California Hearings Continue, CPUC Decision Expected This Week ,
 I don't know if I have sent one of these to you before.
This is an e-mail update service that we may want to consider as a 
distribution vehicle -- either because they pick up the content or because we 
procure their distribution list.  Dan- could you have someone check these 
guys out?
----- Forwarded by Steven J Kean/NA/Enron on 01/03/2001 08:16 AM -----

	"IssueAlert" <IssueAlert@scientech.com>
	01/02/2001 06:41 AM
		 
		 To: 
		 cc: 
		 Subject: California Hearings Continue, CPUC Decision Expected This Week






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[IMAGE]

 


IssueAlert for January 2, 2001

 

California Hearings Continue, 
CPUC Decision Expected This Week 



by Will McNamara 
Director, Electric Industry Analysis

 

Hearings aimed at giving consumer advocates and utility officials in 
California the chance to air their views on a looming electricity rate 
increase are expected to continue through today, setting the stage for a 
decision by regulators that very well may not please everyone. Officials from 
Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) have asked 
the California Public Utilities Commission (CPUC) to grant immediate rate 
hikes of as much as 30 percent to help offset rising wholesale power prices. 
The CPUC board is expected to announce on Jan. 4 how much of a rate hike it 
will allow, and under what terms. 

Analysis: Despite the lull of the holiday week just now completed, the 
spotlight continues to grow more intense over California's energy market, 
both throughout the energy industry and across the mainstream media. As we 
wait with anticipation to hear what the CPUC will decide, let's recap some of 
the issues that will no doubt continue to cause great dissension among the 
primary players in California. 

As has been well documented, PGOand SCE are in a massive amount of debt due 
to uncollected costs they have accrued related to the purchase of power on 
the wholesale market. Due to rate freezes still in place, both utilities have 
been unable to charge customers for the dramatic increase in the price of 
wholesale power, which has placed them both on the brink of bankruptcy. 

From several conversations with my contacts in California, here's my 
understanding of where the negotiations currently stand. The CPUC already has 
agreed in theory to a rate increase, but the sticking point is the specific 
amount of that increase. Reportedly, the CPUC and Gov. Gray Davis proposed a 
15-percent rate hike to the two utilities. In sharp contrast, PGOmaintains 
that it needs to increase rates by as much as 40 percent, and SCE says that 
it wants an increase of 30 percent (or 76 percent over two years). In fact, 
PGOalready began notifying customers last week that it wants to boost their 
electric bills by that specific amount. Both utilities continue to argue that 
even if their proposed rate increases are accepted, they still may not be 
enough to cover wholesale costs, which are projected to rise through 2003 
(see my IssueAlert from Dec. 29). In addition, PGOand SCE also claim that 
their financial solvency still will not be guaranteed even if their rate 
increase proposals are accepted, and bankruptcy will be very likely if the 
CPUC only allows them to increase rates by 15 percent.  

Over the last few weeks, pressure was put on the Federal Energy Regulatory 
Commission (FERC) to step in and solve the problem. However, FERC issued its 
own order in early December that mainly focused on mechanisms to keep power 
generators active in the state and did not adequately address the core issues 
of high wholesale prices and rate freezes. Due to the lukewarm response that 
FERC's order received, it has been generally concluded that the CPUC and Gov. 
Davis alone will have to solve the California energy crisis.  

It is important to not overlook or discount the role that consumer advocates 
are playing in the negotiations. Harvey Rosenfield, a long-time critic of the 
state's utilities who led the failed attempt to overturn deregulation in 
California in 1998, remains very vocal that "the people of California should 
not have to pay one more penny to bail out the utilities for the mistakes 
they made." Consumer groups led by Rosenfield and Ralph Nader continue to put 
enormous pressure on Gov. Davis, a Democrat, to keep any rate increase given 
to the utilities to a minimum. In fact, last week Nader stated that Davis' 
political future "hangs by a kilowatt hour" and that any decisions made in 
California will "reverberate all over the country." In essence, consumer 
groups believe that utilities share the bulk of responsibility for the 
current mess in the state, as they played a large role in California's 1996 
restructuring legislation. If mistakes were made in that legislation, 
consumer groups say, the utilities and not utility customers should be made 
to pay the price.  

Speculation is growing that, on Jan. 4, the CPUC will approve an increase for 
extra costs that will be applied in increments over the course of 2001, 
resulting in an ultimate rate increase that is somewhere in the range of 15 
percent to 30 percent (or more). This in effect will offer a compromise to 
both sides. The utilities will receive a rate increase closer to what they 
claim is necessary, and utility customers will not get slapped with an 
immediate, all-at-once increase in their electricity bills. However, the CPUC 
probably will not approve any back billing that the utilities have also 
demanded. Both PGOand SCE have claimed that their stranded costs were 
probably paid off months ago, meaning that the rate freeze still in place for 
both utilities should have been lifted as a result. That theory being 
accurate, both companies want to bill their customers retroactively to the 
date that the rate freeze should have been lifted, which on its own could 
amount to several billions of dollars. Under the current arrangement, the 
rate freeze is scheduled to stay in effect until March 2002, unless lifted by 
the CPUC. 

Meanwhile, the question about the financial solvency of both PGOand SCE 
continues to loom. SCE's parent, Edison International, announced that it has 
eliminated its fourth-quarter dividend and reduced its work force by 400 jobs 
because of financial problems related to SCE. In a statement last week, 
PGOCEO Gordon Smith acknowledged that PGOhas "virtually exhausted its 
financial resources" because it has borrowed on average $1 million per hour 
to pay for power that it is obligated to provide to California consumers.  

Both utilities have argued that the real cause of the problem in the state is 
the generators who unjustifiably continue to charge exorbitant rates for 
power on the wholesale market. There may be some validity to this theory as 
power generators who operate in California know that the state's IOUs have 
essentially been stripped of their own ability to generate power and thus are 
heavily dependent on power bought on the wholesale market. This has given an 
enormous amount of market power to the generators and allowed them to charge 
rates that are not reflective of their own costs. Some reports indicate that 
generators are charging as much as 30 times what it costs them to generate 
power. Yet, without a cap on wholesale rates, generators remain able to 
charge whatever price the market will bear.  

Due to these high costs, some power generators have begun refusing to sell 
power to the California IOUs, out of fear that the utilities will not be able 
to pay their bills. In an ironic twist, the same companies that have 
expressed concern about selling power to PGOand SCE actually own and control 
the plants that were divested by the two utilities as part of their 
agreements in the state's restructuring plan. Thus, companies outside of (and 
inside) California that own California plants are refusing to sell power back 
into the state, power produced at plants that were once owned by PGOand SCE. 

As a result, PGOwent on record last week saying that it may not have enough 
power to serve customers in February unless additional rulings come from the 
CPUC. PGOsays that it has enough power to supply customers through January, 
but that 15 to 20 suppliers have demanded payment up front before selling 
natural gas to the utility in February. Due to its current debt situation, 
PGOclaims that it cannot make any payments up front and thus may not be able 
to buy natural gas to serve its customers.  

These issues have formed the landscape across which negotiations still rage 
on in California. Much pressure is now being placed on the CPUC to formulate 
an end-all solution to the state's problems, one that can appease all the 
dissenting stakeholders. Yet, much like FERC's order which was criticized for 
not going far enough, the CPUC is particularly challenged to make decisions 
that can once and for all solve the state's structural problems. As Enron's 
Kenneth Lay said a few months ago, the CPUC must avoid "putting band-aids on 
California's hemorrhaging wounds" and instead complete a successful 
reconstructive surgery. 

 

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