Shifting of funds to parent firms is area of dispute

The San Diego Union-Tribune

California utilities are squaring off against state regulators in two arenas in the next few days, in a tug of war over how much money the utilities can charge customers.

Today, the California Public Utilities Commission will consider launching an investigation into how San Diego Gas and Electric, Southern California Edison and Pacific Gas and Electric shifted billions of dollars from their utility operations to their parent companies.

PUC President Loretta Lynch warned that if the commission finds the money transfers were improper, it could order “appropriate remedies,” including monetary penalties. Agreements that allowed utilities to become part of larger, diversified corporations specified that the parent companies had to give top priority to the capital needs of the utilities.

In the meantime, debt-ridden Edison and PG&E are suing the PUC to get the right to charge customers more money for electricity. In a federal lawsuit scheduled to begin in Los Angeles on Monday, Edison is pushing to raise its rates 10 percent, just a month after the PUC granted increases of 7 percent to 15 percent. PG&E has filed a similar suit that may be grouped with Edison‘s.

When the state first deregulated the energy industry, the three big utilities agreed to keep a cap on the rates they charged consumers, at least until they paid off the so-called “stranded costs” associated with building expensive nuclear power plants.

SDG&E, the only utility to pay off its stranded costs, removed the cap on customer prices last summer to disastrous effect. Electricity rates in San Diego went through the roof, forcing the state government to impose new caps along with a guarantee that SDG&E would eventually be repaid for the gap between its wholesale expenses and retail revenues.

As wholesale costs kept rising, Edison and PG&E pushed to lift their caps. During the past few months, they have accumulated more than $12 billion in debt by paying more for wholesale electricity than they are able to charge customers.

In their lawsuit, the utilities argue that under the federal “filed rate doctrine,” they should be able to pass any legitimate wholesale price increases directly to consumers. Federal law should supersede the state’s deregulation laws, they say.

Some federal officials agree. William Massey, a member of the Federal Energy Regulatory Commission, says flatly that “a federal court, if asked, will declare that the utilities are entitled as a matter of federal pre-emption to recover these high wholesale costs from their customers.”

But consumer activists complain that it is unfair for the utilities to have enjoyed the profits of deregulation while passing the costs on to consumers.

“The utilities wrote the legislation that included the rate caps, and they made a lot of money from it during the first few years,” said Harvey Rosenfield, who heads the Foundation for Taxpayer and Consumers Rights. “Now that they’re losing money, they’re saying the rate freeze is void.”

Edison makes light of such arguments. “Case law makes clear that past profits cannot be used to justify currently confiscatory rates,” Edison lawyers wrote in a brief this week.

Michael Shames, head of the Utilities Consumers’ Action Network in San Diego, concedes that Edison may win its case. But he added that if the judge orders the PUC to allow the utilities to raise their rates, the PUC may examine the utilities’ past actions to determine how much money they are entitled to recover.

One major question area is how much money the utilities transferred to their holding companies.

Audits released last week showed that Edison and PG&E funneled a total of $9.3 billion to their parent companies, Edison International and PG&E Corp., between 1996 and 2000. The parent companies pumped much of that money into other subsidiaries or stockholder dividends, while making comparatively minimal investments in the utilities. Although the audits did not mention San Diego Gas and Electric, it made similar payments to its parent, Sempra Energy.

Nobody accuses the utilities of doing anything illegal through the transfers.

But the PUC today will discuss whether the utilities followed the spirit of the agreements that set up the holding companies. The agreements say that the PUC can reconsider the holding-company arrangement “at any time when the facts warrant such a change.”