PUC Postpones Vote on Shift of Rate Authority

With a rare public split among Gov. Gray Davis’ appointees, the California Public Utilities Commission abruptly postponed a vote Thursday on a crucial step toward the state’s planned sale of bonds to recoup billions in power costs.

The commission did vote to approve two other long-debated changes in energy policy. But the most controversial item on its agenda was an agreement under which the PUC would surrender much of its authority over electricity rates to the state Department of Water Resources, which has been buying power for utility customers since January.

The 3-2 vote to postpone that decision exposed an increasingly tense, and now open, rift between the Davis administration and Loretta Lynch, the president of the PUC and one of three Davis appointees on the five-member commission.

For several weeks, Lynch has been wrangling with the water resources agency over the terms of the agreement through which the PUC would surrender its authority. Before the meeting Thursday, she made a courtesy call to the governor’s office and the state treasurer’s office, repeating those misgivings.

As a result of those calls, Davis aides feared Lynch was planning to vote against the agreement, causing its defeat, said Commissioner Jeff Brown, another Davis appointee. The aides asked Brown to hold up the vote if Lynch’s problems with the pact could not be ironed out.

If the agreement were defeated, Brown said, the bond sale would be jeopardized, causing fiscal problems for the state treasury.

“I feared that the markets would think this has become the Banana Republic of California,” he said.

The commission commonly votes along partisan lines, with the three Davis appointees siding against Richard Bilas and Henry Duque, Republican appointees of former Gov. Pete Wilson.

This time, by contrast, Brown and the two Republicans voted to postpone the rate agreement. Lynch and the third Davis appointee, Carl Wood, voted to proceed despite the risk that the proposal would be defeated.

After the meeting, Lynch said she was prepared to vote against the rate agreement in part because of concerns that it would expose the state to litigation from utilities or others.

She said, however, that she tried to proceed with the vote because top state officials had been pressing the PUC for action.

Lynch said she now intends to continue working on the proposed agreement with the water department and the treasurer’s office, which has repeatedly pushed back its timetable for the bond sale.

“I am glad we have more time to work it out,” she said.

The commission will consider the issue again Oct. 11.

Davis spokesman Steve Maviglio said, after speaking with Lynch, “We’re optimistic it will be resolved.”

Tensions between Davis and Lynch have been increasing for months. In March, Lynch moved to raise electricity rates before the governor came to the conclusion that was needed. And recently, Davis has criticized the pace at which the PUC has tackled the rate agreement and other matters related to the bond sale. For her part, Lynch endorsed a bill proposed by state Senate President Pro Tem John Burton (D-San Francisco) that would ensure the PUC has a right to scrutinize the department’s revenue needs. Davis opposed that measure.

Lynch was appointed to a six-year term on the PUC, but the governor could remove her from the leadership post.

On Thursday, Davis said in Los Angeles that he was prepared to discuss a change in the PUC presidency, but he did not go into detail. “A little later this week or next,” he said, “I may have some comment.”

The governor voiced disappointment that the PUC has not taken all necessary action to pave the way for the bond sale.

“They have done some constructive things in the last few days, but not as many as I would have hoped,” he said. “At this time, all officials, elected and appointed, ought to take steps to assuage, not increase, economic insecurity.”

The commission’s agreement with the water department is one of several PUC measures designed to reassure Wall Street that the department has a safe revenue stream to pay off $12.5 billion in bonds the state wants to issue. The bond sale is urgent because California has already used $6 billion from the treasury and has taken out a $4.3-billion loan to buy electricity. The state has also signed $43 billion in long-term power contracts.

Although the PUC did not act on the rate agreement, the panel decided Thursday to suspend immediately the right of utility customers to enter into new contracts with their own energy providers. The vote was 3 to 2, along partisan lines.

“Direct access,” as the system is known, was one of the cornerstones of the deregulation experiment in California. Coalitions of large energy users ranging from factories and farms to grocery chains and universities had lobbied hard at the PUC and in Sacramento, saying they have saved many millions of dollars through direct access and need an alternative to power supplied by utilities and the state water department.

But Wall Street and state officials worried that customers would leave utilities in the quest for lower rates, leaving behind fewer customers to pay for the department’s power purchases. State officials warned of a “death spiral” of higher rates and fewer ratepayers.

After the vote, the Utility Reform Network condemned the commission for not retroactively ending direct access for businesses covered by existing contracts with electric companies. “The decision rewards electricity marketers who have been frantically signing up customers,” the group said in a statement.

The Alliance for Retail Energy Markets said in a statement that its members were “incredibly disappointed” by the PUC decision but “still firmly believe that direct access need not be killed to facilitate the state’s pending bond sale.”

The alliance expressed hope that legislation could preempt the PUC action.

In another step to reassure Wall Street of the water department’s revenue stream, the PUC voted 4 to 1 to impose a rate increase on San Diego Gas & Electric customers. The increase would help cover the costs for the water department, which is supplying more than half of the power for SDG&E; customers.

The increase--1.46 cents per kilowatt-hour, or 12.1%--is an interim amount. It might be adjusted after the PUC completes its reevaluation of the water department’s statewide revenue needs and decides how to allocate those power costs among the utilities.

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Times staff writers Dan Morain in Sacramento and Kenneth Reich in Los Angeles contributed to this story.