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SCIENTECH IssueAlert, November 27, 2000
PG&E Co. Proposes Huge Rate Increase to Recover Debt
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Last Wednesday, PG&E Co. proposed a five-year "rate stabilization plan"
that would allow the utility to pass along to customers more than $3 billion
in power costs incurred last summer. Under PG&E's plan, submitted to the
California Public Utilities Commission (CPUC) for approval, average 
residential
bills of $54.50 would increase to about $63.50 a month as of Jan. 1, 2001.
This amount is intended to accommodate potential wholesale price spikes
after an existing rate freeze ends by 2002. However, a portion of the increase
also would go to paying down the $3.4 billion in unforeseen charges that
PG&E insists are not the utility's responsibility.

ANALYSIS: Although most of the publicity related to the price spikes this
past summer focused on San Diego Gas & Electric (SDG&E), the legacy of
the market problems in California is perhaps being carried by PG&E and
Southern California Edison (SCE), as both utilities have yet to fully enter
competitive markets within the state. This latest proposal from PG&E is
an attempt to save itself from what many have claimed will be financial
insolvency unless it can free itself from the staggering debt it currently
carries.

Let's first understand how PG&E found itself in the red, since this is
critical to the utility's argument that customers should be responsible
for the debt.  Due to its obligation to provide energy to customers in
its service territory, PG&E must its power on the wholesale market. In
addition, under California's restructuring mandates, PG&E had to buy its
power out of the Power Exchange (PX) rather than establishing bi-lateral
contracts with suppliers. The combination of low supply and high demand
drove up the wholesale cost of power in the PX this summer, which PG&E
faced as a buyer. Due to the retail rate freeze that is still in effect,
PG&E has been unable to pass on the high cost of power to its customers.
Although reports vary, on average PG&E has been paying up to 19 cents per
kilowatt hour on the wholesale market, when by law it is only allowed to
charge its customers on average 5 cents per kilowatt hour.  As a result
of these factors, PG&E has paid about $3.4 billion more to suppliers than
it can bill customers, and this amount is growing by hundreds of millions
each month. This explains the utility's motivation in wanting relief from
its debt, and also its argument that*since it was obligated to buy the
power for customers in the first place*its customers should ultimately
carry the burden for the high costs.

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. Consequently, PG&E has been lobbying to the CPUC
for several months for various options that would all result in PG&E customers
picking up the $3.4 billion tab. The utility first proposed to retroactively
bill customers for the debt. This latest proposal changes the course a
bit to provide for a rate increase, but the end result would essentially
be the same.

Under the proposal, PG&E's rate freeze would end Jan. 1, 2001, and residential
and small business customers would begin paying 6.5 cents per kilowatt
hour for five years, compared with the current wholesale costs of 15.2
cents per kilowatt hour (generation costs). Without such a rate stabilization
plan in place, PG&E warns that an average monthly bill could soar to more
than $108 after the rate freeze is lifted. The utility also contends that
the portion of the new rate that goes toward paying for the summer's high
prices amounts to less than 20 percent of the total monthly increases.
To reduce the impact on low-income customers, the utility plans to increase
their discount to 25 percent from the 15 percent they currently receive.
PG&E said there would be further increases on an annual basis if rates
proved not to be high enough to cover costs. If the deficit of uncollected
costs grew by $1 billion, for example, then rates at the start of 2002
would rise by one cent a kilowatt hour or around 15 percent to 7.5 cents.

Skeptics*including some within the CPUC*say PG&E is simply looking to protect
its own interests. Carl Wood, a CPUC commissioner, referred to PG&E's proposal
as "volume two of their bailout request" and noted that the request results
in a rate increase for most customers and complete recovery of all of the
utility's debt. The consumer group TURN contends that PG&E, and not customers,
is obliged to eat the cost of the debt it incurred. The group also argues
that, although PG&E has cast its proposal under a guise of customer 
protection,
the proposal only really serves to assure PG&E of full recovery of its
debt. In addition, TURN noted that PG&E submitted its proposal to the CPUC
on the day before Thanksgiving, conceivably to downplay media attention
and avert an immediate negative reaction from the CPUC.

PG&E remains adamant that its customers should be made to pay off its debt,
and is determined to go to court if the CPUC does not approve its proposal.
PG&E believes that federal law would supports its right to bill customers
for debt it believes it accrued on its customers' behalf.

PG&E's proposal comes at a time when the utility's reputation has taken
a beating. A current report from the San Francisco Chronicle reveals that
the CPUC received more than 17,000 complaints about PG&E from 1997 to 1999.
According to the report, PG&E received more than three times as many 
complaints
per customer as SDG&E during the past three years, which is quite significant
considering that SDG&E customers were exposed to bills that increased by
two and three times their normal amounts last summer. The comparison between
PG&E and SDG&E was made because they are the only major private utilities
in the state to offer both electric and gas service.

PG&E also accounts for an unusually high percentage of complaints statewide.
From 1997 to 1999, PG&E complaints represented 56 percent of the total
filed with the CPUC, even though it only has 39 percent of gas customers
and 46 percent of electric customers served by regulated utilities in the
state. Nearly three out of four complaints filed with the PUC against PG&E
concerned billing problems. In its own defense, PG&E claims that it faces
a unique set of weather-related conditions that make the service it provides
to customers more fraught with problems, which consequently results in
more complaints.

It is unknown how state regulators will rule on PG&E's request, but prior
comments from Wood and other commissioners would indicate that the utility's
proposal will be rejected. This casts a dark shadow over the future of
PG&E as, without being able to bill customers for its debt, it is uncertain
how the utility will continue to remain financially solvent. Ironically,
unregulated subsidiaries under the parent company PG&E Corp. continue to
perform well and show profits. Yet, the huge debt of PG&E Co. may become
an overwhelming anchor around the parent company's neck in the very near
future.
==============================================================
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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