State's Utilities Could Be in Hot Water as Bills Are Due

Financial Desk
State's Utilities Could Be in Hot Water as Bills Are Due Power: Whether they
can collect funds for escalating costs is a question that worries Wall
Street, others.
CHRIS KRAUL

09/22/2000
Los Angeles Times
Home Edition
Page A-1
Copyright 2000 / The Times Mirror Company
As the meter runs on California's electricity crisis, shock over this
summer's price spikes is giving way to a new concern: uncertainty over
whether and how the state's three investor-owned utilities can collect the
staggering amounts in power costs they haven't been allowed to pass through
to consumers.
The unanswered question is how high the bill--now $4 billion and
counting--will go, and whether consumers will foot all or part of it. And
that there are no easy answers--perhaps short of an overhaul of the state's
deregulated power market, or legislation from officials seemingly reluctant
to act--only adds to the growing anxiety.
Rate freezes in effect at Southern California Edison, Pacific Gas & Electric
and San Diego Gas & Electric, which serve about three-quarters of the state's
residents and businesses, are forcing the utilities to borrow an estimated $1
billion a month to cover their added wholesale costs. Those loans are
draining the companies' resources and threatening their financial structure,
analysts say.
The rising unpaid balance presents a longer-term burden that worries Wall
Street, the state's business interests and, of course, the utilities. If
passed along to consumers, the amount could ultimately negate the promised
benefits of cheap energy that were the reason for being for the landmark
deregulation of California's electricity industry. But making the utilities
absorb the entire "undercollections" would strike a grievous financial blow
to the companies.
The crisis also has created a potential time bomb for shareholders of parent
companies Edison International and PG&E Corp. Skyrocketing wholesale
electricity costs are canceling out deregulation's underlying assumption of
low-cost wholesale energy--and the projected generous retail margins with
which utilities were to pay off nuclear plants and other uneconomical assets.
The deregulation law gave utilities until March 2002 to complete the payoff,
when open-market conditions would take over in their service areas. But with
wholesale electricity costs where they are, the "stranded asset" balances are
growing instead of shrinking--and posing an enormous potential hit for
shareholders, who would have to absorb the remaining "bad asset" costs after
the deadline passes.
Whether the companies' shareholders or ratepayers--or both--end up footing
the undercollection bill, all Californians could pay in the long run,
analysts say, if current market problems remain unresolved and the state is
seen as a less attractive place in which to do business.
How will it all shake out? Wall Street is as much in the dark as
Californians, said Lori Woodland, an analyst with Fitch Inc. of Chicago, one
of three debt-rating agencies to recently lower their outlooks for Southern
California Edison, PG&E, SDG&E and their parent companies.
"It's not clear how regulators view this issue," Woodland said. "They may
permit the utilities to recover their costs [from ratepayers]; they may not.
That's a big uncertainty, and it may remain this way for months. Meanwhile,
power prices are very high, and significant amounts of money are flowing out
the door of the utilities."
The uncertain prospects for collecting those billions of dollars also affect
stock prices, and PG&E in particular has slumped in recent days as the
implications register with investors. From a high of $31.64 on Sept. 11, PG&E
shares have dropped to Thursday's close of $23.19 on the New York Stock
Exchange.
Amid the finger pointing and doubts, many wonder if electricity deregulation
itself could be junked and the state's power industry re-regulated. Others
suggest that rate freezes be extended indefinitely or hope that the Federal
Energy Regulatory Commission now investigating the California electricity
market will take corrective action to make it all better.
Although the parties involved all seem fearful of the dimension of the crisis
and doubtful of any near-term solution, consensus couldn't be less evident
among the major players on how to deal with it. Although all three utilities
agree the current market isn't working, they have not come forward with a
common plan to solve the crisis and aren't working on one, sources say.
Partial lifting of the rate freezes is advocated by PG&E Corp. and Sempra
Energy, parent of SDG&E, the first state utility to pay off its stranded
costs and thus be allowed to fully pass along wholesale costs to customers.
The state Legislature has since stepped in to freeze SDG&E rates after a
political firestorm fed by customer protests over bills that doubled and even
tripled during the summer.
Lifting the rate freeze would stem the tide of electricity undercollections,
a sum the utilities realize is not necessarily collectible in the current
political climate.
"We have to fix these retail rates, which mask the true cost of electricity
and which are creating the shortfall," said SDG&E President Edwin A. Guiles.
In San Diego, for example, the average price paid by SDG&E customers zoomed
from 11 cents per kilowatt-hour last year to 28 cents at its highest point
this summer, before the Legislature stepped in to cap the rates, bringing the
average price paid down to about 10 cents.
So tinkering with the rate freeze could be politically hazardous.
"The pain we saw in San Diego this summer is something we want to avoid for
our customers in Northern and Central California," said PG&E spokesman Jon
Tremayne.
PG&E is expected soon to formally petition the state Public Utilities
Commission to lift its rate freeze. The San Francisco-based utility argues
that the $2.8-billion value of its Northern California hydroelectric
properties, which under deregulation it is required to divest, would erase
its stranded costs and make it eligible to pass along wholesale costs to
consumers.
Southern California Edison's chief financial officer, Jim Scilacci, said the
utility could possibly be eligible to lift the rate freeze later this year if
planned asset sales bring high enough prices.
But with the legally mandated rate freeze in effect in San Diego, observers
doubt that the state would let PG&E and Edison revert to market prices.
In response, some consumer advocates are saying, in effect: Let the
utilities, which ignored warnings of the electricity shortages at the root of
the summer's price spikes, lie in the beds they made and pay the unforeseen
costs of deregulation themselves.
"Essentially this is the result of a deal gone wrong. It's buyer's remorse,"
said Michael Shames of the Utility Consumers' Action Network, a San Diego
watchdog group. "The utilities cut a deal, and now they don't like the terms
of the deal and they want out of it."
Somewhat more flexible is Ed Yates, senior vice president of the
Sacramento-based California League of Food Processors, whose energy-intensive
industry could be devastated by the full brunt of high wholesale energy
costs.
"What frightens us is that the utilities and the state could declare the rate
freeze over and we'd have a San Diego situation," Yates said, referring to
how the rising summer power costs made some San Diego County agricultural
products noncompetitive. "What we want is rate stability. But I don't see a
solution. There are powerful interests at work who don't agree on the goal."
State officials are divided, with some including PUC President Loretta Lynch
looking to the federal government to impose order. Gov. Gray Davis has
discussed holding an energy summit next month to try to hash out solutions,
but no date or agenda have been set.
"The governor is obviously aware of the problems that California utilities
are facing and continues to be committed to making deregulation work and is
calling on everyone involved to act in a responsible way," said spokesman
Steve Maviglio, adding that Davis has set aside much of October to work on
the problem.
Lynch made it clear she will be unreceptive to any solution that would have
consumers absorbing all of the undercollections and that resolving the
utilities' huge debts must come as part of a comprehensive overhaul of
California's dysfunctional electricity market.
"I don't think there is a simple solution. The utilities have a problem, I
agree, but the resolution is much more complex than having the ratepayer eat
the bill," Lynch said. "The answer lies in a broader solution of addressing
the wholesale energy market."
Unclear is how long Wall Street would wait for some kind of resolution before
downgrading utilities' debt, the next step after the negative outlook
revisions.
"There are obviously many challenges presented to the power industry," said
Standard & Poor's David Bodek. "The costs are very high and at the end of the
day have to be borne by someone. If it's the utilities, there are financial
implications that could impact credit quality."