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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf http://www.consultrci.com ************************************************************************ Miss last week? Catch up on the latest in the energy industry at: http://www.consultrci.com/web/infostore.nsf/Products/IssuesWatch ************************************************************************ =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, October 10, 2000 PG&E's Rate Cap Proposal: Leading the Charge for Re-Regulation, or Protecti= ng Itself from Economic Disaster? 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 Pacific Gas & Electric Co. (PG&E), in filings with the California Public Utilities Commission (CPUC) and California Independent System Operator (Cal-ISO), has requested that a rate cap be placed on wholesale purchases in the state. The utility is asking the CPUC to lower the current rate cap from $250 per megawatt hour to $100, or 10 cents per kilowatt hour. In seeking the rate cap, PG&E is joined by Edison International, the parent company of Southern California Edison, and The Utility Action Network (TURN= ), a ratepayer advocacy group. ANALYSIS: The current rate cap of $250 per megawatt hour in the wholesale market of California resulted from the price spikes experienced in San Diego this summer. As San Diego Gas & Electric had paid off its stranded costs, the retail rate freeze in its area was lifted and SDG&E customers were exposed to market-based prices, which doubled and at times tripled due to increased demand in the state and power supply concerns. PG&E custom= ers were not exposed to the price spikes because, at the time, PG&E had not paid off its own stranded costs and was still under a retail rate freeze. Yet the company has felt the impact from the price spikes just the same. PG&E buys a great deal of its power on the wholesale market, and as a resul= t is about $2.2 billion in debt (some figures suggest it is as high as $2.7 billion). Due to the retail rate freeze still in effect, PG&E has been unable to pass this debt on to customers by raising its rates. In real terms, PG&E was paying up to 19 cents per kilowatt hour on the wholesale market this summer, when by law it was only allowed to charge its customers on average 5 cents per kilowatt hour. In total, PG&E has paid about $2.7 billion more to suppliers than it can bill customers for, and this amount is growing by hundreds of millions each month. This explains the utility's motivation in wanting to see the CPUC further lower the cap on wholesale rates in California. However, even though PG&E as a whole is in debt, the utility=01*as well as other divisions under parent company PG&E Corp.=01*is still making money of= f deregulation in California. For instance, PG&E's Diablo Canyon nuclear plant has been able to capitalize on the high value of power on the wholesa= le market. The utility confirmed recently that altogether its power facilities= =01* the ones left after the utility was forced to divest the bulk of its power assets=01*still provide about $150 million a month to the utility. In addit= ion, PG&E Corp.'s unregulated energy commodity trading operation has been doing very well. And the unregulated National Energy Group=01*which operates in markets outside of California, such as Massachusetts, Rhode Island and New Hampshire=01*posted a 233-percent profit increase for the second quarte= r. Thus, it is important to note the distinction between PG&E and its parent, PG&E Corp. Ironically, as a whole, PG&E Corp. has stated that it does not support rate caps, and has opposed the issue when it has surfaced in other states. PG&E reported second-quarter earnings of $216 million on $2.3 billion in revenue, representing a 26-percent increase over the same quarter last year. Third quarter earnings also reportedly will be strong. This puts PG&E in an awkward predicament. On one hand, PG&E wants to convince=20 shareholders that the company is doing well and making money from the commodities that it sells. On the other hand, PG&E is attempting to convince regulators that it is losing money due to the high wholesale prices that it must pay for power. In fairness, though, the revenue PG&E has earned cannot come anywhere near to paying off the massive debt the company has accrued due to its obligation of serving customers. 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. When this is officially determined by the CPUC, PG&E will argue that customers should be liable for some or all of the debt it has assumed while the rate caps were in place. The CPUC has scheduled a hearing to address these issues on Oct. 19. The core question of these proceedings will be whether or not PG&E should be allowed to turn over its debt to customers through rate increases once the rate freeze is lifted= . PG&E wants to be able to retroactively bill customers for its debt, based on the date which the CPUC determines that PG&E had in fact paid off its stranded costs, a point groups such as TURN will surely protest. It may seem surprising that TURN was among the group with PG&E that filed the petition to lower the rate cap on wholesale prices. Typically, TURN and PG&E (along with most utilities) are at polar opposites regarding most issues. However, both agree that wholesale rates are too high and want to see a new cap put into place, but for completely different reasons. TURN says that PG&E and other utilities took a risk when agreeing to the rate freeze and they should not be allowed to pass debts that resulted from that risk onto customers. TURN continues to retain a watch over the proceedings related to PG&E's proposal, specifically with regard to the possibility that the CPUC will allow the utility to raise rates on customer= s. Within the course of these new developments, it's important to be clear on PG&E's motivations. Some California lawmakers and consumer advocates have called for a complete return to regulation, arguing that deregulation in California has become a failed experiment. Many have surmised that PG&E'= s proposal for wholesale caps is essentially a call to return California to a regulated structure. I think this is a misinterpretation. PG&E has very clearly stated that its proposal is a "necessary short-term step to try to bring prices back in line." PG&E's efforts really shouldn't be viewe= d as a move to return California to a regulated market. Rather, PG&E is merel= y attempting to protect its own interests. The utility wants to secure tempor= ary lower rates for the power it needs to buy on the wholesale market and trans= fer its debts to customers once the rate freeze is lifted. A return to regulati= on via a permanent rate cap would not be in PG&E's best interests as it contin= ues to sell power from its nuclear plant. In addition, PG&E probably recognizes that regulation would discourage additional companies from building new power plants in California, which would not be good for the long-term econo= my of the state. This also would do little to lower wholesale prices in=20 California. As we discovered this summer, the less supply, the higher the price for power. PG&E's proposal to lower rate caps on wholesale prices is, more than anythi= ng else, an attempt to protect itself from what it perceives as disastrous economic impact if it is not able to transfer its debt to customers. A recent Wall Street Journal report inferred that if wholesale prices continu= e to exceed what PG&E can charge customers, the utility could become=20 "technically insolvent" sometime next year. It will be interesting to see if the CPUC has the same perception when it evaluates PG&E's proposal later this month. =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 Need to design and implement your IT infrastructure? Learn more about=20 SCIENTECH's Information Technology team and what they can do for you at: http://www.consultrci.com/web/rciweb.nsf/web/Depts-IT.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=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 including e-commerce and telecom in the electric utili= ty industry. 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 in the body of the email type "remove."
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