PG&E, Edison International Estimate 2000 Electricity Debt at $12 Billion

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PG&E, Edison International Estimate 2000 Electricity Debt at $12 Billion Friday, December 29, 2000 05:17 PM ET

By Jason Leopold and Andrew Dowell

Dow Jones Newswires

SAN FRANCISCO -- Executives from California's two largest utilities expect their undercollected wholesale-power costs this year to reach $12 billion.

Chris Warner, chief regulatory council for PG&E Corp.'s (PCG, news, msgs) Pacific Gas & Electric Co. unit, puts the company's debt at a staggering $7 billion, an increase of $2.5 billion this month alone.

Southern California Edison's Chief Regulatory Executive John Fielder said its debt stands at about $5 billion. SoCal Edison is a unit of Edison International (EIX, news, msgs).

Both companies are pleading with state regulators to allow for massive rate increases in order to continue purchasing wholesale power and obtain credit from Wall Street. Earlier, PG&E added a new wrinkle by saying it is having difficulty buying natural gas for its customers because suppliers are concerned about credit risk created by the power-purchase losses.

The undercollection represents the high wholesale price the utilities pay for power and the inability to pass on those costs to consumers, whose rates are frozen under the state's electricity-deregulation program. One-third to one-half of those losses are offset by profits from generators the utilities still own.

Mr. Warner argued that California needs a rate cap on wholesale power in order for utilities like PG&E to remain solvent. He said he was "hopeful that the California Public Utilities Commission will recognize PG&E's needs and help to provide the company with a rate increase so it can continue to provide reliable electricity service to customers."

Mr. Fielder said the company's 30% rate-increase request wouldn't keep the company afloat on a long-term basis, but called the higher rates a short-term fix that allows SoCal Edison to get additional funding.

He added the PUC needs to declare an end to the rate freeze, allow any rate increase to be retroactive to June and recognize that SoCal Edison would have to boost rates by an additional 5% every six months, if needed, to continue purchasing wholesale power and to recover the nearly $5 billion in debt. SoCal Ed's long-term rate plan would increase retail electricity rates by 76% by 2003.

The PUC, which began hearings on the proposed rate increased Wednesday, said it will wait until an audit of the companies' accounting books is complete next week before voting Thursday on whether to raise rates. However, the PUC did say at its meeting last week that electricity rates needed to rise.

Sources close to the PUC, however, have urged them to take whatever steps are necessary to insure that rates aren't increased by more than 10% regardless of the outcome of the audit.

Mr. Fielder said the audit began on Wednesday and isn't a "true audit. It is a very focused review of specific issues, such as liquidity, cash position and checking with rating agencies on what they need to know."

Consumer groups believe that the utilities are overstating their financial woes in an effort to pressure the PUC and Gov. Gray Davis to increase rates.

Jason Zeller, an attorney with the Office of Ratepayer Advocates, a state-sanctioned organization that represents consumers' interests, said he believes that the utilities should only be allowed to increase their rates by 10%. He added the state should pursue having the utilities exercise power of eminent domain and take back power plants they sold off, and that any rate increase should only be on an interim basis.

Mr. Zeller also said advocates with his office are working with the PUC to allow the utilities to engage in enough long-term contracting for electricity that would limit their exposure to the spot market.

The hearings, which were originally scheduled to last only two days, will continue Tuesday, and when a decision is made, it is likely to be interim and not a final settlement.

"I've been cautioning clients that this battle will go on for a year or two years," said Bear Stearns utility bond analyst Ted Olshanski. "It's a risky situation obviously. This is a moving target."

At stake is the financial viability of the utilities, which ratings agencies have warned face a downgrade of their debt to junk-bond status and an end to their ability to borrow in the capital markets if a rate hike isn't agreed to next week.

Also at stake is California's access to power, because the utilities' deteriorating creditworthiness has left generators reluctant to supply electricity to the state without guarantees they'll be paid.

The debate stems from an imbalance between what the utilities pay for power in the wholesale market and what they can charge their customers. Power for delivery Tuesday in the West traded at $140-200 a megawatt-hour Friday. PG&E's rates are capped at $54 a megawatt-hour, while SoCal Edison's are capped at $66 a megawatt-hour.

Cconsumer groups are also applying more pressure. In addition to their surprise unveiling of Ralph Nader this week, they have begun arguing that California should be willing to allow the utilities to go bankrupt, if that is where they're headed.

The groups have threatened to fight any rate hike in court, saying the PUC, under California's landmark deregulation bill, doesn't have the authority to increase retail electricity rates before March 2002, the date when the rate freeze is scheduled to end.

Despite the fierce divisions, Mike Florio, senior attorney with The Utility Reform Network, said Thursday that a rate increase for Pacific Gas & Electric and Southern California Edison is likely, because of the pressure brought by the ratings agencies.

"The utilities could very well walk away with a big rate increase," he added. "It still looks more likely that it will be in their favor."

An SoCal Edison official, however, said the PUC appeared to be siding with consumer groups. "Come next Thursday, the utility is not going to get what it needs to survive," the official said.

Write to Jason Leopold at jason.leopold@dowjones.com

http://www.quicken.com/small_business/news/index-article.dcg?story=/news/stories/dj/20001229/on20001229000428.htm&department=0



-- Martin Thompson (mthom1927@aol.com), December 30, 2000


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