After being delayed a half-hour by chanting consumers opposingrate increases in a standing-room-only hearing room, the CaliforniaPublic Utilities Commission Tuesday raised electric rates on apermanent basis by up to 40%. The CPUC also took other actionsdirecting the two of the state’s major investor-owned utilities toresume paying small independent power producers known as”qualifying facilities” (QFs) and the state Department of WaterResources for wholesale spot supplies.

The actions do not deal with the almost $14 billion in past-duecharges to generators, suppliers, creditors and debtholders, forwhich a settlement is still being negotiated between the utilitiesand state officials.

Underscoring the importance of re-instituting idle QFgenerators, the Cal-ISO, within an hour of the CPUC’s actions inearly afternoon, declared a Stage Two power alert when imports ofpower suddenly dropped by 1,100 MW. An estimated 10,500 MW ofin-state generation was out of service for planned and unplannedmaintenance, and some 2,900 MW of QF generation remained off-line.Peak demand was expected to be the same as it was last week duringrolling blackouts – about 29,000 MW.

The rate increase was made effective immediately, although therate apportionment is still to be determined over the next month toinclude what the regulators describe as “tiered” rates thatencourage conservation. Under current state law, up to 45% of theresidential customers will see no rate increase. At least onecommissioner, former CPUC President Richard Bilas, called theincrease “long overdue,” noting it could have been considerablysmaller if it had been imposed last year. Bilas also was criticalof the continued freeze on retail electricity rates.

The five-member CPUC, with three commissioners appointed by thecurrent governor, voted unanimously, 5-0, on the measures. Gov.Gray Davis, whose aides worked with the CPUC on the proposedactions, at this point is publicly opposing the action. He has kepthis distance from the proposed rate hike, steadfastly maintaining astrategy of solving the state’s nagging electricity woes withoutadditional rate increases above those now in effect or anticipatedas part of the state’s 1996 electricity restructuring law.

Within minutes of the CPUC action Tuesday, Davis’s pressspokesperson Steve Maviglio said the governor will continue tooppose the rate increase, and he reiterated that his boss had “nocontrol” over the CPUC, although that body has faithfully followedin Davis’ footsteps up to this point.

Davis clarified his position on rate increases generally, notingthat he will support them if it is found they are absolutelynecessary for the well-being of the state. But he called the CPUCaction “premature” for lack of financial data to support it. Hisadvisors continued to maintain that the CPUC acted without thegovernor’s okay citing that the regulatory commission in Californiaenjoys state constitutional independence. Skeptics continue tosuggest he is taking a political walk to avoid responsibility forthe increase.

“From the beginning, I’ve said that my main goal was to solvethis problem while protecting the consumer from undue rate hikes.The PUC’s action today was premature because we do not have all theappropriate financial numbers necessary to make a decision. Untilwe do, I cannot support any rate increase.

“I want to make sure that everyone understands my position.While I have opposed rate increases, if it becomes clear that arate increase is absolutely necessary for the good of the State, Iwill support one that is fair and do my duty to convinceCalifornians of its necessity.”

In a briefing by the governor’s staff involved in settlementnegotiations, it was divulged that a deal with Edison may beannounced late this week, but the talks with PG&E lag behindand the SDG&E discussion are last in the queue.

A state legislative leader, Roderick Wright, chair of theAssembly Energy Committee, made an eleventh-hour plea that ratesalso be raised for San Diego Gas & Electric Co., which has beenexempt from most of the legislative and regulatory remedies beingproposed because of legislative help it received during lastsummer’s power crisis. Wright argued that SDG&E is only threeor four months behind the other two, larger and near-bankrupt,investor-owned utilities in becoming insolvent.

Whether the increases will be sufficient to fill the current gapbetween wholesale power costs and previously frozen retail utilityrates is still to be determined, depending on how the increase isallocated. CPUC President Loretta Lynch, a close confidant of thegovernor, is strongly proposing that rates be “tiered,” so up toabout half of the residential customers who keep usage low and lowincome households would see small or no increases, and large users- “energy hogs,” as Lynch describes them – including mostbusinesses, may see increases greater than the 30% to 40% averagehike.

Lynch continued to criticize merchant generator/suppliers for”price gouging,” and federal regulators for not stopping them. “Weonly have the legal authority to control the prices charged by theretail utilities,” said Lynch, noting that federal regulators are”simply not doing their job, since they share the responsibility tokeep the lights on and make sure the system doesn’t collapse.” Shesaid the rate increase would be subject to refunds “if we aresuccessful in getting refunds from the gougers.”

Another CPUC commissioner appointed by the governor, Carl Wood,said that if the Federal Energy Regulatory Commission would just doits job the same way the SEC regulates the stock market,California’s need for rate increases could be reduced.

The head of the California Chamber of Commerce urged his membersto support the rate hike as “probably necessary to keep the lightson,” and to practice conservation as a means of avoiding rollingblackouts this summer.

While Pacific Gas & Electric and Southern California Edisonobviously welcomed the new ability to raise retail rates afterstruggling for the past four months on the brink of bankruptcy,they both expressed concerns about whether the increases will dothe trick. On “cursory review” of the proposal on Monday before itwas enacted, Edison said it is not clear that these steps will”align costs and rates.”

Consumer advocate Douglas Heller, with the Foundation forTaxpayer and Consumer Rights, blasted merchant generators as”modern day robber barons,” saying state officials should fightback with a “massive windfall profits” tax. Then if the generatorsshut down plants, the state should take them over. “Deregulationhas been a license to steal,” Heller told the CPUC before its vote.His organization, which was involved with an unsuccessful statewideanti-deregulation ballot initiative in 1998, has threatened to puta similar measure on the ballot next year when Davis stands forre-election. The governor is fearful a ballot measure will pass andpotentially undermine his re-election campaign.

Echoing Heller’s comments, one of about a dozen vociferousconsumers appearing before the CPUC called the merchant generators”robber barons on steroids,” advocating the state take over theprivate-sector power plants and create a statewide public poweragency, without any investor-owned participants. She called forconsumers to stop paying their electricity bills until the statemoves to public power. (A city ballot initiative in San Franciscothis fall calls for a municipal utility district and promises to bean early litmus test for a statewide anti-deregulation ballotmeasure. Supporters in San Francisco are trying to encourage othercities to push for municipalization where it doesn’t alreadyexist.)

After waiting for legislative solutions that have notmaterialized, the CPUC Tuesday revamped the QF program, directingutilities to pay the small generators going forward, using a new,temporary rate formula changing the gas price index from the Topockat the California-Arizona border to the Malin, Oregon-Californiaborder trading point, with further proceedings that will look atlonger term formula changes that may take natural gas indices outof the equation. Possible market abuse on the El Paso Natural Gassystem at Topock is “reason enough” to change the price indexpoint, according to CPUC Commissioner Carl Wood, who abandonedearlier proposals to also place a $79 MWh price cap and options forlong-term, fixed price options, in response to strong argumentsagainst them from the QFs.

“At a time when every megawatt of electricity is needed, wecannot afford to lose any supplies because of non-payment from theutilities,” Wood said. “QFs are a key part of the supply sources inCalifornia and they must be kept on line.”

In separate action, the regulators set up a mechanism for theutilities to transfer monies to the state Department of WaterResources. “Today’s decision does not provide the state DWR all ofthe money it has spent procuring power for the state,” Lynch said.”It includes a proposed method for calculating a ‘CaliforniaProcurement Adjustment’ (CPA) that will be made final at a meetingearly next month.” The importance of establishing a formula forcalculating the amounts of rates that would repay DWR for the $3.1billion it has spent buying wholesale spot electricity supplies isthat it allows the state to begin selling back bonds to reimbursethe utilities and the DWR.

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