In the News: Recent Developments

July 23, 2001

State sees no need to hike rates


Saying electricity rates have dropped lower than even they expected, state officials said Sunday they can pay billions of dollars for electricity without raising customer rates again.

In a much-awaited estimate of its revenue needs, the Department of Water Resources, which buys electricity on behalf of the state’s three troubled investor-owned utilities, said existing rates are sufficient to pay the utilities’ expenses and cover the state’s power purchases.

“There is plenty of money,” said S. David Freeman, senior adviser to Gov. Gray Davis. “There is no need for a rate increase for anybody, period.”

The cost projections are crucial to the state’s plan to sell $12.5 billion in bonds in September — and begin digging its way out of the energy crisis. The proceeds will replenish the state treasury for roughly $8 billion spent on power purchases since January and finance billions more in future buys.

The bonds will be repaid through customer rates, and the governor’s critics and some independent experts had speculated that rates would have to go up again to cover the costs. The state Public Utilities Commission, which will have the final say on rate increases, raised rates an average of 30 percent in March for customers of Pacific Gas and Electric Co. and Southern California Edison.

The PUC, to the dismay of consumer advocates, is preparing to adopt a new policy Aug. 23 in which it surrenders much of its regulatory authority and simply promises to raise rates whenever the state water agency needs more money.

Yet Joseph Fichera, a Wall Street financier advising Davis, said the updated numbers rule out another increase “for the foreseeable future.”

To meet its revenue requirements, the agency needs slightly more than half of the billions generated by the March rate increase, Fichera said. The rest of the money should be enough to cover the utilities’ internal costs, he said.

There’s enough money left over in existing rates even to gradually pay off the billions Edison owes to creditors, Fichera said. However, creditors won’t wait long enough for Edison to pay those debts, which means the state Legislature still needs to pass a rescue plan to keep the utility from joining PG&E in bankruptcy, Fichera said. The Senate passed a rescue package last week but Edison said it doesn’t go far enough to restore the utility to creditworthiness.

Officials with the investor-owned utilities said they were still reviewing the Department of Water Resources numbers and wouldn’t comment Sunday.

Key to state officials’ optimism about rates is a dramatic slide in electricity prices the past few weeks. In late April, when prices were averaging about $269 a megawatt-hour, the state forecast that summertime prices would drop to $195, a prediction that generated considerable skepticism among independent experts. In fact, prices have fallen far below that, and the state’s updated forecast assumes prices will average $129 through the end of September, Fichera said.

“Back in April, there wasn’t just criticism of our forecasts — people mocked our numbers,” Freeman said. “We did know what we were doing.”

Fichera said prices have slumped largely because of the state’s decision to sign a slew of long-term contracts, which has reduced its dependence on spot purchases and effectively tamed that market. He also credited the state’s conservation program and the new price controls imposed by the Federal Energy Regulatory Commission.

Fichera said the projections are “reasonably conservative” and allow for the possibility that electricity prices might shoot back up. There’s another buffer, in the form of more bond financing: If the projections are wrong and the water agency needs more money, the state can borrow more, which would effectively defer the higher costs to future years, Fichera said. Although the agency expects to sell $12.5 billion in bonds, it has authority from the Legislature to sell up to $13.4 billion.

Despite the significant drop in prices, the Department of Water Resources reduced its revenue requirements only slightly from April. That’s because the state is picking up some additional power costs that weren’t in the equation in the spring — the cost of buying standby power.

Before, standby power — in which generators are paid to stand by and be ready to produce — was purchased by the Independent System Operator, which manages the state’s power grid. Now, because of an order by federal regulators, the water department is responsible for those costs, said Ron Nichols of Navigant Consulting Inc., which is advising the department.

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