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		 Subject: Electric Restructuring: Two Utilities In California Suffer Under 
Deregulation --- Wholesale ...


 
The Wall Street Journal Europe
Two Utilities In California Suffer Under Deregulation --- Wholesale Power 
Costs Them More Than They Can Charge 
By Rebecca Smith 
? 
09/27/2000 
The Wall Street Journal Europe 
8           
(Copyright (c) 2000, Dow Jones&Company, Inc.) 

California's two biggest utilities are losing so much money buying 
electricity in the state's deregulated market that they've run up deficits 
equivalent to half their net worth in just four months.

If the cost of wholesale power continues to exceed the price utilities are 
allowed to bill their customers, it's conceivable they could become 
technically insolvent sometime next year, putting pressure on regulators to 
orchestrate a multibillion-dollar public bailout. 

Such a scenario is quietly being discussed by bond rating agencies that 
recently reduced their credit outlooks for Pacific Gas and Electric Co., a 
unit of San Francisco-based PGOCorp., and Southern California Edison, a unit 
of Edison International of Rosemead, California. Bond rating agencies say 
they're not sure how much additional debt can be borne by the two affected 
utilities before they'll have difficulty paying their bills.

"If this is just a seasonal aberration, the utilities can get through it," 
says Lori Woodland, analyst for Fitch IBCA "If it goes on for six or nine 
months, it's a very serious situation."

A.J. Sabatelle, senior credit officer at Moody's Investors Service, said, "At 
some point, you have a financial crisis."

The utilities say they're having no difficulty meeting expenses and don't 
envision problems in servicing their debts. But they're vigorously lobbying 
state and federal regulators to change the rules of the game, hoping to 
somehow charge their customers for the shortfall. As such, California's 
experience may be a harbinger of what could happen in other states where 
wholesale power prices have surpassed the amount utilities are allowed to 
charge their rate payers.

Today's situation represents a complete turnabout from what was expected when 
California deregulated its energy market on March 31, 1998. California tried 
to give its utilities a competitive edge nationally by deregulating faster 
than other states and by creating a mechanism to allow investor-owned 
utilities, like PGOand Edison, to quickly pay down debts incurred to serve 
customers under the old regulatory system.

To do this, the state legislature set rates at high levels, which, at first 
generated fat surpluses. As the money piled up, utilities used it to pay down 
debts for generation facilities that looked like they would be unprofitable 
in the new deregulated world. By the end of June, PGO and Edison together had 
collected more than $12 billion (13.75 billion euros) and were on track to 
finish paying down debts well ahead of the March 31, 2002, deadline set by 
the legislature. At that point, rate freezes were to end and retail prices 
were to fluctuate with the market.

But all that went out the window in June when wholesale power prices surged. 
Average prices at state-sanctioned energy markets were four to five times the 
prices a year earlier and three to four times the level utilities could 
charge customers.

The cash-burn rate has been so enormous at PG&E, which serves one in 20 
Americans, that analysts expect its undercollection to exceed $3 billion -- 
half its shareholder equity of $5.7 billion -- by the end of October. 
Southern California Edison finished August with a deficit of $2 billion, 
equivalent to two-thirds of its net worth of $3.2 billion.

That leaves utilities in a bind. They want to end the rate freeze to be able 
to pass on the real cost of electricity to consumers. But as soon as the 
freeze ends, they get clobbered. That's because they'll immediately have to 
book a loss on their power-purchase deficits. What's more, they can't use the 
proceeds from power plant sales to cover those losses; instead, with the 
freeze ending, they'll be obliged to refund that money to ratepayers. In 
PG&E's case, the refunds could total $500 million, while in Edison's case, 
the amount is $254 million.

Publicly at least, utility executives insist that a mechanism will be found 
to let them recoup the money spent on electricity. But that assumes 
politicians will be willing to change a law that protects ratepayers from 
this expense.

Consumer advocates are gearing up for the fight. Nettie Hoge, executive 
director for San Francisco consumer group the Utility Reform Network, says 
ratepayers shouldn't end up footing the bill for a deal cut by utilities that 
benefited them before prices shot up. "Our heart bleeds for the utilities, 
but they have more power to get the wholesale market fixed than we do," she 
says.

Utility executives are now distancing themselves from the legislation that 
got them into such a mess, which was drafted with their assistance. 
PGOChairman Robert Glynn says it's best not to "overanalyze" the "old deal." 
Instead, he says, regulators and legislators should sit down with utilities 
and construct a new agreement as "it's in the broad interests of the state 
not to have critical energy infrastructure look like a leper."

Mr. Glynn says the current deal offers "mutually assured destruction" to both 
utilities and ratepayers. Something must be done, he says, or consumers 
throughout most of the state will experience "a San Diego-style rate shock." 
The utility serving that city, San Diego Gas and Electric Co., ended its 
freeze a year ago and began passing wholesale power costs directly through to 
ratepayers. Legislators intervened this summer, however, and temporarily 
capped retail rates when monthly power bills nearly tripled. As a result, San 
Diego Gas and Electric, a unit of Sempra Energy, also is accumulating a 
deficit. 

Folder Name: Electric Restructuring 
Relevance Score on Scale of 100: 47

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