Controversy, Disagreement Surround CA DWR's Revenue Filing

The California Public Utilities Commission held a workshop last Friday to begin sorting out the wide variation in interpretations of what the state bulk electricity buying agency, the Department of Water Resources (DWR), needs in reimbursement from utility retail electric rates.

DWR filed its so-called revenue requirement with the CPUC last week, indicating it will not need all of the 3-cent/kw rake hike the utilities put in effect last month, meaning there should be enough for the two financially strapped utilities to regain their financial stability. One utility, Pacific Gas and Electric, disagreed with DWR's contention and asked for it to hold public hearings to resolve the issue.

A DWR spokesperson Friday said his department hopes to resolve the issues at the CPUC workshop and other proceedings the energy regulators might hold before their Aug. 23 scheduled vote on the issue.

DWR on July 23 filed with the state regulators for $13 billion in estimated revenue needs coverings its power-purchasing from the first of this year through the end of next. On average, DWR estimates it will need about 1.65 cents/kw of the 3-cent/kw-rate increase.

The DWR filing is regarded as an essential step toward the state later this year selling $13 billion in public sector revenue bonds to restore the state general fund and the financial standing of the two fiscally crippled utilities--one in bankruptcy and the other on the brink of it. DWR's portion of the principal and interest on those bonds is included in the revenue requirement, along with the state agency's cost of buying power and the administrative costs attached to that function that it assumed Jan. 17 this year.

In a scathing letter July 24, less than 24 hours after DWR filed its estimated revenue requirements for the next 18 months with state regulators, PG&E's utility demanded the state's power-buying agency hold public hearings to ferret out what the utility characterized as incomplete, misleading and contradictory information in its regulatory filing.

What it characterized as DWR's lack of information, PG&E's utility stated, "should be of great concern to all parties." Thus, PG&E has requested the DWR hold "full evidentiary" administrative hearings.

"Given the lack of information in the (DWR) filing, it is impossible to verify the 1.65 cents/kwh number or whether DWR's rate increase will translate to an increase in customer rates," PG&E stated in its letter.

Under a CPUC interim financing order, DWR currently receives 9.5 cents/kwh for its power purchases on behalf of the PG&E utility customers, but the utility argued that the new filing requires a much higher rate of 13.7 cents/kwh from PG&E electric utility customers. The utility argued that represents a potential 44% increase next year, or $930 million.

If the PG&E utility's analysis is correct, DWR needs more money than is currently available in the total retail utility rates being collected. PG&E argued that a "significant lack of detail" from DWR makes it impossible for its utility to assess the impact of the water agency's needs on utility electric customers.

DWR responded at mid-week with a nine-point clarification, saying the PG&E was misinterpreting its filing. For example, the added $600 million in requirements next year is not an increase beyond what is already in effect. It called the likelihood of the filing being insufficient to cover all of the state's power-buying costs "remote," noting the current declines in natural gas and electricity prices should help mitigate matters further.

"Because of declining power prices, DWR does not see a need for a rate increase after 2002," the nine-point department analysis said. "However, that is not currently part of the (DWR's CPUC) rate filing. Consequently, that data was not included in the filing."

DWR provided a caveat with its CPUC filing, noting that "actual conditions (demand, wholesale natural gas prices, conservation impact, etc.) may differ from those assumed by the department, and any differences could have a material impact on the revenue requirements."

Nevertheless, state officials and their retained consultants assured news media that no additional rate increases by the two cash-strapped investor-owned utilities, PG&E and Southern California Edison Co., will be needed over the next 18 months. DWR's current estimates are an update of much more bleak numbers filed by the agency in late April and early May.

Assumptions in future gas prices continue to vary greatly among the Southern California border, Malin and the PG&E city gate. The SoCal border prices are assumed to vary from a quarterly high of $7.68 to $6.75; Malin, from $5.94 to $3.47; and city gate, from $7.15 to $5.43. A large price spike is assumed for the fourth quarter of 2002 at all three delivery points.

The assumptions for the prices of spot power supplies are necessarily lower than what had been projected earlier, Nichols said. For the third quarter of this year for example, DWR earlier assumed an average price of $195/MWh and now it is assuming prices around $130/MWh, which Nichols characterized as a "reasonably conservative, but prudent number in going forward this summer."

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