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Utility crisis getting worse: Natural gas prices to soar, PG&E says By Carrie Peyton Bee Staff Writer

(Published Dec. 30, 2000) California's energy debacle turned more desperate Friday than anyone had predicted even a few weeks ago.

Pacific Gas and Electric Co. announced that everyone who heats with natural gas -- including hundreds of thousands of Sacramentans -- will pay 2 1/2 times what they did one year ago, with the average residential bill for January rising from $50 to $125.

The news came late in a day during which a top PG&E executive testified at the state Public Utilities Commission that an initial round of proposed electric rate increases will cover only a fraction of the billions of dollars that PG&E believes it needs over the long term.

If PG&E's rate plan is approved, electricity bills could triple in two to five years, said one PUC analyst.

Utility officials declined to predict how high electricity rates would go, but acknowledged that there would be no cap.

"This just seems outlandish," Mike Florio, an attorney with The Utility Reform Network, said of the gas increases. The Bay Area consumer group expected January gas bills to be higher than December's bills, already 65 percent higher than the previous year's.

"But this is astonishingly higher," Florio said. It's time to start asking if PG&E is properly managing its gas purchasing and storage programs, he said.

PG&E charges for gas the way it hopes to charge for electricity.

It sets a delivery fee -- still regulated by the state PUC -- that averages about 36 cents per therm, although the number increases for households that use more. An average Sacramento household uses about 70 therms a month.

On top of the delivery charge, PG&E is allowed to pass along to consumers the price it pays wholesalers for the gas. Last January, that was about 31 cents a therm, or 100,000 British thermal units. By December, that had grown to 75 cents a therm. Next month, it will hit $1.42.

"It's unbelievable. It's not like anything we've ever seen," said utility spokeswoman Staci Homrig. As recently as three months ago, PG&E had predicted that gas prices would top out around 60 cents a therm, driving average bills from $50 to $75.

The utility's predictions were so wildly off partly because last-minute, or "spot" prices for gas have soared, sometimes five times higher than elsewhere in the nation, and partly because some of its longer-term purchases were tied to other gas-price indexes that also jumped, said Homrig.

"We're just trying to prepare people ... to be cognizant when they flip on the heat," she said.

Word of the rising gas rates came just as the PUC concluded a daylong hearing into whether PG&E has done enough to forestall what the company describes as an electricity emergency that demands immediate rate hikes despite a state-ordered freeze.

Two PUC commissioners, an administrative law judge and attorneys for consumer groups fired questions for hours at Walter Campbell, the utility's director of business and financial planning.

If things are so bad, they asked, why hasn't PG&E slashed operating costs? Why haven't its executives taken pay cuts? Why is it still paying stock dividends? And why hasn't its parent firm, PG&E Corp., ordered other subsidiaries to sell off some of their assets to help PG&E meet its bills?

None of those steps would be anything but a stopgap measure, given the huge debt crisis PG&E is facing, Campbell said.

The utility, which has a net worth of about $5.4 billion, needs about $4 billion to pay for power costs that weren't covered by frozen rates or offset by power plants it owns, Campbell said.

The utility has publicized a need for up to $7 billion, but at least 40 percent of that is offset by its own generating revenues, Campbell acknowledged under oath. He also confirmed under questioning that PG&E has collected more than $9 billion in competition transition revenues since April 1998, much of it through charging rates that were frozen well above utility costs.

In the past three years, Campbell said, PG&E has paid out nearly $1.5 billion in stock dividends and spent another $1.5 billion in stock repurchases -- actions that depleted what otherwise could have been cash reserves.

"Cash would be handy right now, wouldn't it?" Dan Carroll, an attorney for a small-business consumer group, asked bitingly.

By the time Campbell left the stand at 2:30 p.m., more than five hours after he was sworn in for the quasi-legal proceeding, his shoulders were bent and his red bow tie askew.

PG&E maintains that if the PUC does not approve a "significant" rate increase at its meeting Thursday and give the utility permission to pass months of prior costs along to ratepayers, its credit ratings will slide so low that it will be forced into bankruptcy.

Consumer advocates doubt some utility figures, although they acknowledge wholesale costs have soared to fantastic heights, driven by sellers' ability to name almost any price in the state's malfunctioning electricity market.

Power plant owners and traders have staged "an enormous transfer of wealth," said Jason Zeller, an attorney with the PUC's Office of Ratepayer Advocates, and "they're trying to push it as long as they can."

"This is the kind of thing that nations have gone to war over. This is a phenomenal amount of money," he said.

Zeller argued that utilities, which long have had the legal right to condemn property to make way for power lines or other energy needs, should use their power of eminent domain to take over the power plants now charging such high wholesale rates.

That probably would be possible, said another lawyer familiar with utility issues, but the price of such a takeover could be steep.

Once scheduled to last two days, the PUC emergency rate hearings probably will run for five.

Time is short for the PUC, said James Asselstine, a research director for Lehman Brothers Inc. in New York.

"You really only have one opportunity to address this," he told the PUC.

Unless the commission votes next week to allow both a rate increase and to guarantee that PG&E can collect the $4 billion it wants from ratepayers, utility bankruptcy is a "very likely probability," he said.

And if PG&E and Southern California Edison go bankrupt, he said, the commission could lose all jurisdiction over power plants the utilities still own, because the court could order their sale.

Asselstine warned that if the PUC lets PG&E only collect future wholesale costs, financiers may be unwilling to lend enough money to keep buying power.

Several commissioners have indicated that they favor an emergency action that would cover future wholesale costs but not give PG&E the permission it seeks to back-bill consumers for costs that piled up during the rate freeze.

Even PG&E's own proposal, Campbell testified, will bring in only a few hundred million dollars in its first three months, perhaps 5 percent to 7 percent of what PG&E needs to pay wholesalers. But he believes it will reassure lenders because so many future rate increases are built in.

The proposal would let electricity rates be adjusted up to three times a year, in much the same way natural gas bills are now adjusted each month.

PG&E blamed PUC policies for permitting high gas prices by discouraging it from building more gas storage space or investing in more pipeline capacity rights.

http://www.capitolalert.com/news/capalert01_20001230.html

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