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CBS News Correspondent John Blackstone adds up the costs of deregulation.

Rate Surge Won't Stop Power Failure

PUC Approving Hike Of 7% To 15% Power Industry Wanted Even More Utilities Still Can't Cover Wholesale Prices

SAN FRANCISCO, Jan. 4, 2001 AP (CBS) Deregulation has left California's electricity system nearing breakdown, with the state's two largest utilities warning a controversial rate increase, likely to be approved Thursday, won't be enough to save them from bankruptcy, reports CBS News Correspondent John Blackstone.

A proposed electric-rate hike aimed at bailing out two California utilities is facing heavy criticism, with consumers angry about picking up the tab and Wall Street skeptical that the move will accomplish its goal.

The state Public Utilities Commission on Thursday was expected to approve hikes of 9 percent for homes, and between 7 percent and 15 percent for businesses. The increases would affect about 10 million customers.

The proposed 90-day increases, unveiled Wednesday, are about one-third the amount sought by Pacific Gas and Electric Co. and Southern California Edison Co. The utilities say they face financial ruin within weeks if they can't get more cash to buy the energy that's distributed to their customers.

The utilities have been struggling because they have been unable to recoup the money spent on wholesale electricity. They buy power for roughly 30 cents a kilowatt hour and, because of a rate freeze, they can only charge customers about a fifth that amount.

The result is that PG&E and SoCal Edison, which serve more than three-fourths of California's population, have lost more than $9 billion since June. Wall Street has threatened to downgrade the two investor-owned utilities to junk-bond status unless they find an assured cash source.

The state's deregulated electricity grid, stressed for months by high demand, scant reserves and tight imports, has been pushed to the brink of widespread blackouts. The need for electricity has sent wholesale power prices dramatically upward.

David Bodek of Standard and Poor's, a New York credit-ratings service, says that the proposed increase still leaves the utilities unable to cover the high wholesale prices. He said the move "would suggest that the commission is not committed to preserving the utilities' financial viability nor the utilities' financial integrity."

Bob Glynn Jr., head of PG&E Corp., the utility's parent company, was equally pessimistic.

"I've got a fourth-grade grandson that can do the math on this. If you're buying at 27 cents and selling at 7, you're going to run out of money," Glynn said.

PG&E had requested an immediate 26 percent rate hike and SoCal Edison had asked for 30 percent, but Gov. Gray Davis reportedly drew the line at 10 percent in private negotiations. Still, taxpayer groups were not happy with Davis' concessions.

"This is day one of the ratepayer revolt in California," said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights, which favors a ballot initiative in 2002 to reregulate the electrical industry.

Rosenfield's associate, Douglas Heller, argued that the rate hike "will be the first in a series of rate increases."

The utilities said the proposed rate increase would do little to reduce their debt, but they said it would send a strong signal to Wall Street about their financial stability.

The utilities must maintain a good credit rating to borrow money to buy power. Otherwise, they might be forced to institute rolling blackouts.

Standard and Poor's was skeptical of rate hike's value, saying it would make only a small dent in the utilities' cash-flow problem.

Even if the rate increase remained in effect for a full year, not just 90 days, it would provide only $274 million for PG&E and some $234 million for SoCal Edison, the credit-ratings service said. The numbers were calculated on 1999 figures from the U.S. Department of Energy.

"It may be a question of too little, too late," said Bodek of Standard and Poor's.

http://cbsnews.cbs.com/now/story/0,1597,221065-412,00.shtml

-- Martin Thompson (mthom1927@aol.com), January 04, 2001