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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Ann M Schmidt X-To: Steven J Kean X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf TAKING A HARD LINE PG&E Insists ratepayers pick up $3 billion tab for deregulated electricity David Lazarus, Chronicle Staff Writer Friday,?October 27, 2000 ,2000 San Francisco Chronicle URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/10/27/B U47723.DTL&type=business San Francisco's Pacific Gas and Electric Co. plans to come out with guns blazing today when it makes its case to state regulators for why ratepayers should be saddled with about $3 billion in unforeseen power costs. But while the utility insists it is guided first and foremost by a sense of what is right and fair, the reality is that PG&E is maneuvering with its back to the wall. Wall Street, that is. ``No one wants to hold stock in a company that is subsidizing its customers,'' said Paul Patterson, an analyst at Credit Suisse First Boston in New York. ``If PG&E has to swallow this $3 billion, investors will run in droves.'' ``The whole idea of Wall Street is to enhance shareholder value,'' agreed Carol Coale, an analyst at Prudential Securities in Houston. ``PG&E's management has to be seen to be doing that.'' In documents filed with the California Public Utilities Commission late Wednesday, the utility said it will not be left ``holding the bag'' for outstanding electricity costs accrued when wholesale power prices spiked sharply higher during the summer. Because of a current rate freeze, the utility has been unable to pass along those additional costs in monthly power bills. Customers of San Diego Gas & Electric saw their bills triple this summer after SDG&E became the first California utility to qualify for an early end to the rate freeze. A senior PG&E official, requesting anonymity, told The Chronicle yesterday that there is virtually no room for compromise on whether the company will swallow even a portion of that $3 billion in unexpected costs. He said PG&E intends to recoup its expenses either from customers or -- and this is a longshot -- in the form of refunds from power companies. ``There is a strong feeling here that we have every right to collect every dime, either from generators or customers,'' the official said. ``We have a pretty strong leg to stand on, under federal law, to get all of the money we've had to pay out.'' Analysts were mixed on whether federal law does indeed favor PG&E and fellow utility Southern California Edison on this question. Some agreed with the companies that electricity distributors cannot be held accountable for surging wholesale power prices and that ratepayers must pay for the power they use. But others pointed out that electricity customers were told when California's energy market was deregulated in 1996 that they would be protected by a rate freeze until early 2002 and that this rate freeze precludes utilities from passing along any extra charges until that time. Legal matters aside, no one doubts that the stakes are high for investors and that this is very much on the minds of PG&E executives as they go into today's PUC hearing. ``If you're an owner of the stock, you want management to take a position that minimizes loss,'' said Paul Fremont, an analyst at Jefferies & Co. in New York. PG&E's share price dipped 44 cents yesterday to $27.13, still well above its 52-week low of $19.69. ``PG&E has to stick to its guns to maintain financial stability,'' said Patterson at Credit Suisse First Boston. Prudential's Coale stressed that shareholders would not take kindly to any solution that involves a big hit on PG&E's bottom line. ``What shareholders do not want to see is a huge write-down,'' she said. ``You would hope for the solvency of the company that PG&E's management would care most about shareholders, not ratepayers, at this point.'' That seems to be the case. The senior PG&E official said the only thing the utility is prepared to negotiate is the length of time ratepayers should be given to pay off the $3 billion. He said four years of surcharges atop customers' regular monthly bills is one possibility but quickly added that PG&E could be flexible on how long the surcharges are imposed. ``That's where we see room for compromise,'' the official said. Until recently, the PUC had been unwilling to even discuss whether utility customers, and not the utilities, should be paying the unforeseen power costs. That changed when the commissioners recently agreed to accept a request from PG&E and Southern California Edison that they revisit the matter. Today's public hearing is the first step in that process. For its part, Edison wants to pass along to customers about $2.3 billion in costs over a five-year span. PUC President Loretta Lynch said commissioners are trying to keep an open mind about how best to resolve the dispute, which threatens to explode from a regulatory issue into a political hot potato. ``A lot of folks are pitching a lot of ideas,'' she said. ``No decisions have been made.'' In fact, a major wild card is what the Federal Energy Regulatory Commission will do, if anything, to stabilize California's electricity market. The commission is scheduled to issue a draft report Wednesday outlining its intentions. Federal commissioners refused yesterday to discuss the contents of their draft report, saying only that they have been working hard to determine whether California's power prices are ``just and reasonable,'' and, if not, what to do about it. ``The California situation has been incredibly difficult and thought provoking and time consuming,'' said Commissioner Linda Key Breathitt. While federal regulators have authority to demand that power generators refund consumers if found to have illegally manipulated prices, few observers expect such a harsh step to be taken. Rather, the commissioners are widely expected to impose new restrictions on wholesale electricity prices for a limited period of time. California wholesale prices are now capped at $250 per megawatt. Ironically, surging wholesale prices could also benefit PG&E customers. The utility reaps profit from selling power it generates into the wholesale market and has proposed that revenue from its network of dams and the Diablo Canyon nuclear power plant be shared in the future with ratepayers. If such a scheme were to get the green light from the PUC, the senior PG&E official said this could shave about one-fourth off the $3 billion and ``lessen the pain a little bit'' for ratepayers. Ultimately, however, the utility will have to convince not just the PUC but also its customers that passing along billions of dollars in extra charges is the most appropriate solution. ``It's going to be a difficult sell, public relationswise,'' said Herbert Hart, an analyst at Redwood Securities Group in San Francisco. ``PG&E just got done reporting an excellent quarter.'' The utility's parent company, PG&E Corp., reported this week that its quarterly operating income jumped 34 percent to $248 million (68 cents per share) from $185 million (50 cents) a year ago. Whatever else, Hart said, ``it's important to maintain good relations with your customers.'' E-mail David Lazarus at dlazarus@sfchronicle.com. ,2000 San Francisco Chronicle ?
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