Reluctantly and in the face of extraordinary pressure fromfinancial, utility and public officials, California regulators lastThursday took initial steps to unfreeze retail electricity ratesfor the state’s two largest investor owned utilities (IOUs) tobegin to cut into the $8 billion of debt dragging down the IOUssince mid-year. An unprecedented lobbying and public communicationseffort by the utilities preceded the action.
The California Public Utilities Commission on a 5-0 vote okayedan expedited two-week fact-gathering process that is supposed tolead to rate relief being given to the two utilities Jan. 4.Whether this will satisfy the financial community and ratingservices breathing down the utilities’ balance sheets was notimmediately clear.
Former CPUC president and economist Richard Bilas raised thatquestion while noting he had no clear answer. Bilas added he hopesthe CPUC’s assessment is correct, “and that we’re not too late.”
Emergency hearings designed to get a rate decision a week laterwill be held this Wednesday and Thursday in San Francisco. Theregulatory commission will use an independent auditor to look atthe two utilities’ financial records to determine that the ratefreeze can be lifted.
In its order, the CPUC committed itself to expedited action toboth “ensure that the utilities can provide service at just andreasonable rates” and “to avoid continuing conditions that mayjeopardize the utilities’ creditworthiness and their ability tocontinue to procure energy on behalf of consumers.”
The two utility companies reacted cautiously, welcoming theregulators’ action, but noting they were unsure how the financialcommunity would react. Statewide utility consumer watchdog, TheUtility Reform Network (TURN), blasted the CPUC action as”regulation by Wall Street,” alleging the CPUC has “pre-judged” theneed for rate increases.
Without rate relief, both Southern California Edison Co andPacific Gas and Electric Co. said they will not be able to buyadequate 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 beenbrought to the brink of financial catastrophe is a tragedy and is afailure,” said Dan Richard, a PG&E Corp. and utility seniorvice president. “But now we have to go forward. The financialcommunity and credit-rating agencies made it clear to the state(Dec. 20) that they needed to see dramatic action to avoiddowngrading our debt to junk-bond status. If that happens, iteffectively extinguishes any other credit capacity that we mighthave, and would cut off our ability in a matter of weeks to buypower. So it is essential that the utilities remain in acreditworthy environment.”
Standard & Poor’s held a conference call last week (Dec. 20)to declare that the PG&E and Edison utilities risk default andbankruptcy within weeks and are likely to see their credit ratingsfall to junk grades if they don’t get help from regulators within24 to 48 hours. “S&P is prepared to take dramatic ratingaction,” said S&P Analyst Richard Cortright. “The ratings areexpected to drop deeply into speculative grade to reflect thelikelihood of imminent default.” S&P backed off from thosecharges 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 toa badly broken wholesale power market and price gouging bywholesale power sellers,” said Gordon R. Smith, CEO of PG&ECorp.’s combination utility subsidiary. “In order to ensurecontinued 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 wedeliver to Californians. No company can continue to operateindefinitely under such conditions.”
Edison announced on Friday that it was eliminating its fourthquarter 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 reducingsubstantially work done during overtime hours,” the company said instatement.
CPUC Commissioner Carl Wood said billions of dollars are beingsucked out of California’s economy in order to feed the “greed andavarice of the corporations (generators and marketers) that have norespect for their obligations under law even if the officials(FERC) charged with assessing those obligations don’t do it. Theirobligation is to provide electricity at rates that are just andreasonable.”
He said the long-term solutions to California’s wholesaleelectricity market problem cannot be implemented withoutunderstanding who is causing the problems.
CPUC President Loretta Lynch, an appointee of current Gov. GrayDavis, reiterated that FERC’s inadequate actions or inactions inrecent weeks and months have “contributed to a five-fold increase”in the cost of power.
Under the circumstances, PG&E and Edison have been “pushedto the breaking point,” Lynch said, noting that eventually thestate legislature is going to have to act quickly to restore someof the CPUC’s past powers to deal with the restructured electricityenvironment. She said not only are the utilities placed injeopardy, but the future integrity of the state’s electricityinfrastructure is endangered.
Lynch took great pains to address “the market,” saying the CPUCwas “taking substantial action” to the full limits of its abilityto do so under the state’s 1996 electric industry restructuringlaw.
“We have a legal trust to keep the lights on at reasonableprices if we can, so we call upon the market to recognize that weare taking substantial actions…to resolve this issue. The FERC’sactions have made it extraordinarily difficult for this commissionto fulfill that obligation.
A Los Angeles state legislator heading the state Assemblyenergy/utilities committee, Roderick Wright, appeared before theCPUC to urge it to act. He suggested that less finger-pointing bedone in the wake of the current crisis until longer term remediescan be addressed.
Leading up to last Thursday’s CPUC action and the reactions fromWall Street to San Francisco, related efforts were carried on inWashington, DC, and Denver between federal and western stateofficials, and various California market participants.
At the Washington conference, “several proposals were placed onthe table by parties which may result in resolving the forwardcontracting issue in the near-term future,” said ChiefAdministrative Law Judge Curtis L. Wagner Jr. in a report to FERC.”Statistics were gathered concerning available megawatt quantitiesand the needs of the [California] investor-owned utilities over afive-year period.” Another meeting between the parties will be heldon Jan. 3.
Senior officials with California’s independent grid operator(Cal-ISO) expressed reservations about a “hard” $100/MW wholesaleelectricity price cap throughout the western states, which was oneof the proposals at the meeting of western governors in Denver lastweek. Several of the governors disagreed, concluding that as ashort-term, interim step the cap will help protect retail consumersand bring some badly needed stability to the power market.
“The idea has been floated before — a fixed cap of anywherefrom $60 to $150/MW — in as many flavors as you can think of,”said Kellan Fluckiger, the Cal-ISO COO. “Whether or not that iseffective depends on a whole bunch of things, including forwardnatural gas prices.
“My experience here in California is that caps are not effectiveand they produce countervailing incentives and the very heart ofthem strike at the core of additional investment (for newgeneration and transmission infrastructure) that is badly needed.
“Caps generally are a difficult thing,” said Fluckiger, notinghe couldn’t comment on the specific proposals discussed by thegovernors. “While they may appear in the short-term to controlrates, our experience is that they are not very successful incontrolling overall costs, and there is really concern about havingsufficient incentives to get the investment to build the new powerplants 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 afederal agency will act. There are things that will have to be donehere in California to protect the viability of the utilitycompanies so we can continue to buy power on behalf of ourcustomers. We hope (the CPUC) action will be sufficient. We’ll haveto wait and see how the banks act.”
Leading up to the mounting pressure on California officials,Edison pushed a multi-million-dollar advertising campaign featuringannouncements by its parent company’s CEO, John Bryson, ontelevision, radio stations and in newspapers, that there could be”rationing” of electricity if the regulators do not grant raterelief. Although the PG&E utility adopted a lower key approachpublicly, Edison openly talked about the need for the utility todeclare bankruptcy in the absence of emergency rate relief.
While the electricity situation, and to a lesser extent naturalgas prices, have become front-page news in general interest newsmedia throughout the state, the utilities and countering consumergroups have raised their rhetoric. Political correspondents are nowsaying this is the major issue for Gov. Davis, and consumer groupsare assuring everyone concerned that they will sponsor a statewideballot measure in 2002 asking the voters to approve a massive moveby the state to take over operation of the electricity generationand transmission infrastructure.
Richard Nemec, Los Angeles
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