PUC May Cede Control Over Electricity Rates

California’s chief utility regulator proposed Wednesday to provide rubber-stamp approvals of any future electricity rate increases that state power buyers find necessary.

This fundamental shift in the state’s regulatory structure would bypass procedures that currently protect the interests of consumers.

The proposed agreement between the state Public Utilities Commission and the state Department of Water Resources is designed to guarantee that consumers pay enough to cover the purchase by the state of electricity for the 27 million people served by three financially troubled utilities.

Consumer payments will be used to repay bonds the state plans to float later this year. The bonds will be used to reimburse the state treasury for money spent on electricity. The PUC is expected to formally ratify the agreement Aug. 23.

A spokesman for the water department said that a historic rate increase in March is expected to cover all of the agency’s costs and that no new hikes will be necessary.

But under the terms of the proposed agreement, if that expectation proves incorrect and future hikes are needed, the PUC promises to adjust electricity rates to meet the department’s need for revenue within 90 days, or 30 days in emergency situations.

“The ruling gives carte blanche to [the department] to do whatever they want to do,” said Richard Bilas, a PUC member appointed by former Gov. Pete Wilson. “We don’t have much control over them. I am uncomfortable with it.”

If approved, the agreement would shift the oversight of electricity rates from the PUC, an independent regulatory body whose members are appointed by the governor, to a state administrative agency that is under the governor’s direct control.

S. David Freeman, Gov. Gray Davis’ chief energy advisor, said the agreement would essentially transform the state water department into “the equivalent of a municipal utility” that has sole discretion to raise revenue from its customers.

The PUC would only have the authority to “make sure that our math is OK, and we haven’t gone out and bought the Brooklyn Bridge,” Freeman said.

Already, however, the state’s judgment in buying power has been questioned. The Department of Water Resources has signed long-term contracts designed to ensure stable supplies. But critics have charged that those contracts have locked the state into prices that are too high. Indeed, because of cool weather and reduced demand by consumers, the state--at least temporarily--is buying more power than California needs and has begun reselling some of it for considerably less than it costs.

In another energy-related development, a top executive of Southern California Edison Co., one of the three utilities that has been flirting with insolvency, criticized as inadequate a state Senate bailout bill.

The bill is a thoroughly rewritten version of a highly publicized deal Davis and Edison officials fashioned in April to restore the company’s financial health. That deal called for the state to buy the utility’s transmission lines for $2.76 billion.

At a hearing of the Senate Energy Committee, Bob Foster, an Edison vice president, testified that the Senate version, which is expected to be voted on this week, would leave Edison $1 billion short of meeting its financial needs.

The problems of Edison, Pacific Gas & Electric Co. and San Diego Gas & Electric Co. triggered the need for the deal between the PUC and the water department. That agreement was hammered out in high-pressure negotiations that involved dozens of state officials and bonding experts. It is viewed by state officials and bond analysts as critical to the sale this summer of the $13.4-billion bond issue.

But Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, said the agreement would strip away the PUC’s constitutional obligation to protect consumers from unreasonable rate hikes.

“This is a power play by the Davis administration, the energy companies and Wall Street to eliminate any public scrutiny over their conduct and the price of electricity for the next 10 to 15 years,” he said.

The agreement is the latest step in implementing emergency legislation passed this year to allow the water department to buy power. The agency stepped into the market after the three utilities said that rates frozen under the state’s deregulation plan were preventing them from recovering their costs and were threatening their solvency.

Assembly Bill 1X, signed into law by Davis in February, provided that the water department would be able to recover its costs and directed the PUC to implement an agreement to accomplish that.

The agreement also would provide assurance to Wall Street that electric rates would provide a reliable flow of funds that could be used to pay off the bonds. The state hopes to use the bonds to create a revolving fund that would pay for $8 billion in current and future power costs.

State Treasurer Phil Angelides said the rate agreement “must be adopted so that the general fund can be repaid, and to protect the state’s fiscal solvency. . . . This agreement provides the assurance that, for the term of the bonds, the law will be honored so that bonds can be sold and bondholders repaid.”

Equally important is the water department’s projection of how much revenue the agency needs for everything from spot market power purchases and the cost of long-term contracts to administrative costs and debt service. That detailed assessment will indicate whether the increase approved in March--an average hike of 3 cents per kilowatt/hour--will be enough to cover the department’s costs for the two-year period ending Dec. 31, 2002. Officials at the PUC and the department said the projection could be submitted as soon as Friday.

“We do not anticipate that [the department] will be seeking any further increase beyond the increase announced by the PUC last spring,” said department spokesman Oscar Hidalgo. “We’re well within the 3-cent increase.”

The department’s statement of its revenue needs has ramifications not only for consumers, but also for utilities. Utility officials fear that their own costs might not be covered after the department takes its share of the revenue from monthly bills.

PG&E; spokesman Ron Low said the company’s lawyers are assessing the proposed agreement but would have no comment on it until they can see the water department’s revenue requirement. He said the company hopes there will be enough left “to ensure our customers are treated fairly” and to cover the company’s costs, including payments for the power it produces and purchases through contracts.

Edison officials said they would not comment until they received more information.

The proposed agreement, though not unanticipated, would reduce the role of the PUC in one of the most pivotal chapters of the energy crisis.

Normally, the PUC holds hearings and conducts “prudency” reviews before making decisions on rate increases, but the water department would not be subject to the same procedures.

“It will not be a review where we say you were imprudent, you goofed up and will have to eat the cost, or you badly negotiated these contracts,” said Commissioner Jeff Brown, who was part of the negotiations.

Brown said the two agencies had differences over issues such as whether the water department’s administrative costs should be covered by the rate agreement and the extent of the PUC’s review. But he said the overriding concern was that the state’s bond sale not be delayed or otherwise jeopardized by uncertainty about the water department’s ability to meet its financial obligations.

“I wish we were not in this situation,” he said. “But when we started doing purchases, the state was the only credit-worthy entity. We’re swimming upstream.”

Commissioner Bilas said that although the bond sale is highly important, he is concerned that the water department will not be subject to governmental checks and balances because the department head reports directly to Davis.

“If the governor believes the director of [the department] is doing a bad job, he can be removed,” Bilas said. “But it is a matter of how much faith you have in individuals rather than faith in a system.”

Commissioner Carl Wood, one of Davis’ three appointees on the five-member commission, pointed out that the PUC was set up to protect the interests of the customers of private utility companies with a monopoly. “When a public agency takes over [the purchase of power], things like a prudency review do not have the same meaning,” he said.

PUC President Loretta Lynch, who published the proposed agreement and solicited comment on it, could not be reached Wednesday.

Her legal advisor, Geoff Dryvynsyde, said the commission has to make a public policy choice that weighs the need to sell the bonds against its own authority to set rates.

“There is lots to balance here,” he said. “A really important consideration is the bond deal, and the rate agreement is important to getting that done.”

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Reiterman reported from San Francisco, Vogel from Sacramento. Times staff writer Carl Ingram contributed to this story.