State Utilities Left With Burden of Reclaiming Costs From Crisis

The $6-billion wrecking ball that is waiting to slam either California consumers or the utility industry is back in the control of state officials after a federal commission this week failed to even address the problem.

The Federal Energy Regulatory Commission declared Wednesday that California has defects in its deregulated electricity market and proposed sweeping changes, but declined to deal with one of the most serious problems.

The summer’s electricity crisis forced the state’s three investor-owned utilities to purchase wholesale electricity costing $6 billion more than what they could charge consumers under existing rates.

Southern California Edison and Pacific Gas & Electric now want consumers to pay the full cost of those purchases in the form of monthly surcharges over the next five years--a plan that would push into the distant future any hope that deregulation would bring relief to the high-cost California electricity market.

But state officials and Wall Street experts doubt the industry has any realistic chance of collecting all $6 billion. Despite their confident public stand, the utilities will likely settle with consumers.

“I’d say the chances of utilities being made whole is zero, and the chances of them eating all the undercollections is zero,” said Steve Fetter, an analyst with debt raters Fitch of New York. Fetter is former chairman of the Michigan Public Service Commission.

A high state official who asked not to be named said a majority of the Public Utilities Commission believes that utilities are not entitled to the $6 billion under current law. “The commission has interpreted the law the same way five times in a row,” the official said. “So if anything is to change, the legislature will have to write new law.”

And yet division within the PUC has been evident lately, adding to the confusion. Despite repeated PUC declarations that SCE and PG&E; cannot raise rates under the current deregulation law, the utilities were encouraged when PUC President Loretta Lynch said on Oct. 17 that “the basic assumptions underlying AB 1890 are ripe for reconsideration.”

The electricity cost issue is a political hot potato that California politicians and regulators clearly hoped the Federal Energy Regulatory Commission would handle by declaring costs “unjust and unreasonable” and by ordering generators to give back profits.

But FERC said it found no evidence of specific market abuses and that it lacked the legal authority to order refunds of federallysanctioned wholesale rates in the absence of market-power evidence.

Early next year, after a new state Legislature is sworn in and Gov. Gray Davis appoints his third of five members on the state Public Utilities Commission, lawmakers, officials and stakeholders will have to hammer out an agreement, which will probably require a new law. Wall Street is already signaling its impatience.

“Our position has been that it is an unsettled situation as far as utilities are concerned,” said Richard Cortright, a director at Standard & Poor’s debt-rating service that downgraded its outlook on California utility debt to negative last summer.

Consumer groups on the one side are clamoring for the utilities and power companies to pony up for the costs of a failed experiment in a free market for electrons, while on the other side the utilities who want full restitution from customers for the electricity they dutifully delivered at going market rates.

“What FERC effectively did was say to California: You guys have to choose between utilities and consumers,” said Douglas Heller, consumer advocate at the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “It’s up to Gov. Davis and the Legislature to do the right thing and stand up to these utility companies.”

FERC’s proposed order “really passed the buck” and left the PUC with clear jurisdiction over the utilities’ transition costs, said Bob Finkelstein, a lawyer with The Utility Reform Network.

The San Francisco consumer group has proposed that the PUC require the utilities to use sharply increasing profits earned through deregulation, such as from the sale of power into the market, to pay off the cost of electricity that they have not been able to pass along to customers.

Utilities will argue just as strenuously that to make them absorb the unexpected costs of a vital service is unfair and would impinge on needed investments in electric infrastructure.

PG&E; and SCE have each petitioned the state Public Utilities Commission for permission to begin collecting those billions of dollars by approving rate increases. In SCE’s case, the proposed rate increase would be no more than 10%, which would add about $5.50 to the typical monthly residential bill.

Although wholesale electricity rates have risen dramatically, SCE and PG&E; customers are still protected by a rate freeze until utilities pay off costs related to “stranded assets” such as nuclear, wind and other noneconomic assets, or until March 2002.

San Diego Gas & Electric got out from under the rate freeze after paying off its stranded assets early in 1999, and began passing along wholesale electricity costs directly to customers. But the state legislature imposed a rate cap last summer after wholesale rates doubled and tripled, causing a political firestorm.

Steve Baum, chief executive of SDG&E; parent Sempra Energy, said Thursday that he was disappointed that the FERC did not open the way for refunds from the power generators.

“This is going to make Wall Street less than happy,” Baum said. “They say they have no basis for refunds but that door is not slammed shut.”