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Experts say PUC rate hike too low

The increase OKd Tuesday won't cover some power costs, they say.

March 29, 2001

By KATE BERRY The Orange County Register

Even though California regulators approved the largest electricity rate hike in history - expected to bring in $7 billion in revenues - economists and energy experts say the increase is not enough to solve the state's energy crisis.

Several energy experts said more rate hikes are inevitable because the rate increase of 3-cents-per-kilowatt-hour approved Tuesday by the California Utility Commission only covers the cost of power purchases starting April 1.

"This rate hike alone will not cover the cost of purchasing power this year,'' said James Bushnell, an economist at the University of California, Berkeley's Energy Institute.

State Controller Kathleen Connell sounded an alarm Wednesday, saying that Gov. Gray Davis and lawmakers failed to examine the state's books when the Department of Water Resources began buying power in mid-January for cash-strapped Southern California Edison and Pacific Gas & Electric.

Despite a rate hike of up to 42 percent for Edison customers, Connell said California faces a cash-flow crunch and will be $7.4 billion short of the $26.8 billion that will be spent to buy power over the next 18 months.

"Without identifying some other means of financing, California will face a cash-flow problem by the first of October,'' Connell said.

The rate hike was passed primarily to ensure the solvency of the state of California and to guarantee a steady revenue stream to Wall Street bond investors for up to $12.4 billion in revenue bonds the state plans to sell in May.

"This rate increase only takes care of the state's own requirements going forward,'' said Richard Cortright, an analyst at Standard & Poor's. "But it doesn't do anything about the debts of the utilities, which are still on life support.''

Among the costs that the rate increases do not cover:

Roughly $3 billion in power purchased by the state since mid-January for the customers of Edison and PG&E.

Roughly $13 billion to $14 billion in debt racked up by Edison and PG&E for the cost of purchasing power last year that could not be passed on to consumers because of a rate freeze. The state plans to resolve the utilities' debt problems by purchasing their transmission systems and issuing revenue bonds that would be repaid by the utilities' customers. The total amount is expected to be roughly $10 billion, Cortright said.

"When you add these pieces up, you have to believe this is just the start of a series of rate increases,'' he said.

Ratepayers could end up paying the costs for several bond issues over a period of 10 years through future surcharges on electricity bills.

The state, through the Department of Water Resources, will receive the bulk of the money from the rate increase. Edison and PG&E will be reimbursed for their own generation, and small independent power producers, known as qualifying facilities, will be repaid as well. A lack of energy production from the qualifying facilities was primarily responsible for rolling blackouts that hit California last week.

The state is expected to float two separate revenue bonds - of $10 billion to $12 billion - to cover the cost of power purchases, the utilities' debts and the cost of buying the utilities' transmission systems.

The Associated Press contributed to this report.

-- Martin Thompson (, March 29, 2001

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