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PG&E Presses to End Freeze That Keeps Power Costs Low in Northern California

Dow Jones Business News

NEW YORK -- California's largest utility is pushing to end a four-year-old retail rate freeze that has insulated millions of Northern Californians from the volatile wholesale electricity prices that have rocked San Diego this summer, Friday's Wall Street Journal reported.

PG&E Corp. (PCG), parent of Pacific Gas & Electric Co. in San Francisco, said it wants to end the freeze imposed in 1996 by the state legislature as soon as possible, because it is losing money under the arrangement. In a filing with the Securities and Exchange Commission, PG&E said it has collected $2.2 billion less from customers this summer than it has shelled out to buy bulk power for them from the state-sanctioned California Power Exchange, a central auction.

PG&E's disclosure sets the stage for a major confrontation between the utility and regulators. It will be up to the California Public Utilities Commission to balance conflicting needs: the utility's desire to protect its shareholders from potentially huge losses, and the commission's own duty, as regulator, to protect the public from a flawed market that appears incapable of delivering the "just and reasonable" rates required by law. Legislators now say they fear the state could be tipped into a recession if electricity prices don't drop soon.

Under the state's 1996 deregulation law, all California investor-owned utilities were allowed to freeze rates at what seemed like high levels. Utilities were permitted to use surplus revenues to pay down generation-related debts that regulators said would render them uncompetitive in a deregulated world. It worked well until this summer. PG&E charged customers, on average, $54 for each megawatt hour of electricity supplied even though it paid only $26 and $31 a megawatt hour, respectively, for that power in 1998 and 1999. By June 30, it had collected enough surplus money to cancel $6.2 billion of debts.

But the situation went haywire this summer as wholesale power prices lurched upward. The utility paid an average price of $163 a megawatt hour for electricity in June, $110 in July and $187 in August.

-- Martin Thompson (, September 15, 2000


Posted at 12:15 a.m. PDT Friday, September 15, 2000

PG&E raises rate fears Sale of dams could lead to end of electricity-bill freeze in spring BY STEVE JOHNSON Mercury News

The freeze on electricity rates that has protected Northern California from the huge price increases felt in San Diego could be lifted by the spring, only months before peak summertime demand.

In a report filed Thursday with the federal Securities Exchange Commission, Pacific Gas & Electric Co. says the electricity rate freeze could end when the firm sells its hydroelectric plants, which some experts say could happen within six months.

The report offers the most public details yet about when PG&E's 4.5 million residential and business customers might be exposed to the real price of electricity. While customer bills were expected to drop as a result of deregulation, they have skyrocketed in San Diego, where a similar rate freeze has already been lifted.

But consumer advocates vow to fight any deal that allows customers here to be subjected to the doubling of rates experienced this summer in Southern California.

``There is going to be a huge dispute'' over when PG&E ought to be freed from the rate freeze, said Bob Finkelstein, an attorney with The Utility Reform Network of San Francisco. ``We're looking at the ugliest of all regulatory proceedings.''

The decision to end the freeze would be made by the California Public Utilities Commission. If the dam issue is resolved in the spring, the commission still could need several months to determine the financial impact for consumers of lifting the freeze, according to its president, Loretta Lynch.

``I'm hopeful to get it done in the spring,'' Lynch said of the commission's review of PG&E's proposal to sell its hydroelectric system of 68 powerhouses and 140,000 acres of watershed land to one of its affiliates. But resolving what to do with electricity rates, she added, could be tough.

``This impacts everybody and it's a big deal, it's a huge issue,'' Lynch said. ``So I want to be assured that the rates are just and reasonable.''

The company says selling the dams would give it enough money to pay off its remaining power plant debts, allowing it to end the rate freeze under terms of the state's 1996 energy deregulation law.

PG&E's report didn't say when the company might seek to lift the freeze, and Greg Pruett, vice president of corporate communications, declined to discuss the report.

``The position that we're taking . . . is that it speaks for itself, and we're not going to elaborate,'' Pruett said. ``We just feel the best thing we can do is not really speculate on or further parse out this filing.''

The report added that PG&E hopes to ``shield customers from the type of unexpected volatility experienced during the summer of 2000.''

But it also emphasized that PG&E wants to make sure it protects its financial interests. The debate over how it should be allowed to do that is likely to become central to any decision about when the rate freeze is lifted. And it comes at a time when California's troubled energy grid is generating rolling blackouts, governmental probes and considerable consumer anxiety.

Lower bills the goal

When the Legislature passed deregulation, which encouraged utility firms to sell most of their power plants and opened up the sale of electricity to competition on March 31, 1998, most energy specialists predicted that the public would benefit. By ending the monopolistic control that utility firms such as PG&E had on the production and sale of power, they insisted, consumers would see lower rates than before deregulation.

But lawmakers knew competition wouldn't happen overnight, so they built in a kind of four-year buffer. They lowered the electricity rate that utilities had been charging by 10 percent and then froze that rate until March 31, 2002. The idea was to give other companies time to obtain their own power plants or to set up retail electricity sales operations to compete with the utilities on an equal footing.

The arrangement also gave utilities time to pay off their old power plant debts so they could compete.

Under the law, utilities that paid their debts before March 31, 2002, could ask to have their rate freeze ended earlier. That's what happened last year in San Diego. The only trouble is that instead of going down, rates there have gone way up this summer.

Although the cause of those price spikes is under investigation, many blame it largely on the fact that California has too few power plants to meet the needs of its growing population. And individual consumers aren't the only ones who have been hurt.

Effect on utilities

While the freeze that's still in effect in Northern California protects consumers, PG&E has had to absorb the spiraling cost of power. Last summer, according to the report just filed, it paid no more than 4.1 cents per kilowatt hour, and was charging 5.4 cents per kilowatt hour under the rate freeze. But this summer, the price rose to 18.7 cents per kilowatt hour, while the amount it could charge consumers was frozen.

The result, the company said, is that it has piled up $2.2 billion in bills that it hasn't been able to recover from customers. So PG&E officials are eager to end the freeze and begin charging the full price for the power the company has to buy.

As of August, the report said, PG&E still had $1.6 billion in old power plant debts on its books. But if PG&E could sell the hydropower units, it noted, it could raise $2.4 billion to $3 billion to pay off that debt and allow it to ``satisfy the conditions that permit the CPUC to determine that the rate freeze and transition period are over.''

Peggy Jones, an energy analyst with Prudential Securities, attended a Wall Street briefing on the company's financial situation Monday with PG&E Chief Executive Officer Robert Glynn and came away convinced that the company is hurting.

"It could be quite serious,'' she said of the power bills that PG&E is piling up. Glynn, she said, ``kept emphasizing how they really wanted to get it resolved sooner rather than later.''

Moody's Investors Service is concerned, too. On Thursday, it issued a negative report about the company's bond rating, noting that the prices PG&E has been paying lately for power ``have escalated to unparalleled levels.''

Even so, consumer advocates are nervous that PG&E's rush to have the rate freeze lifted could wind up hurting a lot of its customers. Nettie Hoge, The Utility Reform Network's executive director, said she's worried that PG&E officials might even try to have the freeze lifted this year.

``Maybe I'm getting too paranoid,'' Hoge said. But given how quickly the company wants to get out from under the freeze, she added, ``I don't think they are beyond trying to do that.

-- Martin Thompson (, September 15, 2000.

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