficiency in public schools; appropriate $ 350 million in matching grants to improve efficiency at government buildings; provide $ 100 million in grants and loans to distribute energy efficient light bulbs; and spend $ 50 million in low-cost loans to shopping centers to install energy-saving lighting devices.

A bipartisan group of California state senators announced support for legislation by Democratic Sen. Byron Sher to expedite the siting process for new power plants. The measure (SB 28x), introduced Feb. 5, establishes an expedited process for repowering existing plants to create new emissions offsets and for peaking plants. It also eliminates standby charges for distributed generation — a provision sought by large industrial users.

The bill would give property taxes on the project to local jurisdictions instead of the state. Local jurisdictions would have 90 days to issue a final report on the potential impacts of a proposed project. The bill also contains several provisions relating to air emissions credits.