Amid the financial calamity facing California’sonce-invincible-looking two major utilities, California regulatorsThursday unanimously approved a temporary 1 cent/kwh rate hike, butthe growing challenge facing the state’s political leaders is thata grassroots push for government-run energy operations isdefinitely picking up steam.

More permanent rate relief, including whether to lift thestate’s 4 1/2-year retail rate freeze, will be decided afteradditional regulatory hearings get under way Jan. 10. The temporaryrate relief granted yesterday in the form of a surcharge isbasically what the utilities and Fitch rating service already haddismissed as woefully inadequate to cut into the $11 billion inadded debt the two utilities have assumed over the past six monthsdue to runaway wholesale power prices they continue to pay. (TheCal-PX price was 28 cents/kwh yesterday, according to a CPUCsource. Retail rates are frozen at 7-cent/kwh.)

CPUC commissioners noted in their pre-vote comments thatbankruptcy is not a viable solution to the utilities’ continuingrevenue shortfalls, and at least one of the commissioners calledconsumer activists “irresponsible” for advocating bankruptcy inlieu of rate relief. Another commissioner, Henry Duque, indicatedhe was voting for the rate hike, but agreed with the utilities thatit should be more — at least another penny/kwh more.

Consumers speaking at the CPUC meeting indicated that seriouspushes for government takeovers in San Francisco and San Diego aretaking hold, and the continuing economic and operating success oflarge municipal-run utilities in Los Angeles and the state capitalof Sacramento lend them moral support. “It would be much better tohave publicly run utilities rather than private sector companies,”a long line of consumer activists told CPUC commissioners.

Activists warned that unless Gov. Gray Davis takes drastic stepssoon, they will “guarantee” another statewide ballot measure tore-regulate the electric industry statewide. They said the City ofSan Francisco would have a measure to vote on regardless. Theytalked vociferously against the CPUC issuing any rate increase.

The growing popularity of government intervention to solve thestate’s continuing power crisis was underscored when CommissionerRichard Bilas urged the state legislature, with support from thecurrent CPUC leaders, to establish a state power authority to buyand sell power to the state’s utilities. He said he was troubled bythe CPUC’s “lack of power” to go after the “real culprits of thewholesale market fiasco, and it is not the FERC, it is the peoplemaking windfall profits as a result of this dysfunctional market.”

Bilas said a state authority could “set the rules of engagement”for the electricity market and also “have the powers ofcondemnation at fair market value so that those people who aregrinding the system to a halt can be held accountable, and I knowno other way to do it.”

CPUC Commissioner Carl Wood said that “deregulation is dead” inCalifornia and no one should carry on the “fiction” that it isgoing to be salvaged in the state. He said the state is the victimof what he called a “western cartel” of generators and marketerswho are “profiteers” of the worst order, and who federal regulatorsare, in effect, protecting by not imposing a so-called hardwholesale price cap throughout the western states.

“Markets do not act in a responsible manner, it isn’t theirnature, and that is what makes them so exciting,” he said.”Reliability through reliance on markets is no longer possible.That is the reality we are facing. The deregulation project inCalifornia is dead because it is no longer defensible.

“What we are voting on today is the epitaph for deregulation inCalifornia,” Wood said before the unanimous vote by the CPUC.”Deregulation is dead.”

In stark contrast to the overwhelming comments advocating publicsector solutions, Robert Mitchell, executive vice president withWashington, DC-based private sector transmission operator,Trans-Elect, said his firm is making an $8 billion offer toCalifornia’s private sector utilities to buy and run the state’sgrid, 70% of which is owned by the three major investor-ownedutilities.ÿ

He asked the CPUC for the opportunity to comeÿback to discussTrans-Elect’s proposal more fully.

Earlier as part of some opening remarks, Commissioner Wood, aformer statewide utility union leader, said he stronglyÿopposedfurther divestiture of utility-owned generation in or outside ofthe state, in reference to aÿpostponed agenda itemÿon SouthernCalifornia Edison Co.’s pending sale of its portion of theÿMohavecoal-fired generation plant in Nevada.

Wood said all the state’s major electric industry stakeholdersagree that the previous sale of the utilities’ major in-stategas-fired power plants is a major reason forÿCalifornia’s currentelectricity supply/price predicament, and the trend should now bereversed with a return to more utility-owned generation assets.ÿ

California’s two cash-strapped utilities, Southern CaliforniaEdison and Pacific Gas and Electric Co. reacted quickly andnegatively to the CPUC rate decision, but they reportedly werenegotiating outside the state regulatory process with politicalleaders on how to avoid seeking bankruptcy protection.

A PG&E Corp. San Francisco-based spokesperson Wednesday saidits utility would be watching closely how the financial communityreacts. Fitch said that the proposed decision is “insufficient tomaintain the credit quality” of the two utilities, and loweredtheir credit ratings to junk bond status.

PG&E estimates it has three to seven weeks of cash reserves;Edison has even less. Both said the mounting debt approached $2.8billion in December alone due to power costs that far exceed frozenretail rates. (Edison said it paid an average of 30 cents/kwh inDecember compared to the CPUC’s proposed rate relief that would setthe frozen rate at 7 cents/kwh.)

“The proposed decision (adopted Thursday), will make it likelythat power generators will decline to sell sufficient power toCalifornia to meet customers’ needs,” Edison said in a preparedresponse to Wednesday’s proposed CPUC decision.

Edison noted that it has filed federal lawsuits in Washington,DC, against FERC, and in Los Angeles against CPUC, attempting toget relief. The DC court is expected to rule tomorrow (Jan. 5) andthe LA court on Monday.

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