California PUC Sets Stage for Increase in Electricity Bills

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PUC Sets Stage for Increase in Electricity Bills

Power: Reluctant commissioners prepare to repeal the rate cap as early as Jan. 4. Consumer groups object, saying the commission should protect taxpayers.

By NICHOLAS RICCARDI and NANCY VOGEL, Times Staff Writers

SAN FRANCISCO--The state Public Utilities Commission on Thursday moved to rescue the state's largest electric utilities from soaring power costs by clearing the way for rate hikes as soon as Jan. 4. Meeting amid a power crisis that has threatened blackouts throughout the state, the commission balked at flatly eliminating a 4-year-old rate cap that was created to protect consumers at the start of deregulation. But, in a 5-0 vote, commissioners laid the groundwork to repeal that limit.

The state's two biggest power companies said rate hikes are necessary for them to recover the skyrocketing costs of electricity in California's deregulated power market. Although 1996 legislation creating that market was intended to cut energy costs, it has had the opposite effect this year.

Details--including the amount--of the rate increase will be decided by the PUC after hearings next week and after commissioners receive the results of an audit to verify the power companies' claims of financial distress. Utilities could be allowed to raise rates immediately, without first notifying customers. The rate hike would not affect residents of Los Angeles, Pasadena, Burbank, Riverside and other cities that rely on public power utilities.

With consumer rates locked in by the deregulation law at 1996 levels and the price of electricity soaring to new highs in 2000, Southern California Edison and Pacific Gas & Electric Co. faced possible bankruptcy if the PUC did not act, Wall Street analysts warned. But with their credit ratings hanging in the balance and their stocks plunging during heavy trading Thursday, Edison and PG&E were circumspect about the PUC's decision. Edison issued a brief statement calling the PUC action "encouraging." PG&E Senior Vice President Dan Richard pledged to be responsible in implementing rate hikes and said he hopes to see a reaction from rating agencies today. "We've got proposals we'll put on the table to smooth out rate increases," Richard said. "We need to stabilize our financial situation so PG&E and everyone can focus on job No. 1--getting wholesale electricity prices under control." But consumer groups expressed concern about the move, saying that the PUC should take steps to protect taxpayers, such as granting public ownership of the utilities' main transmission system or requiring the companies to dedicate the power plants they own to serving customers at low, stable rates. They also urged the PUC to weigh the utilities' current debt of several billion dollars against about $20 billion in revenue the two companies collected in the first few years of deregulation. "Consumers have already paid a hefty price for deregulation," said Matthew Freedman, an attorney with the Utility Reform Network in San Francisco.

Even commissioners were openly unhappy about their position. "There aren't going to be any good decisions that come out of this commission," Commissioner Carl Wood said. "There is going to be some kind of bad decision. We are going to do something that will affect people's rates, that will affect the well-being of the utilities."

Audit to Check Companies' Claims Before approving the hike next month, the commission will tap an independent auditor to comb through the utility companies' books and ensure that their claims of poverty are legitimate. The results are expected before the final vote. To accelerate the process, the commission Thursday waived its requirements to give the public 10-day notice of its meetings and scheduled two public hearings next week to determine whether to lift the rate cap. It left little doubt about its intention: Its order stated, "We believe that retail rates in California must begin to rise."

Along with determining the size and form of the hike at its Jan. 4 meeting, the PUC is scheduled to consider whether to allow utilities to sell their remaining power plants to outside companies, including unregulated subsidiaries. Before granting the hike, the PUC would have to find that the two utilities had collected enough money to cover investments in nuclear and alternative energy made before deregulation. Such a finding in 1999 allowed San Diego Gas and Electric to lift its rate freeze and pass on to customers the soaring prices it paid for power this summer. The Legislature froze those rates in August after a public uproar.

Gov. Gray Davis has pushed for a 10% hike, while utilities have said they may need 17%. Davis spoke with President-elect George W. Bush on Thursday morning, pledging to work with the new administration--which is laden with energy-company executives--on the electricity crisis. In an indication of the national scope of the issue, the governor spoke with Federal Reserve Chairman Alan Greenspan about it Thursday afternoon. He will meet with the chairman in Washington on Tuesday. Aides to Davis had warned that Edison might have to ration power soon if the company does not get rate increases. In a statement issued after the PUC decision, Davis seemed to back off from that concern, saying that the commission showed that "it will rule in a fair, reasonable and balanced fashion to keep the lights on in California."

Law Included 10% Rollback Although it appeared inevitable as the Golden State's energy crisis became increasingly dire, a rate hike was the last thing on policymakers' minds when the seeds of the current crisis were sown. When California's much-ballyhooed deregulation was launched by then-Gov. Pete Wilson, his appointees on the PUC and the Legislature in 1996, the step was supposed to cut costs for consumers and utilities.

That was more than a promise. As a concession to consumers, the deregulation bill included a 10% rate rollback for the 27 million people who receive their electricity from the big three utilities. Rates also were frozen until March 31, 2002, or until those companies paid off past investments, including nuclear power plants. By that time, the energy market was supposed to be flush with new players and competition would keep power cheaper for everyone. But just as deregulation got underway, the gap between California's demand for electricity and its supplies widened rapidly. The state has built no new major power plants in the last decade, and shortfalls became severe last summer. Cooler temperatures have not improved the situation, with the cost of power increasing fivefold in the last three weeks. The state was on the verge of rolling blackouts last week when U.S. Secretary of Energy Bill Richardson stepped in and ordered all Western energy generators to sell surplus power to California.

Even with that order in place, energy reserves are so low that the state declared a Stage 2 power alert Thursday, the 35th of the year. The alert urges businesses to voluntarily shut off power to conserve electricity. "We're just in a resource crunch. There's no question about it," said Patrick Dorinson, a spokesman for California Independent System Operator, the state agency charged with ensuring that the lights stay on across the state. "The [federal] order does help, but at the same time there's a shortage" throughout the West.

Consumer groups and some officials are suspicious of those shortages, pointing out that suppliers have seen profits soar as much as 600% this year and accusing them of holding back energy to drive up costs. Five separate investigations have been launched into the shortages. PUC Commissioner Wood unleashed a scathing criticism of those companies at Thursday's meeting. "Billions of dollars are being siphoned out of the California economy in order to feed the greed and avarice of corporations who have no respect whatsoever for their obligations under law," Wood said.

Northwest Feels Pinch California consumers can take comfort in that they no longer are alone in their power woes. Pacific Northwest residents, who traditionally have enjoyed some of the lowest electricity rates in the nation because of abundant hydroelectric power, are beginning to feel the pinch. The city of Tacoma, Wash., this week approved an immediate 43% surcharge on electricity. Seattle residents will see an 8.9% increase beginning Jan. 1. Just north of Seattle, the Snohomish County Public Utility District approved a 33% hike last week, the second highest increase in the utility's 51-year history. In addition to escalating rates, the region faces a supply crunch similar to that in California. Thanks to a cold, clear autumn that brought little snow or rainfall and unusually low temperatures, and an inability to import power from California, the Northwest faces a potential energy shortfall in January.

Among all this news Thursday, consumer groups did find a silver lining in the California PUC's order--the audits of the two utility companies. The utilities said they have fallen billion of dollars in debt because of rising energy prices, but consumer groups allege that the corporations have benefited financially from deregulation by investing in subsidiaries that own power plants elsewhere. "The steps toward calling the utilities' bluff by auditing their finances is the first time Gov. Davis has been willing to stare down the utilities in this brinkmanship," said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

Still, the mood was bleak among activists. "There's nothing to be happy about here," said Mike Florio, an attorney for the San Francisco-based Utility Reform Network. "We dodged the bullet for two weeks, but it sounds like two weeks from now we're going to be back here with a gun to our heads, held by Wall Street."

--- Times staff writers Chris Kraul in Los Angeles, Dan Morain in Sacramento and Kim Murphy in Seattle contributed to this story.

http://www.latimes.com/business/reports/power/lat_power001222.htm

-- Martin Thompson (mthom1927@aol.com), December 22, 2000

Answers

Energy Crunch Puts Strain on Smog Controls

By GARY POLAKOVIC Times Environmental Writer

California's power plants are spewing large quantities of extra air pollution during the state's energy crunch--setting the stage for a high-stakes conflict between power producers and air quality regulators as the energy shortage continues.

Earlier this month, regulators received a taste of problems to come when energy company AES Pacific Inc., ordered to clean up some of Southern California's dirtiest plants, turned off its power, wiping out precious megawatts while the state was under power- shortage alerts. The company and regulators eventually compromised on a record $17-million fine, plus an agreement that will keep the plant working-- and polluting--for now, but will clean it up before next summer's smog season. Officials at the regional Air Quality Management District and the state Air Resources Board are preparing for more such fights in the weeks to come. They are clearly feeling the pressure to avoid cutting into electricity supplies. "Air pollution is a problem, but no lights is a problem as well. We need to find ways to make sure these plants are not shut down," said Jerry Martin, a spokesman for the state air board. But Barry Wallerstein, executive officer at the South Coast Air Quality Management District, which regulates air quality in Los Angeles, Orange, Riverside and San Bernardino counties, said it is unfair to blame clean-air rules for power outages. Some power companies are using air quality agencies as scapegoats, he said. "These power producers have had years to put controls on the plants. They should have been put on a long time ago. This is clearly a problem of their own making," Wallerstein said.

Using Free Market to Cut Pollution In fact, the utility companies that owned the state's power plants until deregulation was instituted spent much of the 1980s resisting demands to clean up power plants.

At the time, the AQMD was proposing regulations that would have slashed power plant emissions by about 90%. Instead the regulators adopted an industry-backed plan to use the free market to reduce pollution. But much as the state's energy shortages have caused chaos in the market for electricity, they also have badly disrupted the pollution-control market. Most of California's electricity comes from hydropower dams in the Northwest, coal-fired plants in the Great Basin and nuclear reactors. But the state has about 900 fossil fuel generating stations that operate as intermediate or peak electricity producers in periods of heavy demand. Until deregulation, those plants--many of which are aging and dirty--were used only sporadically. But with this year's electricity shortages, they have been running at full tilt. That has helped keep the lights on, but has led to increases of at least 25% and possibly much more in smog-forming emissions, according to estimates being prepared by the Air Resources Board.

"Basically, we have an electric power system with a 1950s infrastructure to power a 21st century technological economy," said V. John White, an energy expert and lobbyist for the Sierra Club. Power plants typically emit 70 tons per day of gases that contribute to ozone, urban haze and airborne acids in California. Many of the state's boilers and turbines are as much as 45 years old. Older plants consume about 50% more fuel per megawatt produced than newer models, and some lack any pollution controls at all, according to officials. Of the 93 boilers and turbines operating in the Los Angeles region, for example, 40 have no pollution controls. The plants are fired with natural gas, which is a far cleaner fuel than coal or oil, but even so, the older plants are too dirty to run year-round without exceeding pollution limits. Air quality districts across the state are feeling political heat as they try to balance the need to protect public health from noxious smog with the need to avert rolling blackouts. When Houston-based Reliant Energy Co. was faced with a potential shutdown of two big power plants in Ventura County last summer because of air pollution violations, the local air district cobbled together an agreement that allowed the plants to keep operating with added pollution in exchange for a promise of greater reductions later. Similarly, in September, the Los Angeles Department of Water and Power agreed to pay a $14-million penalty and slash power plant emissions for violating clean-air regulations. The city-run utility relied on old power plants in Long Beach, Inglewood and the San Fernando Valley to supply electricity. Those units had been mothballed for five years, and their use resulted in the release into the air of an additional 100 tons of pollution.

AES Pacific reduced power production by 2,000 megawatts, half its capacity, by idling some of its dirtiest units at plants in Redondo Beach, Huntington Beach and Long Beach when the company was threatened in November with a cleanup order from the AQMD. Those boilers and turbines were offline for three weeks, a period during which the governor switched off Christmas tree lights at the Capitol to save energy. Before being shuttered, the three AES Pacific power plants had released an extra 1 million pounds of pollution this year. In the Bay Area, a power plant operated by Southern Energy Co. appears on the threshold of exceeding its emissions quota for the year. If it reaches its pollution limit, which could happen any day now, the local air district plans to restrict use of six so- called "peak units" generating 125 megawatts, except in cases of extreme power shortage, according to air quality officials. Industry and air quality officials acknowledge that the state's generating stations need to be cleaned up but have debated on and off for nearly two decades over how best to do it.

Smokestack controls are expensive and plant owners have strongly resisted efforts to require them. But the state as a whole--and Southern California in particular--is under federal mandate to keep making steady progress toward cleaner air. That means any increased emissions from power plants must be offset somewhere else--putting even greater pressure on other industries to clean up. At the same time, the current energy shortages have strengthened the hand of energy companies, even as their generating stations pollute more. Aides to Gov. Gray Davis have urged regulators to keep the power situation in mind as they enforce clean-air rules. The energy shortage is the biggest problem so far in Davis' administration, prompting the governor to attempt to control the damage as major utilities face the prospect of bankruptcy and consumers face rate hikes. "I don't want to breathe dirty air, but a combination of the existing regulations and the [power] capacity shortage are certainly making it difficult for us to get needed megawatts," said Kellan Fluckiger, chief operations officer for the California Independent System Operator, which manages three-fourths of California's power grid.

Cost of Emission Credits Soars The free-market pollution-reduction strategy that the AQMD adopted in 1993 was a smog-credit trading program called Reclaim. The program, which was supported by the industry to reduce costs and add flexibility, gave each factory and plant in Southern California a set amount of pollution that it could emit each year. Those companies that did not fully use their pollution allotments were allowed to sell credits to companies that were going over their limits.

Each year, the total amount of allowable pollution was reduced. The idea was that, as the overall limit tightened, the free market would lead companies to find the least costly ways of reducing pollution. But this year, as power companies gobbled up credits to cover excess emissions, the cost of credits soared. The trading market was thrown into chaos, and many companies found credits unaffordable. That has forced manufacturers and power companies to search for new, cheaper ways to control pollution, which was the original intent of the program. But it also has meant that some power plant operators have decided that paying fines to the AQMD is cheaper than trying to buy pollution credits.

Industry groups would like to change the program by bringing new sources of credits into the market. For example, some have proposed letting industries receive credits for scrapping old, polluting cars-- an approach that has been plagued with problems in the past.

If the trading system cannot be fixed, regulators could move to impose detailed pollution-control rules--as they planned to do more than a decade ago. In the short term, they also have the option of issuing legal directives, known as abatement orders, which direct the owners of polluting plants to shut down. But mindful of the enormous economic stakes, air quality officials have been reluctant to take that step. As dirty as the old power plants are, they are difficult to clean up right now. Installing pollution control equipment requires taking a plant offline--something state officials do not wish to have happen at a time when supplies are already short. This time of year California's homes and businesses require about 38,000 megawatts of power. But power plants, after running hard much of the year, are starting to break down, and maintenance has idled equipment that would normally produce about 5,000 megawatts. A like amount is typically unavailable because of plant failures or accidents, Fluckiger said.

"It's like running a '57 Chevy at 85 mph on the freeway. It just breaks down more," said Aaron Thomas, spokesman for AES Pacific.

http://www.latimes.com/business/reports/power/lat_smog001222.htm

-- Martin Thompson (mthom1927@aol.com), December 22, 2000.


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