PUC Set to Make Key Ruling on Utility Bills

How much of utility customers’ monthly bills will be used to pay for California’s multibillion-dollar entry into the power market?

That’s the question as regulators set out in coming days to determine how to split ratepayers’ bills between the state, which has been buying electricity at the rate of $45 million a day since late January, and the debt-laden utilities, which continue to deliver that power and collect customers’ payments.

The issue has moved center stage as Gov. Gray Davis continues to negotiate a rescue of the near-bankrupt Pacific Gas & Electric Co. and Southern California Edison. The resolution is crucial to Davis’ complex plan to pull California out of its costly energy crisis.

When the Legislature put the state in the power-buying business, it needed to ensure eventual reimbursement for its purchases. The result was the CPA, for California Procurement Adjustment, essentially the portion of customers’ bills left over after the utilities subtract their cost of operations.

After weeks of wrangling in Sacramento, the front lines in the utility debate will now shift for a time to San Francisco, where the California Public Utilities Commission will determine the size of the CPA and the way it is to be divvied up.

How the commission rules will be the main factor in determining if customers of the three big investor-owned utilities--PG&E;, Edison and San Diego Gas & Electric--will face rate hikes above the 19% already set in motion. It also will have a direct bearing on the state’s ability to sell the $10 billion in bonds it needs to finance its long-term power buys without having to commit taxpayer money.

“What happens at the PUC is fundamental, in terms of our ability to issue bonds with investment-grade ratings,” state Treasurer Phil Angelides said. “How they allocate moneys between the state and utilities will be fundamentally important to how far our $10 billion will go. And it will be fundamentally important if it is not done in the right way, [because] it will have a direct and negative impact on consumer rates.”

Utility executives disagree with the state on how to allocate the CPA but agree on its importance.

“One issue is: How do you divide the pie? And an important and related issue is: Is the pie big enough?” said Ted Craver, chief financial officer of utility parent Edison International, during a conference call Friday with debt holders.

Before skyrocketing wholesale electricity prices turned PG&E; and Edison into financial basket cases, the money left over after subtracting their costs of delivering power to customers was called “headroom,” and that was where the utilities paid off past investments, retired debt and took their profits.

Under Davis’ plan, most such money would be reserved by the state to pay off the $10 billion in bonds to buy electricity and reimburse the treasury for the billions the state has already spent to buy power.

Some consider this a gamble and wonder if there will be enough money available without either dipping into the state general fund or, more likely, raising customer rates even further.

Under the January law, AB 1X, that put California in the power-buying business, the CPA needs to total at least $2.5 billion annually from utility customers. Angelides on Thursday estimated that the state needs $1.3 billion from CPA funds just to service the bonds.

PG&E; and Edison both say they believe the utilities are entitled to be paid first out of ratepayer bills under AB 1X.

The Department of Water Resources, the agency empowered by the state to buy electricity for utility customers, would get whatever is left over after utility expenses are covered, the two companies say. If nothing is left, rates would be allowed to rise high enough to pay the water agency what it needs to cover its electricity expenses under an interim order issued Wednesday by the PUC.

“If that means rate increases, then the commission has affirmed it will pass through those rate increases,” said Ann Cohn, assistant general counsel for Southern California Edison. “The DWR will have to determine what its own revenue requirement is.”

In filings with the commission, PG&E;, the state’s largest electric utility, insists that once its obligations are subtracted the CPA would be virtually penniless. The most financially troubled of the utilities, PG&E; is believed not to have ruled out filing for bankruptcy as a way out of its $8-billion debt.

What percentage the commission allots PG&E; from customer bills could be a factor in the utility’s decision about seeking protection from creditors under Chapter 11 of the federal bankruptcy code.

Meanwhile, Davis is faced with a dilemma of his own that is no less wrenching. For his rescue plan to work, four things must happen:

* The cost of electricity purchased by the state must be reduced through long-term contracts.

* The amount of money paid by the utilities to alternative-energy suppliers--generators of solar, wind and other forms of power, which constitute about one-fourth of the electricity used by utility customers--must be cut in half.

* The utilities must agree to sell electricity to the state from their own generators, including nuclear plants and hydropower facilities, at slightly above cost.

* And the state must obtain favorable rates on its massive bond sales.

Although some progress has been made on all these fronts, none have been finalized.

For example, Davis announced a week ago that 40 long-term supply contracts had been negotiated with major generators at terms favorable to the state. But by Friday, fewer than a dozen of the contracts had been signed.

Moreover, because of the secrecy the Davis administration has imposed on details of the contracts, it is impossible to tell if the prices negotiated by the state are low enough to be covered by the $10 billion in power bonds beyond September.

Several California newspapers, including The Times, have been denied by Davis in repeated requests to obtain details under the California Public Records Act. On Friday, Assemblyman Tony Strickland (R-Moorpark) said he plans to file a lawsuit today demanding that contract details be disclosed.

If any one of the four key fronts blows up on Davis, the governor would then be faced with either dipping into the state budget surplus or asking the PUC to raise rates beyond the level now in motion. The currently programmed average 19% hike comes from a temporary 9% increase approved by the commission in December (and generally expected to be made permanent) and a further 10% boost by next March (when a rate rollback ordered under the state’s 1996 deregulation law expires).

Davis has publicly opposed using tax funds to bail out the investor-owned utilities, on grounds that such a move would be unfair to customers of municipal utilities, such as the Los Angeles Department of Water and Power, that remain financially healthy.

In its action last week, the PUC made clear that if enough money is not found in the CPA to repay the Department of Water Resources, then customer rates would have to rise.

While acknowledging that it will be a close call, administration officials last week repeated their contention that the governor’s rescue plan can be accomplished without raising rates beyond the 19%.

“Conceptually, I’m confident that the CPA mechanism operates in a manner that gets us appropriate bond capacity,” state Finance Director Tim Gage said.

Angelides warned that the state needs to be wary of the utilities’ taking more than their fair share.

“As the final divisions of the pie are made,” Angelides said, “the utilities should recover no more out of that pie than the actual cost of generation plus their regulated return, and the state must be accorded the balance.”

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Times staff writer Nancy Rivera Brooks contributed to this story.