Davis Acknowledges Need for Rate Hike

After spending months voicing opposition to electricity rate hikes, Gov. Gray Davis acknowledged to a statewide television audience Thursday night the need for an increase that would average 26.5%.

Calling the upheaval in California’s deregulated electricity market a “crisis” for the first time, Davis enumerated steps he has taken, then said he has fought “tooth and nail against raising rates.” But citing a need for increases, the Democratic governor called for a tiered system in which people who use the most electricity would pay the most--as much as 37% more if they use more than twice their minimum allotment.

“Here’s the point: The more you use, the more you pay,” Davis said. “The more you conserve, the more you save. Conservation is our best short-term weapon against blackouts and price gouging.”

The rate hike would apply only to customers of the state’s three private utilities, not those owned by municipalities such as the city of Los Angeles.

Davis said his proposed rate plan includes money to help reduce the $13-billion debt of Southern California Edison and Pacific Gas & Electric. While the bulk of the rate increase would be used to help California finance bonds for long-term power purchases, about 5% would be earmarked for the utilities, according to Joseph Fichera, a consultant hired by Davis. That assistance would be provided only if the utilities agree to sell their transmission lines to the state, the governor said.

The money set aside for the utilities under Davis’ plan, according to his aides, would allow the companies to repay roughly $8 billion of debt by floating bonds.

Davis’ announcement follows the California Public Utilities Commission’s approval last week of a record rate hike of as much as 40%, which seeks to raise $5 billion annually from utility customers. The commission has not yet determined how that increase would be spread among its residential and business customers.

The PUC’s rate hike, unlike the one proposed by Davis, would not channel money to the utilities to help them pay off their debt. Instead, it would be directed toward future purchases by California and toward offsetting the billions in tax funds being spent by the state on wholesale electricity that the utilities can no longer afford.

That said, a majority of the commissioners are Davis appointees and are expected to align their plan with the governor’s, his aides said Thursday.

“They’re compatible,” PUC Commissioner Carl Wood said Thursday. “There’s not a big difference in the proposals.”

Davis aides said the PUC’s rate proposal was higher because the commission did not have specific information about the state’s cost of buying electricity, and failed to take into account potential savings from conservation.

The governor’s decision to offer the utilities at least some rate hike money brought a sharp response from lawmakers and consumer advocates.

“We are not in this business to bail out these guys,” Senate President Pro Tem John Burton (D-San Francisco) said of the state’s three privately owned utilities: Southern California Edison, Pacfic Gas & Electric and San Diego Gas & Electric.

Harry Snyder of Consumers Union described the governor’s plan as an “absolute giveaway. . . . He is going to pay them off completely for all their mistakes.”

The governor took the unusual step of reserving air time on statewide television at a time when he is slipping in polls and surveys show that the public is increasingly concerned about the energy crisis. Gov. Pete Wilson took a similar step during the recession in 1992 when he moved to raise taxes and cut government spending.

The speech took on greater urgency as the California Independent System Operator, the entity that oversees power distribution, warned Thursday that the state will face 34 days of rotating blackouts if consumers and businesses use the same amount of electricity this summer as they did last year. The blackouts could be extensive enough to darken 5 million homes at once.

The governor’s speech came hours after the Legislature approved a record $1.1 billion in energy conservation measures designed to provide consumers with incentives to reduce electricity use.

In his speech, Davis renewed his call to Californians to curtail electricity use by at least 10%: “If each of us does our part, we can minimize disruptions and get through the summer.”

Davis advisor and Los Angeles Department of Water and Power General Manager S. David Freeman called the governor’s emphasis on conservation “a rallying cry” for an era of unprecedented energy efficiency in California.

“Sometimes there is a real problem that requires the people to face up to it and tighten up,” he said.

Freeman has been the administration’s primary negotiator with electricity suppliers in attempting to drive down prices, which have soared since last summer.

Davis, in his brief address, suggested that sufficient contracts for power supplies have been reached and that his administration is close to striking deals to stabilize the financially hobbled utilities. But he has refused to disclose details of the contracts, and deals with utilities remain elusive.

Edison issued a cautious statement. Stephen E. Frank, its chief executive, said the utility “will look to what actions follow the governor’s words tonight.”

“The governor tonight again affirmed his commitment to maintain financially healthy utilities in California,” Frank said. “After many months of this crisis, there is very little remaining time for effective action.”

Under Davis’ proposal, Edison residential customers would face an average increase of 2.21 cents per kilowatt-hour. San Diego Gas & Electric customers would have a 2.57-cent hike, and Pacific Gas & Electric would get a 2.44-cent increase. Business rates would rise slightly more.

Davis blamed the rate hikes on rising natural gas prices, a lack of adequate generation and the federal government’s refusal to cap wholesale power prices.

Rates for customers of the state’s two largest utilities rose 9% in January. That boost remains in effect. Legislation approved earlier this year bars further rate increases for those who use up to 30% more than their so-called baseline allocation. The baseline, determined by the utilities, is the minimum level needed for household usage. It varies by climate and region, and is listed on customers bills.

According to administration estimates, 53% of consumers would experience no rate hike beyond the 9% boost approved in January. A fourth of all households would face increases averaging 34.5%.

Under the proposal, which requires PUC approval, people who use up to 200% of their baseline allocation would see rates on that portion of their electricity use go up by 9%, plus the 9% already imposed, for a total of 18%.

Electricity users who consume more than twice their baseline allocation would pay between 33% and 37% more for kilowatts used beyond 200% of their baseline allocation.

“My proposal raises rates fairly, assures us of long-term power, stabilizes the utilities and promotes conservation,” Davis said.

Perhaps adding to the urgency of the governor’ speech, utility customers could start seeing increases in their bills as early as next month. Further raising the stakes for the speech, Davis warned this week that supplies will be so short that there could be blackouts by the end of the month, and continue into May and June.

But political players and consumer advocates criticized the governor’s speech as far too spare. The talk, delivered in less than 800 words, lasted was a mere five minutes. “People will listen and read and reread the entire speech,” Democratic consultant Gale Kaufman said. “You have to look at what he did say and what he didn’t say. It was short on specifics, so what comes next is critical.”

Until Thursday, Davis had not characterized the situation as a “crisis,” instead calling it a “challenge.” That euphemism had raised the hackles of many legislators.

“What we heard the governor say tonight is, ‘Oops, I guess we’ll need a rate hike after all,’ ” Assembly Republican leader Dave Cox of Fair Oaks said.

Sen. Don Perata (D-Alameda) echoed that comment, criticizing fellow Democrat Davis for failing to say “what is going to happen this summer and what are we going to do about it.”

Several recent private polls show that a majority of Californians would not vote to reelect Davis if he were on the ballot today, though Davis will not face voters in a general election for 19 months, giving him plenty of time to recover.

Paul Maslin, the governor’s pollster, said that the speech had been on the agenda for weeks but Davis was waiting until the financial picture--the utilities’ debt, the long-term contracts and whether a rate increase might be needed--was clearer. “This isn’t about politics,” Maslin said.

In a conference call with skeptical Wall Street analysts after the Davis speech, the governor’s financial advisors sought to reassure them that his proposed rate increase would cover electricity costs with something left over to help pay off their debts.

That, in turn, should give the utilities confidence to sign agreements with the state to sell their transmission networks as part of a deal that would bring the companies cash to cure some of their financial ills.

Wall Street initially had reacted euphorically to last week’s PUC rate increase, but the stock prices began to erode as investors realized that the PUC intended the increase to pay for future power purchases, not past debts. In addition, the utilities insisted that even the higher rates would not cover ongoing electricity costs.

Utility watchers issued gloomy reports early Thursday, helping to drag down the stocks of Edison International and PG&E; Corp., parent corporations of the beleaguered utilities.

Standard & Poor’s said it is unlikely that Southern California Edison and Pacific Gas & Electric will regain a sound credit rating soon. The debt-rating firm lowered the utilities’ credit rating to high-risk junk-bond status in January when they began defaulting on debt.

Standard & Poor’s cited a lack of action by Davis and state legislators, and said rate increases approved by the PUC will not be sufficient to pay all electricity costs.

The firm predicted that “the coming weeks are likely to be critical if the utilities are to be made financially sound companies once again and avoid bankruptcy proceedings.”

The Legislature, meanwhile, approved two measures touted as ways to cut the state’s power needs this summer. The bills, a $709-million measure by state Sen. Byron Sher (D-Stanford) and a $409-million measure by Assemblywoman Christine Kehoe (D-San Diego), contain a range of financial “carrots” designed to help people cut power use.

There is $50 million to help low- and moderate-income consumers replace energy-wasting appliances such as old refrigerators with more efficient equipment, $60 million to help consumers replace older lighting systems, $7 million to teach schoolchildren about energy efficiency, and $50 million for electricity meters for businesses.

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Power Points

Background

The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.

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Daily Developments

* For the first time, Gov. Gray Davis called the energy situation a “crisis,” and acknowledged to a statewide television audience the need for a rate increase that would average 26.5%.

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* The proposed rate plan calls for a tiered system in which people who use the most electricity pay the most, up to 37% more if they use more than twice their minimum allotment.

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* If consumers this summer use the same amount of electricity as last, the state could see 34 days of rotating blackouts, according to new figures.

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Verbatim

“We are 34 million strong, and if each of us does our part, we can minimize disruptions and get through the summer.”

--Gov. Gray Davis

Complete package and updates at www.latimes.com/power