Utilities Protest Plan Giving State-Bought Power Priority

California’s two largest utilities are protesting a proposed requirement that could force them to distribute power the state has purchased before selling their own lower-cost electricity.

The state Department of Water Resources--which started buying electricity on behalf of 25 million Californians when Pacific Gas & Electric and Southern California Edison became insolvent earlier this year--is seeking the requirement because it has contracted for more power than is needed, PG&E; said.

If forced to distribute that surplus power in place of typically lower-cost nuclear, hydroelectric and other energy from their generating sources, PG&E; and SCE would face added financial hardships, and the higher costs eventually might show up in consumer rates, the companies said.

“This would not be in the best interest of utility customers,” Southern California Edison said in a filing with the California Public Utilities Commission. The commission will consider whether to adopt the “must-take” requirement later this month, when it sets the terms by which the state will be repaid for its power purchases.

“We believe DWR has a current surplus of high-priced power under contract, and therefore is seeking authority from the CPUC to charge our customers for that high-priced power,” Pacific Gas & Electric, a unit of PG&E; Corp. of San Francisco, said.

In comments filed at the utilities commission earlier this week, Pacific Gas & Electric said the rate agreement would be illegal because Assembly Bill 1X--which put the state in the energy-purchasing business in January--does not allow customers to be charged for DWR power that is not delivered to them. Instead, the utility said, the law says the DWR may sell surplus power on the open market.

California entered the power business when a surge in wholesale electricity prices and a regulatory freeze on consumer rates created billions of dollars in losses for the two utilities. That eventually pushed Pacific Gas & Electric to seek protection from its creditors in Bankruptcy Court; SCE, a unit of Edison International in Rosemead, has avoided following suit but is insolvent and is seeking a financial rescue from the state.

The proposed rate agreement between DWR and the utilities commission guarantees that the water agency would recover whatever it spends on electricity for PG&E; and SCE as well as Sempra Energy unit San Diego Gas & Electric, which is financially healthy but also turned to DWR for power after the state’s primary power market collapsed in late January.

PG&E; said one section of the draft rate agreement would require the utilities commission to order that DWR power be delivered to utility customers whenever the water agency requests, “even if the DWR power is millions, if not billions, of dollars more expensive than the utilities’ own power supplies or power available from third parties.”

The state has signed long-term power contracts totaling $43 billion at rates that average 6 cents to 8 cents a kilowatt-hour for so-called base-load power, or electricity produced by the large power plants that operate most hours of the day.

PG&E;’s cost of generation for its nuclear power is 3.5 cents a kilowatt-hour. SCE said cost of the power it generates through its plants averages about 4.5 cents a kilowatt-hour.

At issue is what is called a “must take” or “must deliver” clause in the agreement between the two state agencies. This would allow the DWR to force any surplus power on the utilities and require them to cut their own generation.

DWR spokesman Oscar Hidalgo said such surpluses would happen infrequently because the department also has short-term contracts that can be adjusted to reduce the amount of electricity the state must buy.

Nevertheless, many energy analysts believe that in the state’s effort to use long-term contracts to lock in prices and tame the volatile wholesale power market, California officials purchased too much power and paid too much for it.

A Los Angeles Times analysis of DWR reports found that surpluses would probably peak in 2004, when the state has purchased electricity that amounts to 43% of the needs of the three large investor-owned utilities. But according to current trends, the utilities need the state to supply only about 35%.

Whether such surpluses are infrequent or become chronic, they can prove costly. In July, the state racked up $46 million in losses after selling excess power for one-fifth the price it paid. The state has not released data for August.