California Rate Hike Still May Not Be Enough

Even with the ink still not dry and final allocation still undetermined on California's record $5 billion electricity rate increase approved last Tuesday, state officials are already worried that the added revenues and state-backed bonds that will follow will not be enough to pay for power over the next 12 to 18 months.

Tuesday's action by the California Public Utilities Commission raised electric rates on a permanent basis by up to 40%. The CPUC also took other actions directing two of the state's major investor-owned utilities to resume paying small independent power producers known as "qualifying facilities" (QFs) and the state Department of Water Resources for wholesale spot supplies.

The actions do not deal with the almost $14 billion in past-due charges to generators, suppliers, creditors and debtholders, for which a settlement is still being negotiated between the utilities and state officials. And whether the increases will be sufficient to fill the current gap between wholesale power costs and previously frozen retail utility rates is still to be determined

The rate increase was made effective immediately, although the rate apportionment is still to be determined over the next month to include what the regulators describe as "tiered" rates that encourage conservation. Under current state law, up to 45% of the residential customers will see no rate increase. Those residential customers who keep usage low, and low income households would see small or no increases, and large users - "energy hogs," as CPUC President Loretta Lynch describes them, including most businesses, may see increases greater than the 30% to 40% average hike.

After waiting for legislative solutions that have not materialized, the CPUC revamped the QF program, directing utilities to pay the small generators going forward, using a new, temporary rate formula changing the gas price index from the Topock delivery point at the California-Arizona border to the Malin, Oregon-California border trading point. Further proceedings will look at longer term formula changes that may take natural gas indices out of the equation. Possible market abuse on the El Paso Natural Gas system at Topock is "reason enough" to change the price index point, according to CPUC Commissioner Carl Wood, who abandoned earlier proposals to also place a $79 MWh price cap and options for long-term, fixed price options, in response to strong arguments against them from the QFs.

In separate action, the regulators set up a mechanism for the utilities to transfer monies to the state Department of Water Resources. "Today's decision does not provide the state DWR all of the money it has spent procuring power for the state," Lynch said. "It includes a proposed method for calculating a 'California Procurement Adjustment' (CPA) that will be made final at a meeting early next month." The importance of establishing a formula for calculating the amounts of rates that would repay DWR for the $3.1 billion it has spent buying wholesale spot electricity supplies is that it allows the state to begin selling back bonds to reimburse the utilities and the DWR.

The five-member CPUC, with three commissioners appointed by the current governor, voted unanimously, 5-0, on the measures. At least one commissioner, former CPUC President Richard Bilas, called the rate increase "long overdue," noting it could have been considerably smaller if it had been imposed last year.

Gov. Gray Davis, whose aides worked with the CPUC on the proposed actions, at this point is publicly opposing the action. He has kept his distance from the proposed rate hike, steadfastly maintaining a strategy of solving the state's nagging electricity woes without additional rate increases above those now in effect or anticipated.

Davis said he would support rate increases if it is found they are absolutely necessary for the well-being of the state. But he called the CPUC action "premature" for lack of financial data to support it. His advisors continued to maintain that the CPUC acted without the governor's okay, citing that the regulatory commission in California enjoys state constitutional independence. Skeptics continue to suggest he is taking a political walk to avoid responsibility for the increase.

The CPUC vote was delayed for half an hour by chanting demonstrators against rate hikes in the standing room only hearing room. Consumer advocate Douglas Heller, with the Foundation for Taxpayer and Consumer Rights, blasted merchant generators as "modern day robber barons," saying state officials should fight back with a "massive windfall profits" tax. Then if the generators shut down plants, the state should take them over. "Deregulation has been a license to steal," Heller told the CPUC before its vote. His organization, which was involved with an unsuccessful statewide anti-deregulation ballot initiative in 1998, has threatened to put a similar measure on the ballot next year when Davis stands for re-election. The governor is fearful a ballot measure will pass and potentially undermine his re-election campaign.

While economists and many energy experts - some among the advisers to state officials - have said the rate increase was long overdue, there is a question of whether it will be enough to support the state bonds that will be sold later this spring. One state official indicated Thursday it may not be enough, but the state treasurer now thinks a $10 billion revenue bond offering, the largest public bond sale ever, will do the trick.

Kathleen Connell, the state Controller who is one of a half-dozen major candidates running for Mayor of Los Angeles, Wednesday caused a stir by arguing that the state may be exposing itself to long-term electricity costs it cannot cover under current rate increases and bond scenarios. She said additional rate increases might be necessary. In reality, no one knows for sure because the wholesale power prices have defied most predictions over the past nine months in California and throughout the western states.

At least one QF operator was not impressed. Watson Cogeneration Co. filed a lawsuit Thursday, asking the court to suspend its power supply contract with Southern California Edison, so it can sell the power on the open market. A Watson executive said the CPUC didn't provide assurance that cogenerators would be paid, nor did it do anything about the $150 million California owes Watson. The Watson facility can produce up to 420 MW, but it has reduced production by 140 MW since last November because it has not been paid.

CPUC's Lynch continued to criticize merchant generator/suppliers for "price gouging," and federal regulators for not stopping them. "We only have the legal authority to control the prices charged by the retail utilities," said Lynch, noting that federal regulators are "simply not doing their job, since they share the responsibility to keep the lights on and make sure the system doesn't collapse." She said the rate increase would be subject to refunds "if we are successful in getting refunds from the gougers."

While Pacific Gas & Electric and Southern California Edison obviously welcomed the new ability to raise retail rates after struggling for the past four months on the brink of bankruptcy, they both expressed concerns about whether the increases will do the trick. On "cursory review" of the proposal on the day before it was enacted, Edison said it was not clear that the steps would "align costs and rates."

PG&E CEO Gordon R. Smith said the decisions left key issues unresolved. They also "do not offer a comprehensive solution, fail to resolve the uncertainty of the crisis, and may even create more instability."

PG&E listed seven questions that remain unanswered:

  • how much will the state DWR collect for power it is buying?;
  • who is responsible for purchasing the state's net open position?;
  • who will pay for the rate increase and how much will they pay?;
  • what prices will be paid to QFs?;
  • when will the value of the utilities' remaining generation assets be set?;
  • when will the ongoing retail rate freeze end?; and
  • how will the utilities recover their uncollected past costs of power?

While the politicians fiddled, Rome continued to burn. California last week had three days of Stage Two Alerts. The ISO blamed the shortage on continuing below-normal supplies from the drought-shrouded Pacific Northwest, the loss of another 1,000 MW from the southern region and the loss of in-state plants for planned and unplanned maintenance.

The reality of greatly reduced hydro resources from out of state is beginning to sink in among state policymakers as summer nears. A soon-to-be published economic analysis by two independent energy consultants places the real crux of the California power crisis on a combination of "sharply higher-than-expected demand growth and the savage downturn in hydroelectricity supplies." Samuel Van Vactor and Frederick Pickel did the analysis in a upcoming paper, "(De) Regulation Follies," in which they cite Columbia River flows being projected at only 54% of normal this year.

The availability of hydro power, along with how fast all of the state's QFs can be brought back online, will have a "huge impact" on the DWR's power bill for the rest of the year, the governor's energy advisers emphasized in briefing news media. Van Vactor and Pickel cited hydroelectric supplies from the Pacific Northwest last summer as being down on average by 6,267 MW/hour.

Political and regulatory leaders still cling to the notion that a federally imposed cap on western wholesale prices would bring that relief, and others think if the market is allowed to work with a lifting of retail price caps in the state and concerted demand-side management, prices eventually will come down later this year.

Davis last week repeated his call for the Federal Energy Regulatory Commission to order refunds from merchant generators selling electricity to the state and to order a wholesale price cap "until the marketplace becomes competitive."

The governor once again said that FERC could help his state by (a) taking interim action to stabilize wholesale power prices in California; (b) ordering refunds of "excess charges" that have been found to be unjust and unreasonable prices as alleged recently by the Cal-ISO; and (c) approving the state's purchase of the investor-owned utilities' transmission grid assets.

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