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********************************************************************* Miss last week? Catch up on the latest in the energy industry at: http://www.consultrci.com/web/infostore.nsf/Products/IssuesWatch ********************************************************************* Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring at nspring@scientech.com or (505)244-7613. Advertising opportunities are also available on our website. ********************************************************************* =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, November 27, 2000 PG&E Co. Proposes Huge Rate Increase to Recover Debt By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Last Wednesday, PG&E Co. proposed a five-year "rate stabilization plan" that would allow the utility to pass along to customers more than $3 billio= n in power costs incurred last summer. Under PG&E's plan, submitted to the California Public Utilities Commission (CPUC) for approval, average=20 residential bills of $54.50 would increase to about $63.50 a month as of Jan. 1, 2001. This amount is intended to accommodate potential wholesale price spikes after an existing rate freeze ends by 2002. However, a portion of the incre= ase also would go to paying down the $3.4 billion in unforeseen charges that PG&E insists are not the utility's responsibility. ANALYSIS: Although most of the publicity related to the price spikes this past summer focused on San Diego Gas & Electric (SDG&E), the legacy of the market problems in California is perhaps being carried by PG&E and Southern California Edison (SCE), as both utilities have yet to fully enter competitive markets within the state. This latest proposal from PG&E is an attempt to save itself from what many have claimed will be financial insolvency unless it can free itself from the staggering debt it currently carries. Let's first understand how PG&E found itself in the red, since this is critical to the utility's argument that customers should be responsible for the debt. Due to its obligation to provide energy to customers in its service territory, PG&E must its power on the wholesale market. In addition, under California's restructuring mandates, PG&E had to buy its power out of the Power Exchange (PX) rather than establishing bi-lateral contracts with suppliers. The combination of low supply and high demand drove up the wholesale cost of power in the PX this summer, which PG&E faced as a buyer. Due to the retail rate freeze that is still in effect, PG&E has been unable to pass on the high cost of power to its customers. Although reports vary, on average PG&E has been paying up to 19 cents per kilowatt hour on the wholesale market, when by law it is only allowed to charge its customers on average 5 cents per kilowatt hour. As a result of these factors, PG&E has paid about $3.4 billion more to suppliers than it can bill customers, and this amount is growing by hundreds of millions each month. This explains the utility's motivation in wanting relief from its debt, and also its argument that=01*since it was obligated to buy the power for customers in the first place=01*its customers should ultimately carry the burden for the high costs. PG&E's rate freeze is scheduled to end March 31, 2002, at the very latest, or sooner if it is determined that PG&E's stranded costs have been repaid, something that utility executives say may already have taken place. Due to higher-than-expected revenues and higher-than-market valuations of the utility's assets, it may very well be the case that PG&E's stranded costs are already paid off. Consequently, PG&E has been lobbying to the CPUC for several months for various options that would all result in PG&E custom= ers picking up the $3.4 billion tab. The utility first proposed to retroactivel= y bill customers for the debt. This latest proposal changes the course a bit to provide for a rate increase, but the end result would essentially be the same. Under the proposal, PG&E's rate freeze would end Jan. 1, 2001, and resident= ial and small business customers would begin paying 6.5 cents per kilowatt hour for five years, compared with the current wholesale costs of 15.2 cents per kilowatt hour (generation costs). Without such a rate stabilizati= on plan in place, PG&E warns that an average monthly bill could soar to more than $108 after the rate freeze is lifted. The utility also contends that the portion of the new rate that goes toward paying for the summer's high prices amounts to less than 20 percent of the total monthly increases. To reduce the impact on low-income customers, the utility plans to increase their discount to 25 percent from the 15 percent they currently receive. PG&E said there would be further increases on an annual basis if rates proved not to be high enough to cover costs. If the deficit of uncollected costs grew by $1 billion, for example, then rates at the start of 2002 would rise by one cent a kilowatt hour or around 15 percent to 7.5 cents. Skeptics=01*including some within the CPUC=01*say PG&E is simply looking to= protect its own interests. Carl Wood, a CPUC commissioner, referred to PG&E's propo= sal as "volume two of their bailout request" and noted that the request results in a rate increase for most customers and complete recovery of all of the utility's debt. The consumer group TURN contends that PG&E, and not custome= rs, is obliged to eat the cost of the debt it incurred. The group also argues that, although PG&E has cast its proposal under a guise of customer=20 protection, the proposal only really serves to assure PG&E of full recovery of its debt. In addition, TURN noted that PG&E submitted its proposal to the CPUC on the day before Thanksgiving, conceivably to downplay media attention and avert an immediate negative reaction from the CPUC. PG&E remains adamant that its customers should be made to pay off its debt, and is determined to go to court if the CPUC does not approve its proposal. PG&E believes that federal law would supports its right to bill customers for debt it believes it accrued on its customers' behalf. PG&E's proposal comes at a time when the utility's reputation has taken a beating. A current report from the San Francisco Chronicle reveals that the CPUC received more than 17,000 complaints about PG&E from 1997 to 1999. According to the report, PG&E received more than three times as many=20 complaints per customer as SDG&E during the past three years, which is quite significa= nt considering that SDG&E customers were exposed to bills that increased by two and three times their normal amounts last summer. The comparison betwee= n PG&E and SDG&E was made because they are the only major private utilities in the state to offer both electric and gas service. PG&E also accounts for an unusually high percentage of complaints statewide= . From 1997 to 1999, PG&E complaints represented 56 percent of the total filed with the CPUC, even though it only has 39 percent of gas customers and 46 percent of electric customers served by regulated utilities in the state. Nearly three out of four complaints filed with the PUC against PG&E concerned billing problems. In its own defense, PG&E claims that it faces a unique set of weather-related conditions that make the service it provide= s to customers more fraught with problems, which consequently results in more complaints. It is unknown how state regulators will rule on PG&E's request, but prior comments from Wood and other commissioners would indicate that the utility'= s proposal will be rejected. This casts a dark shadow over the future of PG&E as, without being able to bill customers for its debt, it is uncertain how the utility will continue to remain financially solvent. Ironically, unregulated subsidiaries under the parent company PG&E Corp. continue to perform well and show profits. Yet, the huge debt of PG&E Co. may become an overwhelming anchor around the parent company's neck in the very near future. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH can help you find the answers you need. From simple questions to complex problems, our experts and consultants will get results. Learn more about our six service areas at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/About_RCI.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and type "remove" in the subject line.
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