PUC Ensures State Recovers Costs, Even if Rates Must Go Up

California’s dysfunctional electricity market was further dismantled Wednesday as the Public Utilities Commission agreed that the state will recover the billions of dollars in taxpayers money it is spending to buy electricity, even if that means higher rates for utility customers.

In language designed to reassure lenders, from whom California hopes to borrow at least $10 billion to finance its long-term power contracts, the commission granted the state Department of Water Resources authority to demand rate hikes “sufficient to enable DWR to recover its revenue requirements on a timely basis.”

In doing so, the PUC gave up some of its regulatory control over retail electricity rates.

The commission’s order puts into action a key portion of AB 1X, the bill that thrust the DWR into the power-buying business after electricity suppliers refused to sell to the nearly bankrupt Southern California Edison and Pacific Gas & Electric Co.

The state has spent more than $3 billion for electricity, at the rate of $45 million a day, for customers of the two utilities and San Diego Gas & Electric Co., whose debts have mounted as wholesale prices skyrocketed and a rate freeze prevented them from passing their costs to consumers.

While opening the door to potential rate increases for customers of Edison and PG&E; above the 19% already anticipated, the order does not necessarily mean that further hikes will be needed. Gov. Gray Davis has repeatedly insisted that his energy crisis package can be implemented without increases beyond the “existing rate structure.”

And the PUC’s action can be viewed as a protection for customers of the Los Angeles Department of Water and Power and other municipal power authorities that oppose use of taxpayers money to rescue the investor-owned utilities.

Discounting such assurances, some observers complained that, under Wednesday’s order, the DWR--a relative newcomer to its high-stakes role as the state’s chief power broker-- will not be subject to review by the PUC or any other state agency.

The bill, AB 1X, which Davis signed Feb. 1, authorized the state to sell as much as $10 billion in bonds, or about $300 in debt for every person in the state, to buy electricity that PG&E; and Edison could no longer afford.

Chris Danforth, a supervisor in the PUC’s Office of Ratepayer Advocates, a separate branch charged with protecting the interests of utility customers, called Wednesday’s order “broad and sketchy.”

“It just says that DWR will be made whole,” he said. “It doesn’t say much more than that.”

Danforth said the utilities have been working out estimates of how much money they can send on to the DWR, after covering their own costs of providing power. Those estimates show that as much as 50% of the water agency’s costs may not be covered.

“It’s implicit that there’s probably going to have to be a rate increase, but how it’s all going to be done is kind of up in the air,” Danforth said.

The DWR has been buying about one-third of the power the three big utilities need to supply their 25 million customers--but none of the money paid by those customers has been sent on to the water agency.

An administrative law judge is expected to recommend next Wednesday what portion of ratepayers’ bills should go to the water agency, and the PUC is scheduled to take up the matter at its March 15 meeting.

The rates that utility customers pay do not necessarily have to be high enough to cover all of DWR’s costs--just high enough to allow the state to float revenue bonds to cover those costs, Danforth said.

“But eventually, the bonds would have to be repaid,” Danforth said. “What’s up in the air is whether rate increases are needed immediately or down the line.

“If they float bonds, they could float them for a long, long time and make the rate increases rather small.”

Nettie Hoge, executive director of the Utility Reform Network in San Francisco, was more blunt: “I think it’s all as ugly as it looks,” she said. “But I think that all happened on Jan. 19 when the governor put the state in the procurer role.”

Davis acted after Northern and Central California suffered rolling blackouts Jan. 17 and 18, as electricity supplies dwindled after several major generators stopped selling to the utilities.

The new PUC order, Hoge said, aims to reassure lenders so that California can float the $10 billion in bonds. In empowering the DWR to demand additional rates as needed, it securely pins the burden of backing those bonds to ratepayers rather than to California taxpayers, Hoge said.

S. David Freeman, interpreting the order on behalf of the Davis administration, said there’s “no question” that Wednesday’s order permits the DWR to raise electricity rates to pay for power delivered to customers of Edison and PG&E.;

But Freeman, general manager of the Los Angeles Department of Water and Power, also said that $43 billion in long-term contracts he helped negotiate for Davis to buy electricity from independent power generators and marketers will help keep rates stable.

PUC Commissioner Richard Bilas said he drew up an order that formed the core of Wednesday’s decision after being contacted by Freeman.

Bilas said energy suppliers and lenders specifically wanted assurances that power purchases by the DWR would not be subjected to the after-the-fact “reasonableness” reviews that the PUC has traditionally performed when utilities buy power.

If the PUC could disallow another state agency’s costs for power purchases, Bilas said, that would leave suppliers and lenders fearful that they would not get repaid.

“The problem is, when you have reasonableness reviews, someone can be docked,” he said. “We can’t have jurisdiction over DWR.”

Ron Low, a spokesman for PG&E;, said: “We are pleased that the commission will follow the intent of AB 1X. The legislation was designed to stem the utilities’ financial damage and allow us to be paid for the power we provide to our customers.”

Under the PUC order, the utilities will be given the opportunity to be paid for all of their costs of providing electricity to customers, Low said. Whatever money is left over from the monthly bills of customers would go to DWR to pay for its cost of buying power.

Steve Hansen, a spokesman for Edison, said his company was still reviewing the order and would have no immediate comment.

“This is really just a start,” PUC Commissioner Geoffrey Brown said. “. . . It gives DWR an assurance there will be a steady stream of money to pay” for power and bonded indebtedness, Brown said. “If DWR runs a shortage between the amount it collects and the amount it is paid, the commission will have to deal with that.”

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Reiterman reported from San Francisco, Vogel from Sacramento. Times staff writers Nancy Rivera Brooks in Los Angeles and Dan Morain and Rone Tempest in Sacramento also contributed to this story.