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Rate Hikes Salvage Utilities from Brink of Bankruptcy

Rate Hikes Salvage Utilities from Brink of Bankruptcy

Reluctantly and in the face of extraordinary pressure from financial, utility and public officials, California regulators last Thursday took initial steps to unfreeze retail electricity rates for the state's two largest investor owned utilities (IOUs) to begin to cut into the $8 billion of debt dragging down the IOUs since mid-year. An unprecedented lobbying and public communications effort by the utilities preceded the action.

The California Public Utilities Commission on a 5-0 vote okayed an expedited two-week fact-gathering process that is supposed to lead to rate relief being given to the two utilities Jan. 4. Whether this will satisfy the financial community and rating services breathing down the utilities' balance sheets was not immediately clear.

Former CPUC president and economist Richard Bilas raised that question while noting he had no clear answer. Bilas added he hopes the CPUC's assessment is correct, "and that we're not too late."

Emergency hearings designed to get a rate decision a week later will be held this Wednesday and Thursday in San Francisco. The regulatory commission will use an independent auditor to look at the two utilities' financial records to determine that the rate freeze can be lifted.

In its order, the CPUC committed itself to expedited action to both "ensure that the utilities can provide service at just and reasonable rates" and "to avoid continuing conditions that may jeopardize the utilities' creditworthiness and their ability to continue to procure energy on behalf of consumers."

The two utility companies reacted cautiously, welcoming the regulators' action, but noting they were unsure how the financial community would react. Statewide utility consumer watchdog, The Utility Reform Network (TURN), blasted the CPUC action as "regulation by Wall Street," alleging the CPUC has "pre-judged" the need for rate increases.

Without rate relief, both Southern California Edison Co and Pacific Gas and Electric Co. said they will not be able to buy adequate power supplies and, therefore, "electricity rationing" would become necessary in the form of rolling blackouts.

"The fact that the state's two largest utilities have been brought to the brink of financial catastrophe is a tragedy and is a failure," said Dan Richard, a PG&E Corp. and utility senior vice president. "But now we have to go forward. The financial community and credit-rating agencies made it clear to the state (Dec. 20) that they needed to see dramatic action to avoid downgrading our debt to junk-bond status. If that happens, it effectively extinguishes any other credit capacity that we might have, and would cut off our ability in a matter of weeks to buy power. So it is essential that the utilities remain in a creditworthy environment."

Standard & Poor's held a conference call last week (Dec. 20) to declare that the PG&E and Edison utilities risk default and bankruptcy within weeks and are likely to see their credit ratings fall to junk grades if they don't get help from regulators within 24 to 48 hours. "S&P is prepared to take dramatic rating action," said S&P Analyst Richard Cortright. "The ratings are expected to drop deeply into speculative grade to reflect the likelihood of imminent default." S&P backed off from those charges Friday after the rate action by the CPUC.

"For months California's utilities, including Pacific Gas & Electric Company, have faced a growing financial challenge, due to a badly broken wholesale power market and price gouging by wholesale power sellers," said Gordon R. Smith, CEO of PG&E Corp.'s combination utility subsidiary. "In order to ensure continued service to our customers during this time, Pacific Gas & Electric has virtually exhausted its financial resources, borrowing an average of $1 million per hour to pay for the power we deliver to Californians. No company can continue to operate indefinitely under such conditions."

Edison announced on Friday that it was eliminating its fourth quarter dividend and was cutting 2001 spending by $100 million. "The reduction will affect needed investments in infrastructure, load growth, and system automation, as well as reducing substantially work done during overtime hours," the company said in statement.

CPUC Commissioner Carl Wood said billions of dollars are being sucked out of California's economy in order to feed the "greed and avarice of the corporations (generators and marketers) that have no respect for their obligations under law even if the officials (FERC) charged with assessing those obligations don't do it. Their obligation is to provide electricity at rates that are just and reasonable."

He said the long-term solutions to California's wholesale electricity market problem cannot be implemented without understanding who is causing the problems.

CPUC President Loretta Lynch, an appointee of current Gov. Gray Davis, reiterated that FERC's inadequate actions or inactions in recent weeks and months have "contributed to a five-fold increase" in the cost of power.

Under the circumstances, PG&E and Edison have been "pushed to the breaking point," Lynch said, noting that eventually the state legislature is going to have to act quickly to restore some of the CPUC's past powers to deal with the restructured electricity environment. She said not only are the utilities placed in jeopardy, but the future integrity of the state's electricity infrastructure is endangered.

Lynch took great pains to address "the market," saying the CPUC was "taking substantial action" to the full limits of its ability to do so under the state's 1996 electric industry restructuring law.

"We have a legal trust to keep the lights on at reasonable prices if we can, so we call upon the market to recognize that we are taking substantial actions...to resolve this issue. The FERC's actions have made it extraordinarily difficult for this commission to fulfill that obligation.

A Los Angeles state legislator heading the state Assembly energy/utilities committee, Roderick Wright, appeared before the CPUC to urge it to act. He suggested that less finger-pointing be done in the wake of the current crisis until longer term remedies can be addressed.

Leading up to last Thursday's CPUC action and the reactions from Wall Street to San Francisco, related efforts were carried on in Washington, DC, and Denver between federal and western state officials, and various California market participants.

At the Washington conference, "several proposals were placed on the table by parties which may result in resolving the forward contracting issue in the near-term future," said Chief Administrative Law Judge Curtis L. Wagner Jr. in a report to FERC. "Statistics were gathered concerning available megawatt quantities and the needs of the [California] investor-owned utilities over a five-year period." Another meeting between the parties will be held on Jan. 3.

Senior officials with California's independent grid operator (Cal-ISO) expressed reservations about a "hard" $100/MW wholesale electricity price cap throughout the western states, which was one of the proposals at the meeting of western governors in Denver last week. Several of the governors disagreed, concluding that as a short-term, interim step the cap will help protect retail consumers and bring some badly needed stability to the power market.

"The idea has been floated before --- a fixed cap of anywhere from $60 to $150/MW --- in as many flavors as you can think of," said Kellan Fluckiger, the Cal-ISO COO. "Whether or not that is effective depends on a whole bunch of things, including forward natural gas prices.

"My experience here in California is that caps are not effective and they produce countervailing incentives and the very heart of them strike at the core of additional investment (for new generation and transmission infrastructure) that is badly needed.

"Caps generally are a difficult thing," said Fluckiger, noting he couldn't comment on the specific proposals discussed by the governors. "While they may appear in the short-term to control rates, our experience is that they are not very successful in controlling overall costs, and there is really concern about having sufficient incentives to get the investment to build the new power plants we so desperately need."

At the end of the week, PG&E's Richard said the state "cannot stake the future of (its) economy on whether or not a federal agency will act. There are things that will have to be done here in California to protect the viability of the utility companies so we can continue to buy power on behalf of our customers. We hope (the CPUC) action will be sufficient. We'll have to wait and see how the banks act."

Leading up to the mounting pressure on California officials, Edison pushed a multi-million-dollar advertising campaign featuring announcements by its parent company's CEO, John Bryson, on television, radio stations and in newspapers, that there could be "rationing" of electricity if the regulators do not grant rate relief. Although the PG&E utility adopted a lower key approach publicly, Edison openly talked about the need for the utility to declare bankruptcy in the absence of emergency rate relief.

While the electricity situation, and to a lesser extent natural gas prices, have become front-page news in general interest news media throughout the state, the utilities and countering consumer groups have raised their rhetoric. Political correspondents are now saying this is the major issue for Gov. Davis, and consumer groups are assuring everyone concerned that they will sponsor a statewide ballot measure in 2002 asking the voters to approve a massive move by the state to take over operation of the electricity generation and transmission infrastructure.

Richard Nemec, Los Angeles

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