Edison Proposal, Power Authority, CA Rate Hike All Move Forward

The vibes were mostly positive in California last week with no blackouts, a new law creating a state power authority, initial work for the state's record $13.4 billion municipal bond sale and a record $5.7 billion retail electricity rate increase being spread to the largest residential users and businesses of all sizes.

A state legislative proposal (SB 278X) also emerged late last Friday to start the political process for implementing the governor's agreement (MOU) with Southern California Edison Co. to return the utility to credit-worthiness in exchange for selling its transmission system to the state and assuring below-market power supplies from the utility's existing fleet of hydro, nuclear and coal-fired power plants. SB 278X will begin the hearing process with assignment from the state Senate rules committee this week, and is expected to inspire other alternative proposals, some of which were already being informally debated in the state assembly late last week.

The prospects for the MOU, or anything close, surviving the legislative process are extremely dim, according to many political and energy stakeholders. Gov. Gray Davis, according to the political insiders, has not been able to generate much enthusiasm for the deal, and some lawmakers are saying the merchant generators will have to accept 25% to 30% discounts of the billings owed them, or the state should buy the Edison utility rather than try to do a piecemeal acquisition of assets.

The proposed legislation -- more than a month in coming since the MOU was announced April 9 -- is "a starting pointing to kick off discussion," said a spokesperson for state Sen. Richard Polanco, who agreed to carry the bill for the governor. "There are a host of opinions on this issue, and this is going to be an open process."

The legislative to help restore Edison's financial health comes a week after a $13.4 billion bond measure was passed by the legislature last week, but has to wait 90 days to become effective, and at a time when the financial community is becoming increasingly wary of California's deepening financial mess as illustrated by Moody Investor Services' downgrading of California's $19.8 billion in general obligation bonds from Aa2 to Aa3, and lowering of the rating on $5.7 billion of the state's lease revenue bonds from Aa3 to A1.

Following Moody's action California officials indicated to Wall Street analysts that they may need only $12.5 billion in bonds, probably as 15-year instruments, with $8 billion being tax-exempt, and the other $4.5 billion as taxable, higher-paying bonds. Wall Street rating sources will review the offering in July, prior to a mid-August sale.

In another sign that the political rhetoric is rising faster than the spring temperatures, Gray Davis delivered the Democratic Party's weekly national radio address, responding to the Bush Administration energy plan, which he emphatically criticized as not offering any wholesale power price relief to California or the other western states.

In the mix of verbal ping-pong being played in the news media, two other concrete steps were taken last week, collectively carrying potential prices tags above $10 billion: (1) the initial legislation needed to create the "California Consumer Power and Conservation.

Financing Authority," and (2) the largest utility rate increase in the state's history, $5.7 billion to cover wholesale power costs for two utilities.

Although Davis said significant clean-up legislation and coordination among other state agencies will be need before the power authority sets up shop later in the year, it sets sail with a broad mandate that includes possible financing of natural gas pipeline and storage infrastructure tied to the state's generating plants. It is given authority to issue up to $5 billion in state bonds for energy projects and conservation programs, including up to $1 billion in conservation, efficiency and renewable energy projects.

Part of the new agency's charter will be to develop 10-year gas and electricity infrastructure investment plans, consulting with the state electric transmission grid operator, Cal-ISO, and state energy commission for the governor and legislature during its first six months of existence, which is expected to begin in mid-August.

The new state agency sunsets Jan. 1, 2007; it was developed on a strictly partisan vote with no Republicans, who are the minority party in both houses of the state legislature, voting for it, something the governor called out for criticism.

Also in its initial months, the new state authority is supposed to work with the California Public Utilities Commission and energy commission to report on the "present, planned and required future capacity of the state's natural gas transportation and storage system," and its ability to provide "competitively priced natural gas."

While championing his state as the leader in electricity conservation at 42% below the national average, the governor characterized the state's latest intervention into the electricity business as a means of forcing down skyrocketing wholesale power prices and adding greater reliability of adequate supplies.

"Direct participation in California's energy markets will help dampen wholesale energy costs and ensure an adequate supply of energy," said Davis, at a media photo-op-staged signing ceremony at a cogeneration plant near the state Capitol. "This bill gives back to California the power to control its own energy destiny."

Strong speculation among industry and government sources is that former city of Los Angeles municipal utility head, S. David Freeman, 75, will be named by the governor to head the new power authority.

"California's Power Authority is modeled, in part, after the successful New York Public Power Authority," Davis said. "We will be authorized to build, own and operate new power plants on behalf of consumers. The Power Authority will be armed with the power of government and the flexibility and initiative of private enterprise. This is power generated in California for California."

Separately, Pacific Gas and Electric Co. launched a new program for industrial customers on a pilot basis, offering an Internet-based service allowing the utility's largest energy users to retrieve real-time consumption/price information via a computer link. Called Inter-Act, the PG&E utility is using a system developed by Alameda, CA-based Silicon Energy. The program employs interval meters as a load management tool, and the 2,700 largest customers are not going to be charged for the service during the pilot, PG&E's utility announcement said.

In other action, California regulators belatedly decided to spread a $5.7 billion (3-cent/kW) rate increase to both moderate and large energy users as a means of motivating the bulk of the mass consumers to conserve electricity going into the critical summer peak-demand period. The rate increase, which was okayed March 27, takes effect June 1 for Pacific Gas and Electric and June 3 for Southern California Edison Co. with five so-called "rate tiers" tied to consumption levels.

The CPUC energy director, Paul Clannon, called the increases the largest in state history. The vote was 3-2, with Gray Davis's three appointees backing it; the two holdover Republican-appointed commissioners voted against the measure, contending that rate spread separates out too many factions for either no increase or too much of the burden of the increase.

At one point prior to the vote, angry consumer protestors tried to shout down the commissioners at a special continuation meeting. Many threatened a ratepayer revolt, withholding or diverting monthly utility payments.

Under the CPUC's action residential customer increases will average 19%, compared to 49% for industrial customers, however, many special exemptions and "caps" are provided to protect low-income and most residential customers from any increase and to keep agricultural customer increases below 30%.

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