UTILITIES: Deregulation and soaring costs have created a politically charged dilemma.

Orange County Register

Customers of the state’s two largest power companies will soon learn whether they’ll have to pay a $5.1 billion electric bill.

By year end, regulators plan to vote on whether Southern California Edison Co. and Pacific Gas & Electric Co. can back-bill consumers for high-priced energy used this summer. The companies paid about $5.1 billion more for electricity than they were allowed to charge ratepayers. Now they want a refund. And the bill is growing every day.

If the utilities prevail, the average residential Edison customer will pay at least $200, by one consumer group’s estimate. Customers of PG&E, which serves Northern California, would pay at least $236 each. On top of that amount, customers could also pay higher market rates for electricity as soon as next summer.

If consumer groups succeed in their efforts to prevent the retroactive billing, the two companies that serve nearly 70 percent of California’s electricity users would each swallow a one-time expense that dwarfs a typical year’s profit. In a worst-case scenario, the companies say, they could be unable to borrow money and unable to pay bills.

Groups on both sides of the issue intensified their lobbying last week, each trying to convince lawmakers and regulators that their situation is dire.

Edison and PG&E pressured regulators, who promised to resolve the issue quickly. The companies also are courting lawmakers, who will reconvene in January and could amend or reverse any regulatory decision. The utilities this week must submit documents to the state proposing how they would recoup the money.

Consumer advocates counterattacked, with one group releasing a 23-page report charging that the utilities have cashed in on deregulation and now want to double their winnings. Another group protested outside a Public Utilities Commission hearing.

“The public is going to have to be very vocal on this issue,” said Doug Heller, advocate with the Foundation for Taxpayer and Consumer Rights. “Consumers need to get the Legislature behind them.”

Utilities say they’re owed

The $5.1 billion deficit developed last summer and this fall because Edison and PG&E paid more for wholesale power than they could charge residential and small-business customers. Those ratepayers are covered by a rate freeze enacted as part of electricity deregulation.

That freeze was put in place in 1998, when wholesale power prices were low. It was intended to force consumers to pay artificially high prices and to give the utilities the time — and money — they needed to pay off debts left from their days as regulated monopolies.

That plan backfired last summer when the cost of wholesale power soared, but retail prices remained frozen. The companies this month filed documents with the Public Utilities Commission asking for permission to collect the now $5.1 billion deficit from consumers. The companies say they are required to buy the power at a higher price, so they should be compensated.

In a worst-case scenario, they said, they’d lack cash to buy power for customers.

“It is a very serious problem for the state and the economy of California,” said Edison spokesman Bob Foster.

In paperwork filed Friday with the Securities Exchange Commission, Southern California Edison said its deficit through Sept. 30 is $2.4 billion, quadruple the $623 million it earned in the fiscal year that ended Dec. 31.

PG&E this month listed its deficit at about $2.7 billion and growing. By comparison, the company earned $878 million from all operations in the fiscal year that ended Dec. 31, including some operations that it sold that year.

Consumers say “No way”

Consumer groups say the utilities shaped deregulation to benefit themselves financially, and that the companies agreed to take on some risks in exchange for some guaranteed revenues. Now that the environment has changed, the companies want to change the rules, consumer advocates say.

“Allowing the utilities to recover these power costs violates the heart of the deal,” said Matt Freedman, attorney with The Utility Reform Network.

Since 1997, TURN said in a report last week, consumers have paid the companies a combined $17 billion toward their pre-deregulation debts, called stranded costs. In addition, when power prices surged this summer, TURN said, the companies made a combined $2.7 billion from selling the power they generate at the power plants they still own.

“Certainly no one wants these companies to go bankrupt. That is in no one’s interest,” Freedman said. “But the utilities are exaggerating.”

Competing strategies

The public should revolt, some consumer advocates say, if the Legislature forces ratepayers to bail out the utility companies. Such a move might be enough to prompt a ballot initiative, said Heller with the Foundation for Taxpayer and Consumer Rights.

Consumer groups in 1998 tried to unwind deregulation with Proposition 9, which failed. But after the troubles this summer, Heller said, consumers would be more likely to support a ballot measure.

The utilities, however, have their own powerful weapon. If they can pay off their stranded costs, the rate freeze ends and customers could be subject to the kind of prices seen last summer in San Diego and South Orange County.

The freeze lasts until March 2002, or until the utilities collect revenue up to the approved limit. San Diego Gas & Electric, which serves San Diego and South Orange County, emerged from the rate freeze in summer 1999, after it sold power plants.

PG&E has said that when it factors in the value of its power plants, it already has collected its stranded costs and could declare the rate freeze ended. Edison, in filings with the SEC, factored in power plant values and said it could consider stranded costs paid off last August, with a $650 million surplus.

“It’s a serious threat that the utilities are making,” Heller said. “The free market is now a threat to consumers.”

Edison, however, said it doesn’t want to shock consumers with market rates. Instead, Foster said, it would prefer some sort of rate cap past the 2002 deadline, but one that builds repayment of the company’s $2.4 billion deficit into the frozen rate.

Customers would pay back that $200 or more, but in the form of a few dollars per month over several years, perhaps as much as a decade. They would also pay interest on that money, Edison spokesman Steve Hansen said.

A ‘painless’ solution?

It’s not clear who will decide whether consumers or the utilities ultimately pay the $5.1 billion. Several lawmakers said in interviews that they think the PUC has the authority to decide. But legislators also said they thought it was likely that the Legislature will fold the question into a broader discussion of what to do about the troubled electricity industry.

“The results of this whole deregulation scheme have been so far from what anybody thought would happen, the best thing to do is put everything back on the table and revisit the whole thing,” said Sen. Debra Bowen, D-Marina del Rey, chairwoman of the Senate Utilities Committee.

Bowen said she doubts she would vote to stick consumers with the bill, however, even as part of a broader compromise.

Harry Snyder, an analyst with the California office of Consumers’ Union, said he thinks the utilities ultimately will get their bailout, but in a way that won’t alarm consumers. State leaders, Snyder said, will stretch the payment over several years so that it disappears as a couple of dollars in the clutter of complicated monthly utility bills.

“I think what will happen is that the PUC, assisted by the Legislature, will make it relatively painless and unnoticeable to consumers,” Snyder said. “PG&E and Edison will be made totally whole despite the fact that they made the mistakes that led to these losses. … The PUC will have hidden the fact that they gave (billions) to these privately owned companies.”