California's Utilities Could Be in Hot Water as Bills Are Duegreenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread
Friday, September 22, 2000 | Print this story
State's Utilities Could Be in Hot Water as Bills Are Due Power: Whether they can collect funds for escalating costs is a question that worries Wall Street, others.
By CHRIS KRAUL, Times Staff Writer
As the meter runs on California's electricity crisis, shock over this summer's price spikes is giving way to a new concern: uncertainty over whether and how the state's three investor-owned utilities can collect the staggering amounts in power costs they haven't been allowed to pass through to consumers.
The unanswered question is how high the bill--now $4 billion and counting--will go, and whether consumers will foot all or part of it. And that there are no easy answers--perhaps short of an overhaul of the state's deregulated power market, or legislation from officials seemingly reluctant to act--only adds to the growing anxiety. Rate freezes in effect at Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric, which serve about three-quarters of the state's residents and businesses, are forcing the utilities to borrow an estimated $1 billion a month to cover their added wholesale costs. Those loans are draining the companies' resources and threatening their financial structure, analysts say. The rising unpaid balance presents a longer-term burden that worries Wall Street, the state's business interests and, of course, the utilities. If passed along to consumers, the amount could ultimately negate the promised benefits of cheap energy that were the reason for being for the landmark deregulation of California's electricity industry. But making the utilities absorb the entire "undercollections" would strike a grievous financial blow to the companies. The crisis also has created a potential time bomb for shareholders of parent companies Edison International and PG&E Corp. Skyrocketing wholesale electricity costs are canceling out deregulation's underlying assumption of low-cost wholesale energy--and the projected generous retail margins with which utilities were to pay off nuclear plants and other uneconomical assets. The deregulation law gave utilities until March 2002 to complete the payoff, when open-market conditions would take over in their service areas. But with wholesale electricity costs where they are, the "stranded asset" balances are growing instead of shrinking--and posing an enormous potential hit for shareholders, who would have to absorb the remaining "bad asset" costs after the deadline passes. Whether the companies' shareholders or ratepayers--or both--end up footing the undercollection bill, all Californians could pay in the long run, analysts say, if current market problems remain unresolved and the state is seen as a less attractive place in which to do business. How will it all shake out? Wall Street is as much in the dark as Californians, said Lori Woodland, an analyst with Fitch Inc. of Chicago, one of three debt-rating agencies to recently lower their outlooks for Southern California Edison, PG&E, SDG&E and their parent companies. "It's not clear how regulators view this issue," Woodland said. "They may permit the utilities to recover their costs [from ratepayers]; they may not. That's a big uncertainty, and it may remain this way for months. Meanwhile, power prices are very high, and significant amounts of money are flowing out the door of the utilities."
The uncertain prospects for collecting those billions of dollars also affect stock prices, and PG&E in particular has slumped in recent days as the implications register with investors. From a high of $31.64 on Sept. 11, PG&E shares have dropped to Thursday's close of $23.19 on the New York Stock Exchange. Amid the finger pointing and doubts, many wonder if electricity deregulation itself could be junked and the state's power industry re-regulated. Others suggest that rate freezes be extended indefinitely or hope that the Federal Energy Regulatory Commission now investigating the California electricity market will take corrective action to make it all better. Although the parties involved all seem fearful of the dimension of the crisis and doubtful of any near-term solution, consensus couldn't be less evident among the major players on how to deal with it. Although all three utilities agree the current market isn't working, they have not come forward with a common plan to solve the crisis and aren't working on one, sources say. Partial lifting of the rate freezes is advocated by PG&E Corp. and Sempra Energy, parent of SDG&E, the first state utility to pay off its stranded costs and thus be allowed to fully pass along wholesale costs to customers. The state Legislature has since stepped in to freeze SDG&E rates after a political firestorm fed by customer protests over bills that doubled and even tripled during the summer. Lifting the rate freeze would stem the tide of electricity undercollections, a sum the utilities realize is not necessarily collectible in the current political climate. "We have to fix these retail rates, which mask the true cost of electricity and which are creating the shortfall," said SDG&E President Edwin A. Guiles.
In San Diego, for example, the average price paid by SDG&E customers zoomed from 11 cents per kilowatt-hour last year to 28 cents at its highest point this summer, before the Legislature stepped in to cap the rates, bringing the average price paid down to about 10 cents. So tinkering with the rate freeze could be politically hazardous. "The pain we saw in San Diego this summer is something we want to avoid for our customers in Northern and Central California," said PG&E spokesman Jon Tremayne. PG&E is expected soon to formally petition the state Public Utilities Commission to lift its rate freeze. The San Francisco-based utility argues that the $2.8-billion value of its Northern California hydroelectric properties, which under deregulation it is required to divest, would erase its stranded costs and make it eligible to pass along wholesale costs to consumers. Southern California Edison's chief financial officer, Jim Scilacci, said the utility could possibly be eligible to lift the rate freeze later this year if planned asset sales bring high enough prices. But with the legally mandated rate freeze in effect in San Diego, observers doubt that the state would let PG&E and Edison revert to market prices. In response, some consumer advocates are saying, in effect: Let the utilities, which ignored warnings of the electricity shortages at the root of the summer's price spikes, lie in the beds they made and pay the unforeseen costs of deregulation themselves. "Essentially this is the result of a deal gone wrong. It's buyer's remorse," said Michael Shames of the Utility Consumers' Action Network, a San Diego watchdog group. "The utilities cut a deal, and now they don't like the terms of the deal and they want out of it." Somewhat more flexible is Ed Yates, senior vice president of the Sacramento-based California League of Food Processors, whose energy-intensive industry could be devastated by the full brunt of high wholesale energy costs. "What frightens us is that the utilities and the state could declare the rate freeze over and we'd have a San Diego situation," Yates said, referring to how the rising summer power costs made some San Diego County agricultural products noncompetitive. "What we want is rate stability. But I don't see a solution. There are powerful interests at work who don't agree on the goal." State officials are divided, with some including PUC President Loretta Lynch looking to the federal government to impose order. Gov. Gray Davis has discussed holding an energy summit next month to try to hash out solutions, but no date or agenda have been set. "The governor is obviously aware of the problems that California utilities are facing and continues to be committed to making deregulation work and is calling on everyone involved to act in a responsible way," said spokesman Steve Maviglio, adding that Davis has set aside much of October to work on the problem. Lynch made it clear she will be unreceptive to any solution that would have consumers absorbing all of the undercollections and that resolving the utilities' huge debts must come as part of a comprehensive overhaul of California's dysfunctional electricity market.
"I don't think there is a simple solution. The utilities have a problem, I agree, but the resolution is much more complex than having the ratepayer eat the bill," Lynch said. "The answer lies in a broader solution of addressing the wholesale energy market." Unclear is how long Wall Street would wait for some kind of resolution before downgrading utilities' debt, the next step after the negative outlook revisions.
"There are obviously many challenges presented to the power industry," said Standard & Poor's David Bodek. "The costs are very high and at the end of the day have to be borne by someone. If it's the utilities, there are financial implications that could impact credit quality."
-- Martin Thompson (firstname.lastname@example.org), September 22, 2000