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
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
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
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
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
"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