Two Key Rulings in Deregulation : Decisions could affect electricity bills across state

The California Public Utilities Commission is expected to issue two decisions this week that will ultimately affect the electricity bills of every household and business in the state. The decision with the most immediate impact deals with rates charged by Southern California Edison and with the sticky issue of how much the utility is entitled to recoup from its investment in a nuclear power plant. The other decision involves final policy guidelines for electric power industry deregulation.

The PUC is trying to create a framework to bring down electric rates--on average, Californians now pay about 50% more than the rest of the nation--but the process often has been slow and confusing. For example, it would have been better to address the rate-setting and rule-making issues together, but the PUC began the proceedings separately and now must continue that way or it risks undermining confidence among the utility’s investors and businesses considering moving into California. However, both issues concern how a utility reassesses costs and rates in a competitive environ- ment.

MAJOR CHALLENGE: A big challenge to companies like Edison is how to position themselves in the free market that will come with deregulation. Like other large utilities in the 1980s, Edison made costly investments in nuclear plants. The state permitted rate structures that would allow the companies to recoup their investments. Separately, Edison was also required by the state to commit to long-term, alternative-energy contracts, which now are proving very expensive compared to traditional fossil-fuel supply contracts. Edison has an exposure of about $12.4 billion in so-called “stranded costs” for nuclear and alter native-energy commitments.

A big chunk, but not the biggest, of Edison’s stranded costs involves the San Onofre Nuclear Generating Station. (Edison owns 75% of the station and San Diego Gas & Electric owns 20%.) As an alternative to mothballing the plant because its power might be too costly to sell, Edison and the PUC agreed a year ago to change the existing 10% return over 13 years on the plant. But the negotiated settlement of an 8% annual return over eight years, with accelerated depreciation, has not been accepted by the full PUC.

EARLIER PROMISES: The commission has said that the state needs to honor past commitments. That’s important to California’s credibility with investors.

Critics surely will howl about the negotiated settlement, maintaining that it would keep rates artificially high. But, even though the settlement has not been accepted, early this year Edison did reduce rates slightly early, and there could be another cut next year to reflect a lower cost of capital. The utility has said it intends to cut rates by 25% by the year 2000.

Edison, however, should not expect the San Onofre settlement to be precedent-setting when it comes to tackling other stranded costs under the bigger umbrella of deregulation.