Today's IssueAlert Sponsors: 


[IMAGE]



The IBM e-Energy Executive Forum ) "Personalization, Partnership, and 
Profitability"


Designed for executives in the utility industry looking to leverage Customer 
Relationship Management in the competitive marketplace. Topics will focus on 
how process and technology can be leveraged to gain competitive advantage. 
Featured speakers will include IT analysts, solution partners, IBM 
executives, and customers including: John Goodman, President of e-Satisfy; 
Richard Grimes, Director of CRM Energy Services; David Bonnett, Global 
e-Energy Sales Executive, Siebel Systems. 

www.ibm.com 

Stay on top of the torrent of e-commerce information news and analysis with 
SCIENTECH'S E-Commerce InfoGrid.  Get over 100 pages of daily tracked and 
verified information regarding what gas, water, electric and utility service 
businesses are doing to keep ahead in the e-commerce industry.  Download a 
sample at www.ConsultRCI.com or contact Chris Vigil, toll-free at (888) 
972-8676 for more information. 
[IMAGE]
The most comprehensive, up-to-date map of the North American Power System by 
RDI/FT Energy is now available from SCIENTECH.  




[IMAGE]

IssueAlert for  March 29, 2001 

California Regulators Approve Massive Rate Increase:
Who Benefits and Who Doesn't?

by Will McNamara 
Director, Electric Industry Analysis

California regulators earlier this week approved electricity rate increases 
topping 40 percent, the largest in the state's history. The California Public 
Utilities Commission (CPUC) voted unanimously to raise rates by 3 cents / 
KWh. The rate hikes, which take effect immediately but won't appear on 
customer bills until May, apply to millions of customers of Southern 
California Edison and Pacific Gas and Electric, the state's two largest 
utilities. Low-income residents are exempt from the increases.  

Analysis: For context, keep in mind that it was only two months ago that the 
CPUC approved its first rate increase in response to the staggering debt of 
SCE and PGOand other factors related to the California energy crisis.  In 
early January, the CPUC approved temporary rate hikes of 9 percent for 
residential customers (about $5 a month for the average customer) and 7 to 15 
percent for businesses. The temporary increases were only to remain in effect 
for 90 days and will be expiring shortly. At that time, both PGOand SCE 
denounced the temporary increase, which was not surprising considering that 
the 9 to 15 percent increase was much lower than the utilities had requested 
(PGOasked for a 26-percent increase and SCE had asked for 30 percent). The 
January rate increase was followed by an additional 10-percent increase that 
is set to take effect next year.  

The CPUC's current ruling increases rates by about 42 percent at SCE and 46 
percent at PG&E. However, the CPUC's measure will most likely serve to 
benefit the state more than SCE or PG&E. The CPUC clearly established that 
none of the additional revenue earned from the rate increases can be used by 
the utilities to pay for past power purchase costs, which have amounted to 
about $13 billion. In addition, the CPUC adopted a proposal by consumer group 
Toward Utility Rate Normalization (TURN) that a rate cap preventing the 
utilities from charging market rates should be extended. In other words, the 
portion of the electric rates that PGOand SCE actually receive from 
ratepayers will remain frozen for the foreseeable future. The CPUC has 
established that the utilities must still recover billions of dollars in 
stranded costs before the rate freeze can be lifted.  

Thus, it appears that most of the revenue accumulated from the rate increases 
will be used to reimburse the state of California for the power purchases it 
continues to make on behalf of the utilities and will not be used to pay off 
any existing debt held by the utilities. PGOalready has responded that the 
CPUC ruling attempts to "completely change the ratemaking rules that are used 
to determine the end of the rate freeze under AB1890." PGOhas said that it 
will challenge this and other aspects of the CPUC ruling. 

However, even though most of the money from the rate increases will go to the 
state, it is also not presently clear if the increases will be sufficient to 
reimburse California for the $4 billion it has already spent to procure 
power, or compensate for the anticipated $14 billion that it will have to pay 
for power this year. Some of the funds generated by the rate increases must 
be used by PGOand SCE to pay for power that they still obtain from suppliers 
or to cover costs for their own power generation. Consequently, the CPUC has 
left open the possibility that additional rate increases may be necessary.  

Although it is still being evaluated how individual customer classes will be 
impacted by the rate increases, it is fairly clear that large commercial and 
industrial customers will end up paying the most.  Loretta Lynch, president 
of the CPUC, maintained that an underlying goal of the increase is to force 
what she referred to as "electricity hogs," or those people who excessively 
use power without concern for the state's supply shortage, to conserve. Lynch 
has said that conservation is the key to staving off additional rate hikes, 
and that the higher rates should put financial pressure on Californians to 
conserve energy, which theoretically should help to reduce the risk of 
blackouts in the state this summer. The average residential cost for a 
kilowatt hour is about 12.5 cents for SCE customers and 10.5 cents for 
PGOcustomers. The new rate increase will add about 3 cents / KWh for the 
customers of both utilities, which as noted averages out to about a 
42-percent increase at SCE and a 46-percent increase at PGO(for electricity 
alone).  

However, Lynch also established that a "tiered" pricing structure, which has 
yet to be fully determined, will be put into place. The tiered pricing system 
will reward customers who conserve energy and penalize those who do not. 
Essentially this means that those customers who use the most power will 
ultimately pay the most, and could face additional rate increases this year, 
which the CPUC did not rule out as a possibility. Under a tiered pricing 
structure, those customers who conserve on their power usage may not see 
their bills increase beyond the rate increase approved this week.  

The CPUC also ruled that PGOand SCE must pay small independent generators in 
the state (known as qualifying facilities) for energy within 15 days of 
delivery. Over the last week, California has again issued Stage 3 
emergencies, signaling that power reserves have fallen to dangerously low 
levels. Contributing to the problem is the fact that QFs have stopped 
producing in recent weeks as a result of the financial problems of PGOand SCE 
and the fact that they have been paid only a small percentage of what they 
are owed for power previously produced. Under normal circumstances, the QFs 
can generate as much as 30 percent of the state's electricity needs. The CPUC 
ruled that PGOand SCE must pay the QFs within 15 days of the end of a billing 
period, or suffer from penalties equal to the amount of their outstanding 
payment. 

Gray Davis, who throughout his tenure as California's governor assured 
Californians that rates would not be increased, attempted to distance himself 
from the CPUC's ruling, and in fact issued a statement that he has no control 
over the commission's decision. Further, Davis said that the rate increase 
was "premature" because the state is still evaluating the financial numbers 
that are needed to make a sound decision. In turn, the CPUC's Lynch 
criticized both the governor and the Federal Energy Regulatory Commission 
(FERC) for "failing to act" on energy rates up to this point. 

In addition to its comments regarding the rate freeze, PGOresponded with a 
mixed reaction to the CPUC's ruling on the rate increase. On one hand, the 
utility said the ruling offered a "welcome dose of realism." However, the 
utility also said that the rate increase "does not offer a comprehensive 
solution, fails to resolve the uncertainty of the crisis and may even create 
more instability." Based on previous statements that PGOhas made, the utility 
believes that the state's fundamental problem has its origins in the 
wholesale market, where prices have often exceeded $300/MWh.  

Some power generators, many of whom have been lambasted by California and 
federal regulators for alleged price gouging, went on record with a favorable 
response to the rate increases. Jeffrey Skilling, Enron's CEO, said, "There's 
been a need to balance supply and demand [in California] and to date I don't 
think anyone has been willing to let the prices rise to help balance supply 
and demand. So [the increases] are a huge step forward in reducing the odds 
of shortfalls."  Keith Bailey, chairman and CEO of Williams, told Reuters 
that he thought the CPUC's rate increase was a rational decision and 
something that the industry has been suggesting for some time.  

Naturally, many consumer activists reacted vehemently against the rate 
increases and protested during the CPUC's proceedings. The main argument of 
the consumer groups is that the CPUC, the governor and FERC have not 
fulfilled their regulatory responsibilities in bringing down electricity 
prices in the state and have not acted with enough force to restrict what 
they perceive as excessive prices for power owned by out-of-state generators. 
This position gained momentum last week when the California ISO reported that 
electricity wholesalers overcharged state utilities by $5.5 billion over the 
past 10 months. Consumer groups also continue to oppose any sort of a 
bail-out for PGOand SCE and believe that the utilities have hidden money 
under the protection of other subsidiaries within their parent companies. 
Both utilities maintain that any financial restructuring activities they have 
implemented have been legal.  

Moreover, while the rate increases may help the state to continue securing 
power on behalf of the utilities, other fundamental problems related to the 
state's energy crisis remain unresolved. The CPUC has asserted that part of 
the benefit of the rate increases is to keep the utilities financially 
solvent. However, at the same time, the commission clearly states that none 
of the extra revenue generated by the rate hikes can be used to pay down the 
utilities' outstanding debt. Consequently, although the higher rates should 
significantly increase revenues for both utilities ($2.3 billion a year for 
SCE and $2.5 billion a year for PG&E), all of this money apparently will be 
turned over to the state and do little to alleviate the utilities' own 
financial problems. This issue still remains unresolved and under the domain 
of the state legislature. However, the likelihood that PGOand SCE would need 
to declare bankruptcy remains strong (unless additional rate increases or 
securitization takes place). In addition, other fundamental problems such as 
the supply / demand imbalance in California and the related volatility of the 
state's wholesale market continue to wreak havoc on the market's 
stakeholders. While the CPUC's rate increases may be a positive step toward 
stabilizing the state's financial, the future remains quite uncertain for 
PGOand SCE. 

An archive list of previous IssueAlerts is available at
www.ConsultRCI.com




Reach thousands of utility analysts and decision makers every day. Your 
company can schedule a sponsorship of IssueAlert by contacting Nancy Spring  
via e-mail or calling (505)244-7613. Advertising opportunities are also 
available on our website. 
SCIENTECH is pleased to provide you with your free,  daily IssueAlert. Let us 
know if we can help you with  in-depth analyses or any other SCIENTECH 
information  products. If you would like to refer a colleague to receive our 
free,  daily IssueAlerts, please reply to this email and include  their full 
name and email address or register directly on our site.  

If you no longer wish to receive this daily email, send a message to 
IssueAlert, and include the word "delete" in the subject line. 
SCIENTECH's IssueAlerts(SM) are compiled based on the  independent analysis 
of SCIENTECH consultants. The opinions expressed in  SCIENTECH's IssueAlerts 
are not intended to predict financial performance  of companies discussed, or 
to be the basis for investment decisions of any  kind. SCIENTECH's sole 
purpose in publishing its IssueAlerts is to offer  an independent perspective 
regarding the key events occurring in the  energy industry, based on its 
long-standing reputation as an expert on  energy issues.  


Copyright 2001. SCIENTECH, Inc. All rights  reserved.