State Faces Crunch Time to Deal With Electricity Costs

After a summer of delays, California regulators and legislators are aiming in one final week to resolve issues crucial to millions of electricity customers and the financial stability of the state and its utilities.

The energy crisis that caused blackouts early this year has receded, but it has left behind a potential fiscal crisis. The state needs to recoup more than $8 billion that it has spent on power, and it has signed $43 billion in long-term electricity contracts.

Final plans for meeting these financial obligations--and spreading the pain of paying them off--have been debated for months. But the decision time has come: Legislators are scheduled to recess for the year on Friday, and the state Public Utilities Commission is under pressure to act on several long-pending measures at a meeting on Thursday.

“What’s before the state, both at the PUC and the Legislature, is how are we going to provide power to people in the years to come,” PUC President Loretta M. Lynch said in an interview. “Are we going to have a healthy utility to provide the power, or are we going to rely on the state?”

The PUC, which approved the biggest rate increase in history earlier this year, now faces another tough choice: Should it surrender its formerly ironclad authority over electricity rates to the state Department of Water Resources, an agency that has come under fire for alleged conflicts of interest and the cost of its contracts? Or should it balk and jeopardize the state’s planned sale of bonds to replenish the treasury and repay loans?

Legislation on Related Issues

Legislators are grappling with two complicated and highly contested bills on related issues. One seeks to repair the finances of Southern California Edison through a $2.9-billion aid plan backed by Gov. Gray Davis. The other would limit the powers of the Department of Water Resources, which has been buying electricity for 10 million customers of Edison, Pacific Gas & Electric Co. and San Diego Gas & Electric since January.

The state law that authorized the Department of Water Resources to buy power exempted the purchases from PUC reviews designed to protect consumers from unreasonable charges.

Now, the department is seeking a formal agreement with the PUC that would guarantee that its cost of supplying power to utility customers will be fully covered. Critics say the accord is a blank check for future rate increases, but the department says no increases will be necessary in the foreseeable future.

State officials say the PUC has little choice but to sign the agreement, which they see as necessary to reassure Wall Street bankers that the Department of Water Resources will be able to repay $12.5 billion in bonds the state plans to sell to cover power costs. The money from those bonds will go, in part, to repay the state treasury for money laid out for power.

Top state officials, including the governor and treasurer, want the bond sale to go without a hitch, but the date of the sale already has been pushed back several months, and threatened litigation could further delay it.

The urgency over the bonds comes about because the state already has used $6 billion from the treasury and has taken out a $4.3-billion loan to cover power costs.

State Treasurer Phil Angelides said that if the bonds are unsold and the economy slows down next year, the state could be revisiting the fiscal crisis of the early 1990s.

“People ought to be laying down their arms over their energy agendas and asking the question: What is the best and fastest way to repay the state general fund to ensure critical programs such as education and health get their funding?” he said.

Lynch, one of three Davis appointees on the five-member PUC, finds herself in a particularly difficult position. She sees the value of PUC reviews of the reasonableness of power purchases. But, Lynch said, “If we do not enter into a rate agreement, the bonds do not issue and that could affect the state general fund.”

“The thing I care about most,” she added, “is ensuring the general fund is repaid.”

Earlier this month, Lynch issued a draft decision that would have the PUC essentially rubber-stamp any future revenue requests or rate increases sought by the Department of Water Resources. But she also has publicly endorsed a bill by state Sen. John Burton (D-San Francisco) that the Davis administration opposes.

The bill would ensure that the PUC has the right to scrutinize the revenue needs of the Department of Water Resources and hold public hearings. It would not, however, give the PUC the power to disallow department expenses. To reassure Wall Street, the bill would dedicate a portion of the money that utilities collect from their customers to repaying the bonds.

At a PUC meeting last Thursday, PUC commissioners Richard Bilas and Henry Duque, appointees of former Gov. Pete Wilson, voiced support for the Burton bill, saying it would let the PUC shed additional light on the Department of Water Resources’ power-related expenditures.

The Davis administration opposes the bill’s present form but is seeking amendments. One concern is that energy providers would sue out of fear that if money runs short, bondholders would be paid before they are.

The bill’s passage could be a “deal breaker” for the bond sales, said contractor Joseph Fichera, a financial advisor to Davis.

At the least, contentious debate surrounding energy-related issues could drive up the price of floating bonds, Fichera said.

“Wall Street does not like risk. Conflict implies risk. So the more we create, the more we are costing ratepayers,” he said.

The Legislature also is considering a bill that would allow Edison to sell bonds to pay off about three-quarters of the debt it accrued during the energy crisis. The utility would have to handle on its own about $1 billion owed to large energy companies. Consumer activists have threatened a ballot initiative to block the bill, which they call a bailout.

The PUC on Thursday is scheduled to vote on several items designed to ease the sale of the Department of Water Resources’ bonds. One is a rate increase for SDG&E; customers. Another measure would suspend the right of businesses and other electricity customers to stop buying electricity from their local utility and choose their own power provider.

The Alliance for Retail Energy Markets, an organization that includes many large California businesses, said its members would be forced to sue if the PUC goes ahead with plans to retroactively void the right of customers to choose their own energy providers.

But the most controversial item has been the proposed PUC agreement with the Department of Water Resources. Consumer groups and utilities alike have called for public examinations of the department’s contracts and revenue requirements.

“The plan would allow a state agency to operate behind closed doors while it negotiates with ratepayers’ money,” said Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Secrecy in DWR leads to conflicts of interest and that leads to higher rates.”

Concerns about the Department of Water Resources’ lack of independent oversight have been heightened by recent developments:

Energy experts have questioned the qualifications of the trading team the department assembled, and several traders were fired for alleged conflicts of interest.

Critics seized on reports that the department sold surplus power at a loss of $46 million in July, although officials say surpluses are bound to occur with long-term power contracts.

And the department’s projections of its revenue needs for future power purchases have been updated and amended twice, prompting utilities and others to question the reliability of the figures.

PG&E; Threatens to Sue Over Revenue

The utilities want the department to be subject to the sort of reviews that have rankled them for years. If the PUC does not provide for that, lawsuits could be coming.

PG&E;, which already is in bankruptcy, has threatened to sue if the Department of Water Resources’ revenue requirement doesn’t leave the utility a sufficient share of the rate increase adopted by state regulators in March.

PG&E; recently asked a Sacramento County Superior Court judge to require the Department of Water Resources to hold public hearings on its revenue requirements. The company has reacted angrily to a draft PUC decision to shift $600 million of the state’s cost of buying power from Edison to PG&E;, saying the plan was illegal and discriminates against PG&E; customers.

Davis aides have defended the Department of Water Resources and its power purchases, saying the department’s long-term contracts helped cool the energy crisis.

“They look overpriced now,” Fichera said. “But four months ago they were underpriced [compared with the spot market]. They are an insurance policy” against market volatility.

Having the PUC review actions of another state agency would be redundant and would serve no purpose, Fichera said, because the contracts already are in place.

“You can’t break contracts,” he said. “You’ve got to pay them.”

Even some critics acknowledge it is difficult to evaluate the Department of Water Resources’ performance to date. One reason is that the department has closely guarded details about its contracts and its spot purchases, arguing that release of too much information would place it at a competitive disadvantage.

Another reason is that market conditions have changed and natural gas prices have declined since the department entered into contracts amid the energy crisis.

“We all have 20-20 hindsight,” said PUC Commissioner Bilas. “When DWR entered into contracts, the state was over the barrel. Now we can say that they are not as good as [the department] thought . . . and that DWR does a lousy job of negotiating contracts. But that’s unfair.”