CA: Consumers to Pay More, No Matter How Crisis Resolved

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Consumers to Pay More, No Matter How Crisis Resolved

David Lazarus, Lynda Gledhill, Chronicle Staff Writers Friday, January 26, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/01/26/MN189426.DTL

While details of a scheme for California to purchase power on behalf of utilities remained murky yesterday, analysts said this much seemed clear: Consumers almost certainly will not escape without hefty electricity rate increases.

"You can structure this thing any way you like," said Paul Fremont, an energy-industry analyst at Jefferies & Co. in New York. "But you'll still have to pay for it at some point."

In other energy-related developments yesterday:

-- California Assembly Speaker Robert Hertzberg, D-Sherman Oaks, introduced a bill allowing the state to issue bonds to pay for electricity. It also would allow the utilities to use a portion of customers' bills to pay down $12 billion in debt.

-- Pacific Gas and Electric Co. asked a federal judge to allow the utility to pass along to customers all its wholesale power costs. A rate freeze now forces PG&E to swallow all such expenses.

-- In a separate court ruling, the California Power Exchange was blocked from selling off PG&E's electricity contracts to recoup missed payments.

-- The Independent System Operator (ISO) predicted that today could be the first day in almost two weeks without a worst-case Stage 3 power alert. The ISO credited lower energy demands expected today with breaking the string of Stage 3 alerts that began on Jan. 15.

Gov. Gray Davis announced Wednesday night that 39 power generators had submitted bids for long-term contracts at an average price of $69 per megawatt hour.

The governor had sought a price of $55; industry leaders wanted $80.

The governor's office declined to provide details of the bids or even to identify which generators had participated in the auction.

Because only a handful of major generators have plants in the Western power network, analysts said, it appeared that a number of the bidders must be smaller companies with only limited generating capacity.

STATE CONTRACT PLAN IN WORKS

Legislators are still working on a plan to give the go-ahead for California to enter into direct contracts with generators. However, Davis called the auction results "good news" and said he was enthusiastic that an end might be in sight to the state's long trek through the energy wilderness.

This was good enough for Merrill Lynch's influential energy analyst Steven Fleishman. He raised his rating on PG&E Corp. and Edison International shares to "accumulate" from "neutral" -- the first such upgrade since the utilities belonging to each parent company went into a financial tailspin.

"The tide is turning," Fleishman declared. "The chances of constructive legislation passing to stabilize the power market and help the utilities has gone up significantly."

PG&E's stock subsequently soared 31 percent to close yesterday at $13, while Edison jumped 35 percent to $12.69.

NEED TO CHECK THE FINE PRINT

But analysts urged investors to await the fine print on whatever deal for future energy purchases was taking shape in Sacramento.

"Obvious questions are the tenor of the contracts and how much power was actually bid," noted Richard Cortright, an analyst at rating agency Standard & Poor's.

Moreover, even if the state enters into contracts for about $69 per megawatt hour, the duration could be for as long as 10 years. If wholesale power prices fall in the interval -- they were just $40 a year ago -- California can be stuck paying above-market rates.

"There are a lot of holes, and I don't think you can expect that they'll be filled in anytime soon," said Susan Abbott, managing director of Moody's Investors Service in New York.

Whatever else, consumers are not off the hook. Jefferies' Fremont said "a very substantial rate increase" was almost inevitable if wholesale electricity prices remained at sky-high levels.

He and other analysts say monthly bills could rise by more than 50 percent over the next few years.

In Sacramento, lawmakers were buoyed by the results of the auction and moved quickly to pass legislation hammering out the details of a comprehensive purchasing plan.

MOVE TO EXTEND RATE INCREASE

Hertzberg's bill would indefinitely extend the average 10 percent rate increase approved by the California Public Utilities Commission earlier this month. The money would go, in part, to slowly paying off the utilities' debt.

In exchange, the state would acquire some kind of asset, although what exactly PG&E and Edison would give up has yet to be decided. While earlier speculation centered on dams or transmission lines, lawmakers are now considering a transfer of stock.

It was not immediately clear how much stock might be involved and whether California could become a significant shareholder in PG&E and Edison.

Consumer groups immediately decried the plan as a bailout.

"If the state's deregulation law was a Frankenstein, then this is the son of Frankenstein," said Nettie Hoge, executive director of the Utility Reform Network in San Francisco. "It abandons any pretense that the interests of consumers will be put before the interests of the utilities and its creditors."

JUDGE ASKED TO LIFT FREEZE

Meanwhile, PG&E asked a federal judge to issue an order forcing state regulators to lift the rate freeze that has caused the utility to accrue nearly $7 billion in debt.

"All of the principal participants in this regulatory drama, from the Federal Energy Regulatory Commission to the CPUC itself, have formally acknowledged that, as a matter of federal pre-emption, PG&E is entitled to recover these wholesale costs from its customers," the utility said in its filing.

In fact, neither federal nor state regulators have explicitly said PG&E and Edison are entitled to recover all such costs. The PUC is now studying the matter.

"Rarely has a more urgent plea for relief been brought before this or any court," PG&E said in unusually melodramatic language. "PG&E is both captive to and victim of California's deregulated electricity market, a market described by government officials in terms ranging from 'disastrous' to 'apocalyptic.' "

SALE OF CONTRACTS BLOCKED

Separately, a San Francisco Superior Court judge awarded PG&E a temporary restraining order blocking the California Power Exchange from selling off the utility's electricity contracts to recoup outstanding payments.

The ruling followed a similar decision in Los Angeles on Wednesday affecting Edison's contracts.

Both utilities are in danger of defaulting on hundreds of millions of dollars in payments due to the Power Exchange for electricity already purchased for customers. Edison already has missed a payment for $215 million.

The Power Exchange, where wholesale power is bought and sold, agreed to both court orders but said it still needed some collateral to cover PG&E's growing debt for electricity purchases. The utility will have $583 million due by next Friday, exchange officials said.

-- Martin Thompson (mthom1927@aol.com), January 26, 2001


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