Rate Hike Will Cover Power Costs, State Says


California's record electricity rate increase earlier this year will cover the state's power buying costs for the "foreseeable future" and should leave enough for utilities to cover their costs without additional rate hikes, state officials said Sunday.

The announcement allayed fears that costs of procuring electricity for utility customers would eat all or most of the 3-cent-a-kilowatt-hour rate increase for 9 million customers of Southern California Edison and Pacific Gas & Electric Co. The state Department of Water Resources concluded that it would need 1.65 cents--or roughly half the hike approved in March--to pay for power and related costs.

But it was not immediately clear whether the utilities believe they will have adequate funds to meet their own costs of generating and contracting for power. Spokesmen for Edison and PG&E; said they could not comment until the numbers can be obtained and analyzed.

The DWR is submitting its long-awaited revenue requirements to the State Public Utilities Commission, which must also assess the utilities' needs in deciding how to allocate the proceeds from the rate increase.

"The previous assumption was that DWR would take the lion's share and leave the utilities short," said PUC Commissioner Jeff Brown. "It looks like things are shaping up favorably."

The state has been racing to help finance DWR's power purchases by selling up to $13.4 billion in bonds this summer. And DWR's upbeat announcement Sunday was designed to assure Wall Street that the state's power buyer will have a reliable stream of revenue to repay bonds.

"This is a good news story of major proportion . . . at a time when we are going to Wall Street to borrow major money," S. David Freeman, Gov. Gray Davis' chief energy advisor, said from Sacramento. "We have plenty of money in rates today to take care of the situation in the foreseeable future."

Last week, the PUC proposed an agreement that would guarantee that consumers will pay enough to cover the state's purchase of electricity for investor-owned utilities. The proposal essentially means that the PUC would rubber stamp any future electricity rate increases that DWR finds necessary.

But state energy experts on Sunday said their projections--even with the most conservative assumptions--indicate that would not be necessary.

They credited what one called "the three Cs" with improving the state's energy picture: contracts, conservation and costs.

Much-criticized long-term contracts obtained by the state, they said, helped stabilize the market and improved competition, holding down prices. Natural gas prices declined, lowering the cost of producing electricity. And consumers saved more electricity than expected, reducing purchases on the costly spot market.

With legislative authorization, DWR has spent about $8 billion on electricity this year. The state's two largest utilities had complained that rates frozen under deregulation prevented them from recovering the full costs of power and were driving them toward insolvency.

The DWR figures it needs 1.65 cents of the 3-cent increase passed by the PUC on March 27, leaving the rest available to assist Edison, which has $3.5 billion in energy-related debts, and PG&E;, which filed for protection from creditors in April.

"We believe that we have enough revenue and financing options so that there will be no need for further rate increases for the foreseeable future," said state consultant Joseph Fichera, chief executive of Saber Partners LLC. "This includes [enough money for a] rate agreement for the back debt of Southern California Edison and possibly for PG&E.;"

The state's regulators or the Legislature could decide to allow any surplus money to be used to pay down the utilities' debts.

State officials said the 1.65 cents would raise $13 billion that would cover the two years ending Dec. 31, 2002. With new power plants being brought online, they said there could even be consumer rebates--but that's the purview of the PUC.

Before the PUC votes on the rate agreement Aug. 23, the commission will hold hearings on the accord and on DWR's revenue requirements.

Commissioner Carl Wood said the panel has to address not only DWR's power-financing needs but also those of the utilities, including their costs of paying for power they generate. But he declined to speculate on whether the utilities would require a rate increase.

Commissioner Richard Bilas said the PUC will scrutinize the numbers because they have ramifications for ratepayers, utilities and the state. "The question is whether the conclusions follow from assumptions and whether the assumptions are reasonable," he said.

One key question with the state numbers is whether there would be enough money left over for Edison to pay off $3.5 billion in debt accumulated since May 2000 when energy prices spiked.

Edison plans to pay off that debt over 15 years by issuing bonds. The state estimates that if Edison gets just four-tenths of a cent of revenue, it would raise about $4.8 billion over 15 years.

That, Fichera said, would be enough to pay the principal and interest on the debt and maintain a financial cushion that is critical to winning Wall Street's acceptance.

However, conservation and an economic slowdown could slice into the amount of electricity Edison sells, which, under some circumstances, might make it harder to collect enough extra revenue to make the debt payments.

Edison has already lowered its forecast of how much electricity it will sell customers because of conservation efforts.

DWR said it would initially sell 12.5 billion in bonds--but can expand that by $900 million. Some $8.5 billion will be tax exempt, with an expected interest rate of 5.77%; $4 billion will be taxable, with an expected interest rate of 7.77%. The bonds are to be paid off in 15 years, by May 2016.


Reiterman reported from San Francisco and Hirsch from Los Angeles.

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