PUC SET TO MAKE KEY RULING ON UTILITY BILLS;

ELECTRICITY: REGULATORS ARE ABOUT TO DECIDE HOW TO SPLIT PAYMENTS BETWEEN THE
STATE AND UTILITIES. THE FORMULA COULD AFFECT FURTHER RATE HIKES.

BYLINE: RONE TEMPEST, TIMES SACRAMENTO BUREAU CHIEF

DATELINE: SACRAMENTO

BODY:

??How much of utility customers' monthly bills will be used to pay for
California's multibillion-dollar entry into the power market?

??That's the question as regulators set out in coming days to determine how to
split ratepayers' bills between the state, which has been buying electricity
at
the rate of $ 45 million a day since late January, and the debt-laden
utilities,
which continue to deliver that power and collect customers' payments.

??The issue has moved center stage as Gov. Gray Davis continues to negotiate a
rescue of the near-bankrupt Pacific Gas & Electric Co. and Southern
California
Edison. The resolution is crucial to Davis' complex plan to pull California
out
of its costly energy crisis.

??When the Legislature put the state in the power-buying business, it needed
to
ensure eventual reimbursement for its purchases. The result was the CPA, for
California Procurement Adjustment, essentially the portion of customers' bills
left over after the utilities subtract their cost of operations.

??After weeks of wrangling in Sacramento, the front lines in the utility
debate
will now shift for a time to San Francisco, where the California Public
Utilities Commission will determine the size of the CPA and the way it is to
be
divvied up.

??How the commission rules will be the main factor in determining if customers
of the three big investor-owned utilities--PG&E, Edison and San Diego Gas &
Electric--will face rate hikes above the 19% already set in motion. It also
will
have a direct bearing on the state's ability to sell the $ 10 billion in bonds
it needs to finance its long-term power buys without having to commit taxpayer
money.

??"What happens at the PUC is fundamental, in terms of our ability to issue
bonds with investment-grade ratings," state Treasurer Phil Angelides said.
"How
they allocate moneys between the state and utilities will be fundamentally
important to how far our $ 10 billion will go. And it will be fundamentally
important if it is not done in the right way, because it will have a direct
and
negative impact on consumer rates."

??Utility executives disagree with the state on how to allocate the CPA but
agree on its importance.

??"One issue is: How do you divide the pie? And an important and related issue
is: Is the pie big enough?" said Ted Craver, chief financial officer of
utility
parent Edison International, during a conference call Friday with debt
holders.

??Before skyrocketing wholesale electricity prices turned PG&E and Edison into
financial basket cases, the money left over after subtracting their costs of
delivering power to customers was called "headroom," and that was where the
utilities paid off past investments, retired debt and took their profits.

??Under Davis' plan, most such money would be reserved by the state to pay off
the $ 10 billion in bonds to buy electricity and reimburse the treasury for
the
billions the state has already spent to buy power.

??Some consider this a gamble and wonder if there will be enough money
available without either dipping into the state general fund or, more likely,
raising customer rates even further.

??Under the January law, AB 1X, that put California in the power-buying
business, the CPA needs to total at least $ 2.5 billion annually from utility
customers. Angelides on Thursday estimated that the state needs $ 1.3 billion
from CPA funds just to service the bonds.

??PG&E and Edison both say they believe the utilities are entitled to be paid
first out of ratepayer bills under AB 1X.

??The Department of Water Resources, the agency empowered by the state to buy
electricity for utility customers, would get whatever is left over after
utility
expenses are covered, the two companies say. If nothing is left, rates would
be
allowed to rise high enough to pay the water agency what it needs to cover its
electricity expenses under an interim order issued Wednesday by the PUC.

??"If that means rate increases, then the commission has affirmed it will pass
through those rate increases," said Ann Cohn, assistant general counsel for
Southern California Edison. "The DWR will have to determine what its own
revenue
requirement is."

??In filings with the commission, PG&E, the state's largest electric utility,
insists that once its obligations are subtracted the CPA would be virtually
penniless. The most financially troubled of the utilities, PG&E is believed
not
to have ruled out filing for bankruptcy as a way out of its $ 8-billion debt.

??What percentage the commission allots PG&E from customer bills could be a
factor in the utility's decision about seeking protection from creditors under
Chapter 11 of the federal bankruptcy code.

??Meanwhile, Davis is faced with a dilemma of his own that is no less
wrenching. For his rescue plan to work, four things must happen:

??* The cost of electricity purchased by the state must be reduced through
long-term contracts.

??* The amount of money paid by the utilities to alternative-energy
suppliers--generators of solar, wind and other forms of power, which
constitute
about one-fourth of the electricity used by utility customers--must be cut in
half.

??* The utilities must agree to sell electricity to the state from their own
generators, including nuclear plants and hydropower facilities, at slightly
above cost.

??* And the state must obtain favorable rates on its massive bond sales.

??Although some progress has been made on all these fronts, none have been
finalized.

??For example, Davis announced a week ago that 40 long-term supply contracts
had been negotiated with major generators at terms favorable to the state. But
by Friday, fewer than a dozen of the contracts had been signed.

??Moreover, because of the secrecy the Davis administration has imposed on
details of the contracts, it is impossible to tell if the prices negotiated by
the state are low enough to be covered by the $ 10 billion in power bonds
beyond
September.

??Several California newspapers, including The Times, have been denied by
Davis
in repeated requests to obtain details under the California Public Records
Act.
On Friday, Assemblyman Tony Strickland (R-Moorpark) said he plans to file a
lawsuit today demanding that contract details be disclosed.

??If any one of the four key fronts blows up on Davis, the governor would then
be faced with either dipping into the state budget surplus or asking the PUC
to
raise rates beyond the level now in motion. The currently programmed average
19%
hike comes from a temporary 9% increase approved by the commission in December
(and generally expected to be made permanent) and a further 10% boost by next
March (when a rate rollback ordered under the state's 1996 deregulation law
expires).

??Davis has publicly opposed using tax funds to bail out the investor-owned
utilities, on grounds that such a move would be unfair to customers of
municipal
utilities, such as the Los Angeles Department of Water and Power, that remain
financially healthy.

??In its action last week, the PUC made clear that if enough money is not
found
in the CPA to repay the Department of Water Resources, then customer rates
would
have to rise.

??While acknowledging that it will be a close call, administration officials
last week repeated their contention that the governor's rescue plan can be
accomplished without raising rates beyond the 19%.

??"Conceptually, I'm confident that the CPA mechanism operates in a manner
that
gets us appropriate bond capacity," state Finance Director Tim Gage said.

??Angelides warned that the state needs to be wary of the utilities' taking
more than their fair share.

??"As the final divisions of the pie are made," Angelides said, "the utilities
should recover no more out of that pie than the actual cost of generation plus
their regulated return, and the state must be accorded the balance."

??*

??Times staff writer Nancy Rivera Brooks contributed to this story.

LOAD-DATE: March 12, 2001