In the News: Recent Developments

March 28, 2001

California Rates Won’t Solve Crisis, Controller Says

(Sacramento, California) Higher rates for PG&E Corp. and Edison International electricity customers won’t cover California’s power-buying costs, which will leave the state with a deficit by October, the state controller said.

The rate increase of $4.8 billion a year, approved yesterday by the California Public Utilities Commission, is intended to pay for power the state buys on behalf of PG&E and Edison utilities. Revenue from the rate increase and other sources for the next 18 months will total $19.4 billion, short of the $26.8 billion needed to buy power, Controller Kathleen Connell said today.

“I don’t see any evidence that the rate increase will be the solution to the state’s cash-flow problems,” Connell said at a news conference in (Sacramento, California.

PG&E’s Pacific Gas & Electric and Edison’s Southern California Edison, the state’s largest utilities, have accrued more than $13 billion in losses buying power on the wholesale market. Connell, a Democrat who is running for mayor of Los Angeles, joins a growing list of officials who say the state hasn’t done enough to fix its power crisis.

California’s budget surplus has dropped from $8.5 billion in January to $3.2 billion, Connell said. The energy crisis probably will eat up the rest of the surplus as well, she said today.

“The deficit hits in the fall,” Connell said.

Even if the state were to receive 100 percent of the proceeds from the rate increase, which Connell considers unlikely, the state would still have a deficit, she said. The state has had a budget surplus since 1996 after it had deficits for four years.


The state’s Department of Finance, a division of the governor’s office, expects to repay all money borrowed from the general fund this year once a bond offering is completed. That bond offering, originally expected to be for $10 billion, may now be as high as $12.4 billion with revenue created by the rate increase, Connell said.

Connell said her conclusions about California’s financial problems assume the state will enter into long-term contracts for 30 percent of power demand, with the rest being bought on the more-expensive spot market.

“The controller doesn’t know and, in fact, no one knows at this point, what our expenditures will be for electricity over the next 18 months,” said Sandy Harrison, an assistant director at the Department of Finance. “It seems she’s estimating kind of a worst-case number there, and we’re trying very hard to get it lower than that.”

The state has been paying about $1.8 billion a month for electricity since it began buying power on behalf of the utilities, Connell said. The state has committed more than $3 billion so far to buying power, said Steve Maviglio, spokesman for Governor Gray Davis.

More Increases?

Lawmakers, analysts and others have already warned that rate increases of up to 36 percent for PG&E customers and 27 percent for Edison customers aren’t high enough to pay for power purchases by the state. The PUC may need to impose further rate increases, they said.

An attorney with the PUC’s Office of Ratepayer Advocates, the consumer-protection arm of the commission, said an increase of 13 cents a kilowatt-hour would be needed to cover the state’s power-buying costs. That’s more than four times the rate increase approved yesterday.

“It’s becoming clear that more increases will be needed,” Jason Zeller said. “The numbers don’t add up.”

Connell said she doesn’t know what yesterday’s PUC rate increase should have been, because she hasn’t seen all the data on the state’s power purchases — data she has been pushing for the governor to make public. It’s also not clear how the PUC decided on the amount of the increase, Connell said, and she’s concerned about the possibility of more increases.

“I am troubled by the fact that consumers are already rocked by a rather substantial rate increase,” she said.


After a meeting today in Sacramento, PUC President Loretta Lynch defended the increase, which she proposed.

“What we did yesterday should suffice,” unless power generators and traders raise their prices further, she said. “But at this point, I can’t imagine that they can raise rates any more than they are already charging us.”

Governor Davis and his advisers are negotiating a purchase of the 32,000 miles of transmission lines owned by PG&E, Edison and Sempra Energy, owner of No. 3 utility San Diego Gas & Electric. The purchase would help PG&E and Edison restructure their debts.

Connell estimated that the state will need to spend $9 billion on the transmission lines. That amount may increase once the state and PG&E reach an agreement, she said.

“Today it’s impossible to know what the grid purchase (price) will be,” Connell said.

Edison Pact Seen

A final agreement with Edison, which reached a tentative pact with the state to sell its power lines for $2.76 billion last month, is expected soon, said Joseph Fichera, chief executive of Saber Partners LLC and Davis’s top financial adviser in the negotiations. That would be followed by agreements with PG&E, then Sempra, he said.

The state is buying power for the two utilities, which are on the verge of bankruptcy. Yesterday’s rate increase covers only future power purchases, not the utilities’ past losses. Under California’s deregulation laws, wholesale prices fluctuate while the price paid to utilities by consumers was fixed.

Credit-rating company Standard & Poor’s Corp. said after the rate increase yesterday that it is still considering lowering its “AA” rating on California’s general obligation bonds, a warning it first issued in January.

While the rate increase “may staunch the drain on the state’s general fund, several uncertainties remain,” including how much revenue will be raised and whether the utilities might file lawsuits over priority claims for the money, S&P said in a release.

“We don’t have any details” to make a judgment yet, said Steven Zimmermann, a managing director in the San Francisco office of S&P.

Bonds Hurt

California’s bonds have been hurt by uncertainty over its power spending, traders said. After upgrades last September, California bond prices traded at levels more expensive than municipal debt elsewhere in the country, meaning the state could borrow at lower interest rates. Bond prices and rates move in opposite directions.

A California general obligation bond maturing in 10 years yielded 4.59 percent in mid-September, or 18 basis points less than the 4.77 percent on an average “AAA” state bond, according to Bloomberg Fair Value. That difference has narrowed to five basis points, or one-twentieth of a percentage point, meaning the state now pays more on a relative basis.

–Daniel Taub in (Sacramento, California) (310) 770-1292 or, with reporting by Dennis Walters in Ojai, California) Christopher Martin in San Francisco, and Anna Marie Stolley in (Sacramento, through the San Francisco newsroom (415) 912-2980/dfr/gcb/cs

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