Please see the following articles:

Contra Costa Times, Tues, 3/27:  "Rate hike in the offing"

Contra Costa Times, Tues, 3/27:  "Power Rate Hike Reaction Mixed

Sac Bee, Tues, 3/27:  "State Proposeselectric rate hike: PUC suggests 30
percent average increase;
industry hit hardest"

Sac Bee, Tues, 3/27:  "Cox new minority leader in GOP coup: Assembly
conservatives want to flex energy muscle"

Sac Bee, Tues, 3/27:  "Dan Walters: An absolutely incredible tale"

Sac Bee, Tues, 3/27:  "Daniel Weintraub: No crisis is big enough to slow
Davis' fund spree"

San Diego Union, Mon, 3/26:  "Energy woes give nuclear plants a life

San Diego Union, Mon, 3/26:  "Top State Regulators Proposes 40 percent rate
increase"

San Diego Union, Mon, 3/26:  "Supplier Duke offers to forego some charges"

LA Times, Tues, 3/27:  "PUC to Vote on Big Rate Hike; OK Is Likel"

LA Times, Tues, 3/27:  "Davis Ducks Reality on Electricity 'Overcharges' "
(Commentary)

SF Chronicle, Tues, 3/27:  "PG&E Bills Set to Rise 40%
TIERED RATES: PUC meets today, expected to enact system penalizing heavy
users"

SF Chronicle, Tues, 3/27:  "Governor's Static Cling May Cost Him Politically
Davis acts stunned at PUC's proposed rise in energy rates"

SF Chronicle, Mon, 3/26:  "Pleas for Warning Of Next Blackout
ISO to address customers' biggest gripe about outages"

Mercury News, Mon, 3/26:  "PUC set to give up on rate freeze; increases up to
36% likely"

Mercury News, Mon, 3/26:  "Gov. Davis' hard line against higher rates is fuel
for challengers"

Mercury News, Mon, 3/26:  "Consumer frustrations keeps pace with rate hikes"

Orange County, Tues, 3/27:  "Seeing the light in energy crisis"   (Commentary)

Orange County, Tues, 3/27:  "Power rates may surge"

Orange County, Tues, 3/27:  "Senators struggle with PG&E rescue talks"

Orange County, Tues, 3/27:  "Resigned to Higher rates
Business officials see little option, though product prices will likely go up"

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Rate hike in the offing
By Mike Taugher
TIMES STAFF WRITER
SAN FRANCISCO -- An energy crisis that has already brought widespread power
blackouts is now set to hit Californians' bank accounts with a large rate
increase that is headed for approval today.
State regulators are weighing a 30 percent hike on electricity rates that
would come on top of a smaller, temporary rate increase that was adopted in
January. The temporary increase also is expected to be made permanent today
by the Public Utilities Commission.
Still to be determined is the question of who will bear the brunt of the rate
increases, which are expected to appear on the May bills of California's 7.5
million utility customers.
Loretta Lynch, president of the Public Utilities Commission, said the rate
increases are needed to replenish more than $4 billion in ongoing electricity
purchases by the state treasury and allow utilities to continue to buy
electricity from alternative energy companies.
The rate increase also satisfies conditions that are needed before the state
can borrow $10 billion or more to finance its power buys.
Lynch also said she will propose a tiered rate structure that would penalize
those who use the most electricity and leave nearly half the state's utility
customers, who use relatively little, untouched by the increase.
Seen as inevitable by many observers, the politically volatile issue of rate
hikes is nevertheless another admission that the state's foray into
electricity deregulation, which was supposed to lead to cheaper and more
plentiful electricity, has failed.
Consumer groups, calling the proposed rate hikes a $4.8 billion gift to
utilities, responded by saying they would hasten plans to take the state's
energy mess to voters through a ballot initiative. Among their proposals:
rolling back rates, forcing a state takeover of power plants or implementing
an excess profits tax on energy companies.
"The ratepayer revolt is under way," said Harvey Rosenfield, president of the
Foundation for Taxpayer and Consumer Rights. "The voters are going to have to
take matters into their own hands at the ballot box. It will be a bloodbath."
Meanwhile, Gov. Gray Davis immediately distanced himself from the rate-hike
proposal.
"The governor believes tiered pricing could promote the conservation
California needs if structured properly but was not convinced of that by the
data made available to him last week," according to a statement from Davis'
office Monday. "He has asked for more information, which should be available
this week. The governor has not had conversations with any commissioners
about a potential rate hike. It is still his hope and expectation that this
matter can be resolved within the existing rate structure."
Some observers were incredulous, noting Davis' reputation as a micromanager
who keeps appointees on a short leash.
"The PUC has been run like his personal cabinet for a year and a half," said
Gary Ackerman, director of the Western Power Trading Forum, a Menlo
Park-based association of electricity generators and traders. "This one's got
me floored. The governor once again is a day late. The Oscars for best actor
were last night."
Confronted with teetering utilities, alternative energy companies that were
refusing to sell power in the state and state coffers bleeding by about $50
million a day, Lynch unveiled a set of four interwoven decisions that the
commission is scheduled to vote on today.
The measures would:
Raise consumer rates by 3 cents per kilowatt-hour, and make permanent a 1
cent temporary hike implemented in January. Before the January rate hike,
Pacific Gas & Electric Co. customers paid a 9.4 cents per kilowatt-hour for
electricity, 5.4 cents of which was earmarked for the utility's energy buys.
If the hike is approved, those figures will rise to 13.4 cents per
kilowatt-hour on average, 9.4 cents of which will be used for electricity
purchases.
Determine how much of that money will be used to reimburse the state
treasury, which has committed more than $4 billion to electricity purchases
since mid-January. Lynch said Monday that although the state has not yet
submitted data on its power buys, she believes the proposed rate hike will
fully reimburse state coffers.
Order the utilities to pay alternative energy companies, some of which have
shut down operations because they are not getting paid. The order would apply
to buys already under contract but not to the $1.5 billion that the utilities
owe for electricity already used.
Launch a PUC investigation into whether the utilities have improperly
sheltered profits in their holding companies and subsidiaries.
The proposals focus on the state's power buys and the utilities' upcoming
power purchases and do nothing to address directly the mountain of debt that
the utilities have accumulated. PG&E and Southern California Edison owe banks
and energy companies billions.
"We're still going through the proposed decisions and would like to wait
until we have fully analyzed the material before we comment on it," said Ron
Low, a spokesman for PG&E.
By raising rates, state regulators would lessen the severity of blackouts
this summer but would probably not prevent them entirely, according to
industry groups.
"In any circumstance, we're going to have a very difficult summer," said Jan
Smutny-Jones, director of the Independent Energy Producers Association. "It's
too early to say how sufficient it is, but it (the commission's willingness
to raise rates) is an important recognition of reality."
Lynch acknowledged the measures will only partly address electricity
problems.
She called on federal regulators to impose regionwide caps on the wholesale
electricity market and order more refunds when prices have been unreasonably
high.
If the commission adopts the rate hike today, its next step will be to
determine who pays what portion.
Staff writer Matt Sebastian contributed to this story.
Mike Taugher covers the environment and energy. Reach him at 925-943-8324 or
mtaugher@cctimes.com.
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Published Tuesday, March 27, 2001
Power rate hike reaction mixed
Wall Street likes proposal, but local business leaders have some misgivings
BY RICK JURGENS
TIMES STAFF WRITER
The electricity rate hike proposed Monday by the state's top utility
regulator elicited cheers on Wall Street, where the prices of California
utility stocks rose about 30 percent, but got a more cautious reaction from
local business leaders.
"This is a regrettable necessity," said Justin Bradley, energy program
director for the Silicon Valley Manufacturing Group, a San Jose-based group
of 190 technology employers.
A rate hike won't in itself solve the state's electricity crisis, said Bruce
Kern, executive director of the Economic Development Alliance for Business in
Oakland. Reliability is the key business concern about electricity, and
restoring reliability will require more generating capacity and conservation
assistance for companies, he said.
Despite a surge in wholesale electricity costs since April 2000, California
regulators have allowed only a 9 percent increase in retail prices and Gov.
Gray Davis has adamantly rejected calls for further rate hikes. But Public
Utilities Commission President Loretta Lynch, a Davis appointee, signaled
that the administration may be ready to retreat with a plan to hike the
average retail price by 3 cents a kilowatt hour. That would be a 46 percent
increase over the current average rate in the PG&E service area of 6.4 cents
a kilowatt hour, excluding distribution and other costs not directly related
to power procurement.
That didn't faze Allan Zaremberg, president of the California Chamber of
Commerce. "We have looked at it as inevitable for some time," he said of the
rate hike. Higher natural gas costs, along with the dry winter that reduced
the availability of hydroelectric power throughout the West, were bound to
boost retail bills, he said.
Bradley, speaking for tech manufacturers, said Lynch's plan promises to stem
the tide of state agency spending on electricity, direct some revenue toward
small generators and put some downward pressure on wholesale prices but is
only one step toward a long-term solution. "We need an overall philosophy and
strategy to restore normalcy to this market," he said.
Lynch, who described her offering as "merely a proposal to jumpstart the
public process of rate design," included as a "principle" plans to narrow the
gap between residential rates and those of industrial users, whose average
bill now logs in at about 3 cents a kilowatt hour less. Lynch suggested that
that differential be shaved by about a penny an hour.
That isn't the direction that Kern would like to see things move. "Our main
concern would be that if there is a rate increase it be (done) equitably and
not disproportionately affect business in this region," he said. "We're
beginning to hear employers say, 'Maybe it's just too costly to do business
here,'" he warned.
Higher electricity rates might force price increase and a cutback in
expansion plans at Helios Farms Nursery in Brentwood, which runs electric
water pumps for up to eight hours a day during the summer. "It's too soon to
tell the affect" of the rate increase, said Maria Orfanos, one of the owners.
"We'll have to see what happens this summer. We need to water the plants."
But rate hikes promise to remove the cloud of debt -- billions of dollars
worth -- that now hovers over the utilities. The gap between high wholesale
prices and fixed retail rates cost PG&E as much as $4.1 billion in after-tax
profits during 2000, the company said in a securities filing Monday. But that
didn't seem to bother investors, whose heavy buying made California utilities
among the stock market's big gainers Monday. PG&E's stock closed at $13.75,
up $3.10 or 29.1 percent, and Edison International, Southern California's
largest electricity seller, closed at $14.55, up $3.35 or 29.9 percent.
Edison issued a late-day response to Lynch's move that seemed designed to
dampen investors' enthusiasm. "A cursory review of the multiple complex
proposals suggests that substantial improvements will be needed if they are
to fully align costs with rates and restore the creditworthiness of the
state's utilities in the eyes of the financial community," it said. Edison
also called for the PUC to allow "flexibility to meet unknown future shifts
in the costs of generation."
A PG&E spokesman said the company was still analyzing the "inch-thick stack
of materials" and had no comment. An earlier PUC proposal to require the
utility to pay small generators would leave the utility with "insufficient
revenues ... to recover the cost of its own generation" and to pay other
contracted generators, it said in its filing.
Kern, the EDAB chief, said he was encouraged by the state's plan to issue
industrial revenue bonds to finance stand-by generators for businesses and to
install energy-efficient lighting.
Staff writer Chris Metinko also contributed to this report. Rick Jurgens
covers economic developments and trends. Reach him at 925-943-8088 or at
rjurgens@cctimes.com.
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State proposes electric rate hike: PUC suggests 30 percent average increase;
industry hit hardest
By Carrie Peyton and Dale Kasler
Bee Staff Writers
(Published March 27, 2001)
The wildfires sweeping California's electric market burned through to
consumers' wallets Monday, with a proposal that appeared virtually certain to
boost overall rates roughly 30 percent.
Some customers, including households that use little electricity, could be
spared entirely, while others, including some of the state's biggest
manufacturers, could see increases of close to 90 percent.
It would be the biggest rate increase in state history, and there is no
guarantee it would be enough to resolve California's electricity crisis,
state-funded ratepayer watchdogs said.
While Gov. Gray Davis sought to distance himself from the proposal, industry
observers said it stretched credulity to imagine his appointees to the state
Public Utilities Commission would have gone against his wishes.
"Anyone who wants to claim this isn't part of his plan is going to fly in the
face of everything he's told us. It's just not likely," said Camden Collins,
a Bay Area energy consultant who has held high-level posts with the PUC and
the state grid operator.
After a weekend marathon of last-minute calculations, the PUC issued a
wide-ranging, sometimes contradictory package of proposals Monday for
probable commission votes today.
In one of the biggest conflicts, a PUC administrative judge who oversaw rate
hearings urged no increase at all, while commission President Loretta Lynch,
who leads a Davis-picked PUC majority, urged a hike of 3 cents per
kilowatt-hour.
Other key proposals include:
Making permanent a temporary 9 percent - 1 cent per kilowatt-hour - rate hike
imposed in January for customers of Pacific Gas and Electric Co. and Southern
California Edison.
Starting immediate discussions on designing rates that would fall hardest on
the heaviest users, changes that could appear in May electric bills.
Revising the formula for paying alternative power producers, known as
"qualifying facilities," in a way that several said still wouldn't solve a
simmering payment dispute.
Creating a formula for utilities to pay the state for electricity purchases
made on their behalf since January, which appears to clear the way for the
state to issue power purchase bonds.
Reclassifying past debts and expenses to sharply cut utilities' estimates of
their losses - a move sought by consumer groups.
Consumer groups blasted the proposal, investors welcomed it, and utilities
were cautious, with PG&E declining immediate comment and Edison saying it
still didn't go far enough. Generators and economists labeled it a good first
step.
"We have unfortunately come to the conclusion that a rate increase is
needed," Lynch said. "It's time to pay the power bills for California."
Customers of the Sacramento Municipal Utility District would not be affected,
although it is considering its own 16 percent rate hike, also driven by
skyrocketing wholesale costs.
Lynch's proposal would let PG&E collect an extra $2.3 billion annually from
customers, increasing PG&E's system average rate from 10.4 to 13.4 cents a
kilowatt-hour. That comes on top of January's 1-cent average increase, for a
total rate hike this year of more than 40 percent.
But individual rates could play out very differently. Some people would
escape entirely, including those on special low-income rates and residential
customers whose electricity use falls below a state-set threshold. Companies
big enough to own their own substations could face hikes of 87 percent;
agricultural consumers, 10 percent to 24 percent; and other businesses, 41
percent to 58 percent.
"Electricity hogs will have to pay more," Lynch said.
For his part, Davis told reporters in Los Angeles, "As governor, I have not
decided there should be a rate increase, and as governor, I have not decided
that tiered pricing makes sense."
Although Davis has appointed three of the PUC's five commissioners, he said
"I can't order or direct an independent body."
Davis' top staff members, however, have been in close communication with the
commission. Industrial groups indicated the governor's staff was discussing
nearly identical rate hikes last week.
Michael Shames, head of the San Diego-based Utility Consumers' Action
Network, said, "This PUC doesn't do anything of this substance without the
governor's approval."
If they pass today, Lynch said, the new rate increases should be enough to
pay the qualifying facilities and the state for power that is produced or
purchased from now on. Still unresolved is whether additional rate hikes will
be needed to cover billions that utilities say they are owed for past
purchases.
Several executives of the qualifying facilities said the plan wouldn't pay
them enough.
"I don't think it works," said Dean Vanech, president of Delta Power Co.,
which runs five gas-fired cogeneration plants in California. Four have been
closed because of lack of payment. "We'd lose money marginally on every
kilowatt we produce," he said.
Still, many in the private sector saw Lynch's statement as a sign that
progress was being made.
Investors drove both utilities' shares up nearly 30 percent. Edison
International rose $3.35 to $14.55. PG&E Corp. was up $3.10 to $13.75.
Stephen Levy, senior economist with the Center for Continuing Study of the
California Economy, said he thinks the state can weather the rate increase.
"Last year California absorbed a 50 percent increase in the cost of gasoline
with no appreciable effect," Levy said.
Although California's economy will slow this year, it will be the result of
the national malaise and the troubles in the technology sector, not energy
costs, Levy said.
But the top increases will hit hard at businesses, including "cement, steel,
a lot of high tech, anybody in manufacturing," said Carolyn Kehrein, a
consultant to commercial power users. Some will flee the state, and many
others will either raise their own prices or cut back on salaries, she said.
In two hours of testimony before the PUC after the proposals were unveiled,
utility and consumer lawyers alternately praised and shredded them.
Noting utilities' last proposal was for a lower increase, Robert Finkelstein,
attorney for The Utility Reform Network, said, "You're surpassing their
wildest dreams. That's very, very disturbing."
The Lynch plan relies heavily on a state bond offering to finance a major
portion of the Department of Water Resources' electricity purchases. In doing
so, "we are borrowing against the future to pay the extremely high rates of
today," said Severin Borenstein of the University of California Energy
Institute in Berkeley. "We're just paying it on an installment plan instead
of paying all right now."
But he said massive, immediate rate hikes could shock California into a
recession. "We're doing a balancing act," he said.
Bee staff writer Emily Bazar and correspondent Cheryl Miller contributed to
this report.

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Cox new minority leader in GOP coup: Assembly conservatives want to flex
energy muscle
By Jim Sanders
Bee Capitol Bureau
(Published March 27, 2001)
Assembly Republicans staged a two-hour coup Monday that ended with Sacramento
County's Dave Cox being named minority floor leader, a move sparked by
conservatives pushing for a more confrontational approach to the energy
crisis.
Cox, of Fair Oaks, vowed to be more "aggressive and proactive" on energy
issues. He declined to comment on reports that his predecessor, Bill Campbell
of Villa Park, was dumped in part because he was working too closely with
Democrats.
"We don't want to talk about individual personalities," Cox said when asked
why Campbell was replaced after less than five months in the leadership post.
"We don't want to sensationalize it. It's a family matter. We'll handle it in
the family."
Cox, 63, who is the sixth Assembly Republican leader since late 1995, has
significant experience in the energy field. He served for four years on the
Sacramento Municipal Utility District's governing board, and later spent six
years as a Sacramento County supervisor before joining the Assembly in 1998.
Under his leadership, Cox said, Republicans will articulate an energy crisis
"game plan" and specific measures to help generate adequate power supplies by
2004.
Although Republicans hold only 29 seats in the 80-member Assembly, Cox said
that does not mean the party has no control over legislation.
"You have as much power as you think you have," he said.
Privately, Assembly Republicans said Cox's selection was driven by a feeling
that they need to further distance themselves from Gov. Gray Davis' power
plans and by several key energy-related developments within the past week:
The Legislature is bracing to vote on separate bills that would provide
long-term contracts for alternative energy providers and would set the stage
for California to market billions in bonds to buy electricity in years to
come.
Both those votes require a two-thirds majority to take effect immediately,
meaning that at least five Republicans would have to join with Democrats in
supporting the measures. Republicans feel that situation gives them leverage,
and many want a tough leader negotiating on the party's behalf.
At a party caucus late last week, many Republicans were upset by the
Democrats' decision to place both key energy issues - and a third that would
extend an existing rate cap to large San Diego businesses - into a single
bill, AB 8x.
Assembly Republicans adamantly opposed that single-bill strategy but were
placed in an awkward political position - they could either swallow their
philosophical opposition or vote against the bill and take the blame if
blackouts resulted.
As Republicans debated the issue in tense party caucuses, Campbell commented
that he thought the Democrats' bill would pass. Opponents were livid. He
later said he did not support AB 8x and was simply providing "cover" for
colleagues who planned to vote "yes."
Republicans ultimately voted as a bloc against AB 8x and demanded that all
three issues be considered in separate bills. Assembly leaders negotiated
throughout the weekend, but the issues remain unresolved.
During last week's tense party caucuses, Assemblyman Dennis Mountjoy,
R-Monrovia, reportedly criticized Campbell for leadership weaknesses.
Campbell lost his temper, adding momentum to a growing feeling of frustration
within the caucus, sources said.
Campbell said Monday that he doubts that the confrontation with Mountjoy
played a major role in his removal. "That was just a case where things
happened and I apologized to Dennis. He said, 'It didn't bother me, I have a
thick skin.' "
Asked if he had any regrets about his service as Republican leader, Campbell
said simply that he has enjoyed the post and did his best during the "wild
ride" of this year's energy crisis.
"I'd like to still be the leader - but I'm not," he said.
Republican sources said opposition to Campbell's leadership has been growing
since January, when he voted to support AB 1x, which committed the state to
enter the power-buying market in a big way and spend billions for long-term
energy contracts.
Campbell, after seeing that he lacked support Monday, decided to step down
rather than spark a divisive fight to retain the post. Sources said Cox held
about twice as much support within the caucus as Campbell.
Ultimately, support from Republican conservatives led by Tony Strickland,
R-Thousand Oaks, provided the margin of victory for Cox.
The vote marked a turnabout for Strickland's group, which sided with Campbell
when he was elected over Cox in November.
Assemblyman Bill Leonard, R-San Bernardino, said it's too soon to tell
whether Monday's vote will leave Assembly Republicans deeply divided.
"It could mean less unity, it could mean more," he said. "It really depends
on Dave Cox's ability to pull the caucus together."
GOP political consultant Wayne Johnson said he thinks term limits were a
factor in the caucus' impatience with Campbell.
"Everybody knows they're not here for very long, and when you're here during
what is becoming somewhat of a crisis environment, people want to be a little
more proactive," Johnson said.
Ray McNally, a Republican Party consultant, called Campbell an "energy
casualty."
Under Cox, he said, Assembly Republicans will be "more aggressive in
presenting alternatives," and Cox will "work harder to show the differences
in approaches to solving the energy problem."
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Dan Walters: An absolutely incredible tale

(Published March 27, 2001)
From the onset of his governorship two-plus years ago, Gray Davis has
insisted, by both public words and private acts, that he and he alone would
make his administration's major policy decisions.
Legislators and lobbyists have complained that no one in Davis' office was
empowered to give an up or down signal on pending legislation, and
administration officials have recounted grimly - and very privately - tales
about Davis' insistence on deciding even minuscule policy matters. The
governor once castigated one of his Cabinet appointees before her colleagues
in the harshest possible language for making an environmental policy change
without his approval. The most routine action by a state agency is trumpeted
through the governor's media office. Davis has even joked about his
micromanagerial tendencies.
It is, therefore, utterly incredible - in the precise meaning of the word -
that Davis' handpicked president of the state Public Utilities Commission, a
former political adviser, would raise electric power rates by billions of
dollars without clearing it through Davis. Yet that's what the governor's
mouthpiece asserts.
On Monday, PUC President Loretta Lynch - acknowledging what anyone with half
a brain knew weeks ago - declared that power rates would have to jump
sharply. She is proposing an increase of three cents a kilowatt-hour, about
40 percent, in areas served by private utilities to cover the massive costs
associated with the current crisis, with a "tiered" structure to impose most
of the burden on high- volume power users.
Even Lynch was fudging, however, when she insisted that the boost - from
about seven cents a kilowatt-hour to 10 cents - would be "all that is needed
going forward." In fact, as anyone who can do simple arithmetic can
calculate, it's only the beginning of a series of rate jumps that will be
needed to cover past debts and current wholesale costs. It's not improbable
that ultimately, rates will double (not counting another nickel a
kilowatt-hour that's imposed for delivery and other costs).
Lynch's public statement came just three days after Davis' aides briefed key
legislators on the likelihood of sharp rate boosts. Throughout, however,
Davis' spokesmen have insisted that the governor was not supporting such
increases and continues to believe that the supply and price crunches can be
handled "within the existing rate structure," as one euphemistic version put
it.
The latest spin was issued by Davis' press secretary, Steve Maviglio, after
Lynch's statement. "The governor has not had conversations with any (utility)
commissioners about a potential rate hike," the Maviglio statement said. "It
is still his hope and expectation that this matter can be resolved within the
existing rate structure."
Clearly, the governor, who has been so insistent on doing things his way - a
tendency bordering on obsessive-compulsive behavior - has gone into the
bunker on this one, allowing Lynch to take the heat from consumer groups,
which immediately denounced the proposed rate increase as a giveaway to the
utilities.
It's cowardly, especially because the current crisis is largely a product of
dithering by Davis and Lynch last summer when the first price-supply problems
appeared. Had they acted forthrightly then, with such steps as long-term
supply contracts, it would have been a relatively minor bump rather than a
full-blown disaster that threatens the state's business climate and its
solvency and will cause financial pain for Californians.
If California needs a utility rate increase, so be it. But we Californians
would appreciate not being treated like children who need sugarcoating for
the bad-tasting medicine. And we'd also appreciate not having our
intelligence insulted with fairy tales from the Governor's Office.
DAN WALTERS' column appears daily, except Saturday. Mail: P.O. Box 15779,
Sacramento, CA 95852; phone (916) 321-1195; fax: (781) 846-8350
E-mail: dwalters@sacbee.com
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Daniel Weintraub: No crisis is big enough to slow Davis' fund spree

(Published March 27, 2001)
If Gov. Gray Davis' potential opponents wanted to invent an anecdote to use
against him when he runs for re-election next year, they couldn't do any
better than the one he handed them Friday.
While lawmakers desperately in need of leadership deadlocked on crucial
legislation to help solve California's energy crisis, Davis was at a Palm
Springs country club and golf course, raising money to add to his campaign
committee's already record-shattering $26 million bank balance.
The governor's spokesman assures us that Davis did not actually play golf
Friday. He merely stopped by the fund-raiser because he had some time to kill
between a morning groundbreaking ceremony and an afternoon television
interview.
Right. Davis may have been in Palm Springs on state business, but it's
curious that, wherever he goes, this governor always seems to find a way to
raise some money. Even if he didn't play golf, the incident drives home the
image of a governor so preoccupied with his own re-election that he can't
stay on-task in Sacramento to work on what is arguably the biggest crisis any
California politician has ever faced.
While Davis was rubbing shoulders with wealthy supporters in the desert, his
staff and some investment bankers were briefing lawmakers on just how bad the
energy crisis has become. The state may need to borrow $23 billion before
it's over, the bankers said, not the $10 billion that the governor has
publicly announced. And the idea of keeping the lights on without further
rate increases - a mantra to which Davis has clung against all reason - is a
fantasy. Rates will have to rise, perhaps double, to get us out of this,
according to the governor's staff. You cannot forever buy a dollar's worth of
power, they are saying, with 50 cents.
This is incredible stuff, especially coming from the governor's own people.
But what's even more astounding is that this news was delivered to the
Legislature, and thus the public, before Davis himself was fully briefed.
Davis is not only out of town, it turns out. He's out of touch. Of course, we
didn't need Friday's fund-raiser to figure that out.
Last week, to put it mildly, was a bad one for the governor, whom critics
have begun to call the prince of darkness. It began with two days of rolling
blackouts that would not have happened but for Davis' inattention to a
problem that threatened to shut down between 10 percent and 20 percent of the
state's already short power supply. Alternative energy producers, including
cogeneration plants that produce electricity as a byproduct of a
manufacturing operation, were going dark because they weren't getting paid
for their electricity and could no longer afford to buy the fuel that fires
their plants.
It has been widely known for months that the utilities weren't paying these
power producers. The Legislature has been working on a measure to get them
paid and lower their rates by roughly half. It's a very important part of any
comprehensive solution to the crisis. But after the blackouts hit, Davis
acted as if he'd only just discovered the problem. He was outraged. He said
it was "immoral" for the utilities to collect money from ratepayers and not
pay their suppliers.
But that was only the beginning. The battle over getting the small energy
producers paid led to questions about how the state would be paid for the
power purchases Davis has been making since January on behalf of the
utilities. Davis intends to float a bond measure - public borrowing - to
reimburse the state's general fund for the $4 billion-plus that the emergency
buys are costing taxpayers. The bond is supposed to be retired by dedicating
a share of future electricity rates to repayment. For the transaction to
work, the bond buyers insist on getting first call on the money collected by
the utilities.
The law Davis signed in January when he started buying the power was supposed
to put the state, and its bond partners, at the front of the line for the
utilities' cash. But the utilities, particularly Pacific Gas & Electric,
don't think the law does that. And Davis apparently failed to get their
signature on an IOU before he put taxpayers on the hook to save the companies
from bankruptcy.
These are rather large details to miss for a guy who has a reputation as a
control freak and a micromanager. But they are part of a pattern stretching
back to last summer, when Davis brushed off early warnings about the
potential depths of the crisis he was even then trying to avoid. More and
more he gives the impression of a man not so much trying to resolve the
energy crisis but of one who is thinking first, and foremost, about saving
his own political skin. The problem is, the more he focuses on his own
prospects, the worse they become.
It would be nice if Davis would suspend his political money-grubbing for a
few weeks and work full-time on the business he was elected to do. But then
again, maybe he should schedule even more fund-raisers: The way things are
going, come re-election time, he is going to need every penny he can get.
Daniel Weintraub's column appears on Sundays, Tuesdays and Thursdays. He can
be reached at (916) 321-1914 or at dweintraub@sacbee.com.
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Energy woes give nuclear plants a life

Crisis offers second chance to all-but-discarded industry
By Bruce Lieberman
UNION-TRIBUNE STAFF WRITER
March 26, 2001
A group of nuclear power advocates and energy experts gathered in an
auditorium in Irvine last month to discuss "Nuclear Power: The Option for the
21st century?"
Their talk was upbeat.
Even asking that question would have been laughable five years ago.
In 1996, California was heading toward a deregulated electricity market. The
commercial nuclear power industry was heading toward extinction.
No way could it compete with coal and natural gas fired plants in a
deregulated market. Never would a utility invest billions of dollars to build
a nuclear power plant when it had no guarantee of recovering that investment
through customer rates, which the architects of deregulation said would only
fall.
No one had ordered a nuclear power plant in this country since 1978, the year
before a partial meltdown at the Three Mile Island plant and eight years
before a nuclear reactor blew up at Chernobyl.
Political support for nuclear power was all but dead, and electric utilities
in the United States knew it.
That was then.
Today, the country's nuclear power industry is looking at California's
troubled experiment with electricity deregulation, environmental concerns
over global warming and an unyielding demand for electricity -- and they see
one thing:
Opportunity.
"I'm extremely optimistic about the future of nuclear power in the U.S.,"
Corbin A. McNeill, Jr., chairman and co-chief executive officer of utility
giant Exelon Corp., told the Irvine symposium.
Nuclear power advocates across the country say the industry is safer, more
efficient and more economically viable than ever before.
"I personally believe there will be a new generation of nuclear power plants
in this country," said Ray Golden, a spokesman for Southern California
Edison's nuclear power plant at San Onofre. "It's a function of when."
Late last month, Senate Republicans introduced an energy bill that could lead
to more nuclear power plants.
The National Energy Security Act, introduced by Sen. Frank Murkowski of
Alaska, would give a big boost to the industry. It would provide nearly $1
billion in research and development money, financial rewards for operators
who make nuclear power plants more efficient, and industrywide tax breaks.
Critics say the bill would just give taxpayer support to a dying industry.
"Clamoring for new subsidies doesn't help the industry make the case that it
is now economically competitive and poised for a resurgence," said
Christopher Sherry, research director for the Safe Energy Communication
Council, a coalition of environmental groups founded after the 1979 accident
at Three Mile Island.
New lease on life
Two primary changes in the nuclear power industry have given advocates reason
to be optimistic.
First, commercial power plants have become more efficient.
The Nuclear Energy Institute, the industry-backed trade association in
Washington, estimates that improvements in output at the nation's 103
commercial nuclear reactors have added the equivalent of about 25 1,000
megawatt-reactors.
The industry, matured by decades of experience, has improved safety and
shortened routine shutdowns for refueling and maintenance. Electricity
production costs are at an all-time low, at 1.83 cents per kilowatt-hour
(down from 3.12 cents in 1987), making nuclear energy competitive with coal
and natural gas, according to the institute.
Second, the federal government has begun extending operating licenses for
nuclear reactors.
Since last March, the Nuclear Regulatory Commission has extended the 40-year
operating licenses for five reactors an additional 20 years. The operators of
five more reactors have applied for license extensions, and an additional 28
are expected to seek extensions within the next five years, the institute
said.
Southern California Edison has not decided whether it will seek a license
extension for San Onofre's two remaining reactors, Units 2 and 3, Golden
said. Both are scheduled to be shut down in 2022.
In those reactors that obtain license extensions, utilities see new value,
and a profitable future.
Environmentalists see an avoidable danger.
Public Citizen, Ralph Nader's consumer advocate group, has called extending a
nuclear power plant's license a "high-stakes gamble" that risks safety in
aging plants.
Critical components in a nuclear power plant, including the reactor pressure
vessel that holds nuclear fuel and the thousands of steam generator tubes
that circulate heated and irradiated water, endure extreme stresses and
degrade over time.
"There was a reason (the nation's nuclear power plants) originally had
40-year licenses," said Scott Denman, executive director of the Safe Energy
Communication Council.
New sales, new worries
With license extensions, nuclear power plants are now seen by buyers as
profit centers. Six commercial nuclear reactors have been sold since
mid-1999, and the sale of eight reactors is pending, according to the Nuclear
Energy Institute.
The merger of several big utilities has consolidated ownership of commercial
nuclear reactors. The marriage of Commonwealth Edison-Unicom in Illinois and
PECO Energy Co. in Pennsylvania in October created Exelon Corp. and placed 17
reactors under one corporate roof.
McNeill, of Exelon, said the consolidation is creating tremendous economies
of scale that are bringing down operating costs.
Critics worry about a new rivalry between utilities that operate the plants.
"Electricity deregulation sets up a direct competition between power plants,
potentially compromising the safe operation of nuclear power plants as owners
attempt to minimize operation and maintenance costs while maximizing
electricity production and sales," Public Citizen has written.
The environmental group argues that a Feb. 3 electrical fire in the turbine
room of San Onofre's Unit 3 reactor, which occurred as workers were
re-starting the reactor after a routine refueling and maintenance outage,
shows that the industry is not as reliable as advocates would like the public
to believe. Damage caused by the failed circuit breaker that caused the fire
will keep the 1,100-megawatt reactor shut down through mid-May.
"The NRC and the nuclear industry have been skimping on maintenance during
refueling to improve the profitability of nuclear reactors," said Public
Citizen's Jim Riccio, senior policy analyst for the group's Critical Mass
Energy and Environment Program.
Yet, according to reports the company filed Feb. 16 with the Securities and
Exchange Commission, Southern California Edison, the majority owner of the
San Onofre plant, will lose between $80 million and $100 million because of
the Feb. 3 fire.
That comes at a rough time for the cash-strapped utility.
The San Onofre nuclear power plant is the company's most important asset at a
time when it is near bankruptcy because of skyrocketing electricity costs
from out-of-state power generators.
"San Onofre is the only thing that makes the company money," Golden said.
State's nuclear future
California, the most populous state in the country and the world's sixth
largest economy, has four nuclear reactors -- two at San Onofre and two at
the Diablo Canyon nuclear power plant near San Luis Obispo. Yet, those four
nuclear reactors generate more than 4,000 megawatts of electricity, nearly 18
percent of the electricity generated in California.
A third plant, Rancho Seco, near Sacramento, was shut down in 1989 when
voters demanded its closure. Opponents said it was badly run.
Yet, so desperate are state legislators to find sources of power that at
least one has discussed turning Rancho Seco back on. On Feb. 22, state Sen.
Tom McClintock, R-Thousand Oaks, introduced a bill to study whether the state
should buy Rancho Seco.
McClintock said the plant could be put back into service in nine months for
$500 million. And, with new turbines, the plant could increase its production
of electricity from 800 megawatts to 1,100 megawatts -- enough power for more
than a million people.
McClintock acknowledges there is little enthusiasm in the state Legislature
for embracing nuclear energy as one answer to California's energy crisis.
"Politically, they're scared to death of it," he said.
John. P. Holdren, a professor of environmental policy at Harvard's John F.
Kennedy School of Government, said the high cost of building nuclear power
plants likely will keep the industry from expanding in the short term.
In the longer term, though, Holdren said nuclear energy could offer a real
alternative to fossil fuels and thereby help combat global warming.
In testimony to Congress last June, he outlined several conditions that must
be met before the nuclear energy production can expand. Among them were some
high hurdles:
?The industry must become competitive with other alternative energy sources
that do not emit carbon into the atmosphere, such as hydro-electric power.
?Nuclear power plants around the world must prove they are safe.
?The nation must find a permanent repository for nuclear waste and build
temporary storage facilities until one opens.
?Research into reprocessing used nuclear fuel, which produces a form of
plutonium that could be used in nuclear weapons, should be suspended.
?Nuclear energy must gain widespread public acceptance.
New breed
If any power company debuts the next generation of nuclear power plants in
the United States, it may very well be Exelon Corp.
The company is helping to finance research in South Africa into a new type of
nuclear reactor, called the "pebble bed modular reactor." The 110-megawatt
reactor, about a tenth the size of conventional nuclear reactors in the
United States, would be designed to eliminate the risk of a meltdown, backers
say.
Passive safety features would eliminate the need for redundant back-up
systems, containment structures and off-site emergency plants, drastically
cutting costs. Because of their modular design, additional reactors could be
added at a single site. McNeill said the new technology could be imported to
the United States and Europe within the next few years.
"A typical plant should be able to generate a kilowatt of electricity for
less than a penny," he said.
Environmental groups have been extremely critical of the design, saying that
it needs some type of containment structure, such as the concrete domes at
San Onofre, to keep radiation from escaping into the atmosphere should
disaster strike.
Meanwhile, the Nuclear Regulatory Commission has approved three designs for
other, more conventional reactors.
McClintock said it's only a matter of time before politicians and the public
re-think their positions on nuclear energy.
The legislator predicts that a shift in opinions will come this summer, when
projections by the California Independent System Operator show that
electricity supply shortages will force blackouts on 6 million people.
"By the time the state has survived the summer of 2001," McClintock said, "as
a practical matter, we'll be forced to take a new look at nuclear energy.
.?.?. It is going to be a very ugly, ugly awakening for a lot of politicians
who sat around and did nothing."
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Top state power regulator proposes 40 percent rate increase

By Karen Gaudette
ASSOCIATED PRESS
March 26, 2001
SAN FRANCISCO ) California's top power regulator proposed a 40 percent hike
in electricity rates Monday, saying such an increase should encourage
customers to cut back on usage and conserve enough power to get through the
hot summer months.
Loretta Lynch, president of the Public Utilities Commission, said rates
should increase by an average of 3 cents per kilowatt hour. The current rate
averages 7.5 cents per kilowatt hour.
The higher rates could go into effect as early as Tuesday, when the PUC
meets. Lynch and two other members of the five-member PUC were appointed by
Gov. Gray Davis, and Lynch's proposal is expected to be approved by the
commission.
Lynch, who repeatedly refused to characterize the hike as a 40 percent
increase, said the increase was needed to avoid significant power problems
this summer.
"That number should be all that is needed going forward," she said at a news
conference, "to keep utilities solvent and ensure that the treasurer of the
state can issue bonds."
Lynch's proposal is at odds with that of administrative law judge Christine
Walwyn, who recently advised the PUC that rate increases were not necessary.
Any increase would be on top of the 9 percent to 15 percent rate increase the
PUC approved in January, and an additional 10 percent increase already
scheduled for next year.
Lynch also supports a "tiered" rate system that would charge residential and
businesses customers more if they're large users and fail to cut back, a move
aimed at encouraging conservation.
The governor repeatedly has said he is confident the state's power crisis can
be resolved without further rate hikes. But Davis aides have concluded that
rates must rise, given that wholesale power costs remain high. Several
lawmakers, including Assembly Speaker Bob Hertzberg, have said a rate
increase is inevitable.
"It's obvious to me that unless you rob a bank or win a lottery you are not
going to be able to do this without raising rates," Senate President Pro Tem
John Burton, D-San Francisco, said Monday.
Southern California Edison Co. and Pacific Gas & Electric Co. both have
pushed for further rate increases, and PG&E has said its current rates would
be insufficient to cover its bills and the state's.
Administration officials have been negotiating with PG&E, Edison and San
Diego Gas & Electric about purchasing the utilities' transmission lines to
give the companies cash to pay their bills.
PG&E and Edison say they've lost more than $13 billion since last summer due
to high wholesale electricity costs that California's 1996 deregulation law
prevents them from collecting from their customers.
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Supplier Duke offers to forego some charges

By Leslie Gornstein
ASSOCIATED PRESS
March 26, 2001
LOS ANGELES ) A North Carolina energy supplier offered Monday to slice nearly
$20 million off California's emergency power bill for January and February if
its debtors agree to pay.
Under increasing pressure from state and federal regulators, Duke Energy
offered to forego part of what it charged for power during Stage 3 alerts in
January and February.
The power went to California's Independent System Operator, which runs 75
percent of the state's power grid, and to the now-defunct Power Exchange.
North Carolina-based Duke offered to drop $19.8 million in so-called "credit
premiums," but only after the two entities agree to pay $273 per megawatt
hour for power supplied in January and $430 per megawatt hour in February.
ISO spokesman Patrick Dorinson refused to comment on the offer.
Duke has not been paid for any power sent to California in January and
February, spokesman Tom Williams said Monday.
The Federal Energy Regulatory Commission said recently that $273 in January
and $430 in February were the highest rates that any supplier could charge
without triggering suspicion of gouging.
Williams would not say how often Duke's rates exceeded those caps during the
two months, nor would he say how many megawatt hours Duke sold to California
during the stretch.
But he did admit Duke often charged more than those rates. He called the
additional charges "credit premiums" ) typical fees within the industry.
Suppliers often charge customers more if they have bad credit or suspect they
will be unable to pay.
FERC has said that Duke potentially owes California $21.14 million in
overcharges for the first two months of the year.
The company's offer was not meant to be an admission of price gouging,
Williams said.
"We have not been paid a dime," Williams said. "It is not unusual to have
credit premiums."
Duke, along with Reliant Energy Services, Dynegy Power Marketing Inc.,
Williams Energy Services Corp., Mirant and Portland General Electric, may
have overcharged California by as much as $125 million in January and
February, FERC has said.
Since the state's power crisis erupted, power at times has cost 15 to 20
times more than it did a year ago.
Before the energy crisis started, electricity was selling at an average
wholesale cost of $30 a megawatt hour.
The crisis stems from 1995 state laws attempting to deregulate the California
power market. The attempt has been criticized for sinking the utilities,
trapping them between state-mandated price caps and soaring electricity
prices on the open market.
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PUC to Vote on Big Rate Hike; OK Is Likely

Electricity: Agency chief urges a boost of about 40% for many, and calls it
necessary to raise cash and encourage conservation. Higher cost could show up
in May bills.

By TIM REITERMAN and NANCY VOGEL, Times Staff Writers

?????SAN FRANCISCO--Millions of Californians would see electricity rates rise
by about 40% under a plan presented Monday by the state's top power regulator.
?????Loretta Lynch, president of California's Public Utilities Commission,
called rate hikes necessary both to raise cash and to encourage conservation.
?????Her plan would charge some customers of the state's two biggest private
utilities 3 cents more per kilowatt-hour, depending on how much electricity
they consume. The higher cost would show up in May power bills.
?????Lynch promised to target the increases on heavy users of electricity and
spare nearly half of residential customers from paying more. The commission
is scheduled to vote on her proposal today, and it is almost certain to win
approval, according to commissioners.
?????It would cost customers of Southern California Edison and Pacific Gas &
Electric a total of $4.8 billion a year.
?????San Diego Gas & Electric is not covered by the proposed rate hikes,
though officials there said their utility should be.
?????Nor would the increases affect the customers of municipally owned
utilities in Los Angeles, Riverside, Pasadena, Anaheim and elsewhere.
?????Lynch's proposal drew fire from consumer advocates, sighs of resignation
from lawmakers and enthusiasm from Wall Street. Stock prices for both
companies jumped by nearly one-third.
?????For renters and homeowners, the proposal could cost nothing or as much
as 40% more per month. Business customers--who now pay lower rates--could see
even higher increases.
?????The latest proposed increase would come on top of an average 10% rate
hike for all users imposed in January, which would become permanent under
Lynch's plan. An additional 10% increase for residential and small business
users is already scheduled for this time next year.
?????"We recognize the utilities are in severe financial distress," Lynch
said. "For utilities to keep the lights on, we unfortunately came to the
conclusion a rate increase was needed."
?????Commissioner Geoffrey Brown, recently appointed by Davis, predicted that
the plan will pass. Commissioner Richard Bilas, a Republican appointed by
former Gov. Pete Wilson, would not say whether he would vote for Lynch's
proposal but said "rates need to go up."
?????Davis, who named three of the five commissioners, distanced himself
Monday from the PUC action, saying that it's an independent body. He repeated
that it is his expectation that rate increases can be avoided.
?????"I've not seen enough information to persuade me we need a rate hike,"
the governor said at a news conference after speaking to students at Walt
Disney Elementary School in Burbank.
?????If the increase is approved today, Lynch said, it will be refined in the
30 days it takes the utilities to change their billing processes. The rate
increase would be subject to refund if it is more than enough to cover costs
of energy purchases.
?????Lynch said she cannot finalize the proposal until she gets more
information about power supply and cost projections from the California
Department of Water Resources, which began buying electricity on behalf of
the nearly bankrupt utilities in mid-January. That's when some generators
refused to sell to the utilities for fear of not getting paid.

?????Utilities Earned Substantial Profits
?????The utilities have been burdened by wholesale electricity prices that
have topped 10 times the levels of those a year ago.
?????Rising demand for electricity across the West, plus fundamental flaws in
the design of the deregulated market that California opened in 1998, have
allowed sellers of electricity to earn substantial profits. Since the state
stepped in to buy electricity for the utilities, it has spent about $3
billion covering roughly 34% of the state's power needs.
?????While Davis has adamantly resisted rate hikes, other politicians have
come to call increases inevitable. The state and utilities need a better cash
flow to cover wholesale power costs expected to soar again this summer, they
say.
?????And rate boosts will serve another critical purpose, they say, by
prompting Californians to switch off lights, buy efficient refrigerators and
shut down hot tubs. Such conservation will be crucial in whether the state
avoids blackouts, grid operators say.
?????"If it is tiered right, it wouldn't break my heart," Senate President
Pro Tem John Burton (D-San Francisco) said, adding that he expects that any
increase will exempt low-income people.
?????Lynch said repeatedly that the 3-cent-per-kilowatt-hour hike she
proposed should be all that is necessary to allow the state and utilities to
keep buying electricity. The more than $13 billion the utilities claim they
are owed for power purchases since May must be resolved through negotiations
between the governor's office and the utilities, she said.
?????The Legislature already has approved a bill guaranteeing that those who
use 30% more than their minimal allocation, known as the baseline, won't feel
the hikes.
?????The baseline is a certain amount of electricity--50% to 60% of the
average residential use per month--that varies regionally, so that a
homeowner in the desert has a higher baseline amount than one living on the
temperate coast. Electricity consumed up to the baseline amount costs less.
?????Last year, Edison customers paid 6.2 cents per kilowatt-hour for
electricity. (The average home uses about 700 to 1,000 kilowatt-hours per
month.) The PUC raised that rate to 7.2 cents in January, and Lynch's
proposal would boost it to 10.2 cents.
?????Edison customers also pay an additional 5.25 cents for distribution,
billing and other costs on top of the electricity charge.
?????Lynch projects that under her plan about half of Edison's households
would have no monthly bill increases, one-fifth would have an 8% increase,
and fewer than about one-third of the households would have a 27% increase.
?????Rather than welcome the potential rate hikes, Edison officials said they
were frustrated that the PUC proposal does not guarantee that the higher
rates will cover all of the utility's and the state's costs.
?????"It helps, but it doesn't solve the problem," said John R. Fielder, a
senior vice president at Edison. "And it's really vulnerable because if it's
not enough, then what do you do?"
?????Fielder pointed out that when Edison argued for higher rates in
December, it was turned down, causing the utility to accumulate additional
billions in debt. Monday's PUC proposal treats that debt as a "stranded
cost," which the utility could eventually be expected to absorb, he said.
?????In a two-hour hearing on Lynch's proposal, PG&E lawyer Chris Warner
called it a "a step in the right direction."
?????"We agree with President Lynch that it's time to pay the power bills,"
he said. Warner declined to elaborate until the utility could study the
proposal further.
?????Consumer groups immediately attacked the rate hike proposal.
?????Jason Zeller, an attorney with the PUC's independent Office of Ratepayer
Advocates, complained that "customers had no notice that they would be socked
with the largest rate increase in California history."
?????"My big concern . . . is it imposes massive increases, damages the
economy, and there is no guarantee it would do any good," Zeller said.
?????Bob Finkelstein of the Utility Reform Network said: "The focus [of the
PUC] should be to bring prices down, not rates up."
?????Power sellers in California's market have "an uncanny ability to sniff
out money," Finkelstein said, and the Lynch proposal "only puts more on the
table."
?????Lynch blamed the need for rate hikes on exorbitant prices for wholesale
electricity, noting that California paid $7.4 billion for electricity in all
of 1999, and $5.2 billion last January. She also blamed the Federal Energy
Regulatory Commission for failing to impose a cap on wholesale electricity
prices in California, despite its mandate under federal law to assure
citizens of "just and reasonable" prices.
?????To plug the $3-billion hole in the state budget and pay for power in
coming months, lawmakers in February passed a law to sell roughly $10 billion
in revenue bonds. The bonds would be paid back with money collected by the
utilities from their customers.
?????In recent weeks the utilities have argued that little or nothing is left
over after they subtract their own costs of producing and distributing power
from what they collect from monthly bills.
?????But on Monday, Lynch issued a draft decision that would force the
utilities to send ratepayer revenue to the state based on a formula set by
the PUC.
?????Representatives of both PG&E and Edison criticized that proposal at
Monday's hearing, saying it gave priority to the state Department of Water
Resources.
?????Lynch also proposed forcing the utilities to begin paying hundreds of
small energy producers. Some of those renewable and alternative power
generators have not been paid since November. Many have shut down, and their
lost output contributed to rotating blackouts last week.
?????The potential rate hikes were seen as lessening the possibility of
utility bankruptcy. That sent investors diving into the stocks of Edison
International, parent of Southern California Edison, and PG&E Corp, parent of
Pacific Gas & Electric Co.
?????Edison rocketed $3.35, or 30%, to $14.55 while PG&E shares leaped $3.10,
or 29%, to $13.75. Both stocks have lost considerable value in recent weeks
as the electricity crisis dragged on with no solution.
?????Investors were not discouraged by PG&E's warning that it might take a
$4.1-billion after-tax charge against 2000 earnings if it concludes that it
will not be able to collect its electricity debts through rates. Edison last
week said it might take a $2.7-billion after-tax charge when earnings are
posted, no later than April 15.
---
?????Reiterman reported from San Francisco, Vogel from Sacramento. Times
staff writers Dan Morain and Carl Ingram in Sacramento and Nancy Rivera
Brooks, Nancy Cleeland and Steve Berry in Los Angeles contributed to this
story.
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Tuesday, March 27, 2001
Davis Ducks Reality on Electricity 'Overcharges'
By BENJAMIN ZYCHER AND, GARY B. ACKERMAN

?????As temperatures rise and the lights go out, let us recall the blessed
memory of Marx. Not Karl. Groucho. Well, not Groucho exactly, but instead the
other star of "You Bet Your Life," his duck, which would descend from the
heavens with a cigar and a crisp $100 bill upon hearing a contestant utter
the secret word of the day.
?????For Gov. Gray Davis, the magic word is "votes," and he wants to offer
$100 bills to everyone, courtesy of the electric power sector. Davis will
discover during the long, hot summer that it won't work. While he and the
Legislature and the Public Utilities Commission and the Electricity Oversight
Board have had a grand time chasing each other around a room with whipped
cream pies and seltzer bottles, the economic and political risks faced by
producers have grown, the state budget reserve largely has gone poof! and
efforts both rhetorical and political to force other Western states to bail
California out predictably have come a cropper.
?????And so the buck-passing season is in full bloom. Accordingly, we now
have studies from the Independent System Operator--the board of which was
appointed by Davis--purporting to show that recent prices charged by power
producers have exceeded costs, and thus have been unreasonable to the tune of
$6.3 billion, concluding that the current mess is all their fault, and that
everyone should get big refunds.
?????Well. It all depends on what your definition of "cost" is. The ISO
analysis ignores the risks of nonpayment, now very real in the California
market, to the tune of $14 billion owed by the utilities, largely to power
producers and traders. The interest costs on late payment are ignored. The
ISO shunts aside the risks of unplanned outages of generating equipment,
necessitating the purchase of power in volatile spot markets. It ignores the
market value of investment in reliability, the political risks of
after-the-fact changes in the rules of the game, the risks posed by the
lawsuit industry, the risks of transmission breakdowns, the risks of rising
prices for natural gas and on and on. That a number of important costs faced
by power producers do not show up on the books does not mean that they are
not real.
?????More fundamentally, the mere fact that prices are high does not
demonstrate that the market is noncompetitive. It is not costs that determine
prices in competitive markets, it is the relationship between cost and demand
conditions. Suppose sudden bad weather destroys a substantial part of the
wheat crop. The price of wheat will rise, despite the fact that costs as
measured by the accountants--the price of fuel and other inputs--will not
have increased at all.
?????The ISO and others attempt to circumvent this simple reality by offering
exotic theories of market manipulation, in which producers withhold
electricity to drive prices up. This old argument fails to answer the crucial
question of which producer will withhold production. Each producer prefers
that his competitors withhold so that he can receive the benefits of higher
prices. An assumption that producers will take turns is not very helpful,
because their respective interests and expectations of future market
conditions are likely to differ. And anyway, where is the evidence?
?????And so we are left with a call for regional price controls. Do
bureaucrats never learn? Price controls raise true prices, they exacerbate
demand/supply imbalances, and yet are beloved of politicians whose time
horizons extend only to the next election. The rest of us, unfortunately,
must live with the longer-term effects. Can anyone believe that confiscating
billions of dollars from the private sector will increase long-term
investment in electric generating capacity?
?????The reality is that for nine months Davis has dallied, dithered and
engaged in demagoguery. Scapegoating now is the order of the day, as it sinks
in that no amount of talk will pull an electric rabbit out of a hat. It was
obvious last year that this problem largely would have been solved with a
moderate increase in electricity rates, combined with some straightforward
changes in regulatory policies.
?????It is true that Davis did not create this problem, although his attempts
to blame prior Republican officials conveniently ignore the fact that the
Democrats held the Legislature when the current system was enacted. Oops. In
any event, it matters not one whit: We elect public leaders to lead when
unexpected problems arise.
?????It would be nice if Davis were simply to level with Californians: There
is no painless route out of this mess, attempts to make scapegoats of the
producers are dishonest and destructive, and our regulatory system is
dysfunctional. Actually, that would be more than merely nice; it would be
uplifting.
- - -

Benjamin Zycher Is an Economist and Adjunct Fellow at the Claremont
Institute. E-mail: Bennyz@pacbell.net. Gary B. Ackerman Is the Executive
Director of the Western Power Trading Forum, a Group of Electricity
Generators and Traders. E-mail: Foothill@lmi.net
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PG&E Bills Set to Rise 40%
TIERED RATES: PUC meets today, expected to enact system penalizing heavy
users David Lazarus, Chronicle Staff Writer
Tuesday, March 27, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/27/M
N102966.DTL

Undermining Gov. Gray Davis' pledge that electricity bills will not go up,
state regulators yesterday proposed an across-the-board 40 percent rate
increase as part of a series of measures to remedy California's energy
crisis.
The immediate rate increase, to be voted on today by the Public Utilities
Commission, includes a new 30 percent increase and makes permanent a
"temporary" 10 percent average increase approved in January.
However, heavier electricity users would end up paying more than lighter
users under a so-called tiered system that could be enacted by May, PUC
President Loretta Lynch said.
"It's time to pay the power bills for California," she said. "We have
unfortunately come to the conclusion that a rate increase is needed."
Steve Maviglio, a spokesman for the governor, insisted that Davis played no
role in the decision to raise consumers' rates.
"He has not signed off on this," Maviglio said. "The PUC is an independent
body. It does what it wants."
However, Maviglio acknowledged that the PUC is controlled by Davis'
appointees and that the governor's staff was briefed in advance of
yesterday's announcement.
Lynch said she does not expect further rate increases this year. But she also
said the situation could change depending on current bailout negotiations
between the governor and near-bankrupt utilities as well as the state's
ability to recoup costs from its multibillion-dollar power purchases.
Harry Snyder, senior advocate for Consumers Union in San Francisco, said
there is no way state officials can avoid additional rate increases after
confronting sky-high electricity prices this summer.
"It's a disaster," he said. "By the end of summer, rates will go up by 100
percent. They have to because these new increases will barely pay back the
state for its power purchases."
Snyder also criticized the governor for having insisted that consumers would
not be saddled with paying the tab for the bungled deregulation of
California's power market.
Davis has said repeatedly in recent weeks that rates would not need to rise
beyond "the existing rate structure," which many observers took to mean
January's 10 percent increase plus an additional 10 percent increase next
year.
"It's the Nixon, trust-me school of government," Snyder said. "How can we
take the governor at his word?"
Because Lynch and other Democratic appointees hold a majority on the five-
member PUC, passage of the rate increase today is all but assured.
However, Lynch said consumers probably would not see the change reflected in
their bills until a tiered rate system can be introduced within 45 days.
Under that system, according to PUC figures, Pacific Gas and Electric Co.
customers who are light power users would see no change from current average
electricity bills of $60.
Medium users -- those who stay within 200 percent of pre-established limits
-- would see average bills rise by 9 percent to about $65. Heavy users would
see average bills jump by 36 percent to around $132.
Rate increases for customers of Southern California Edison would range from 8
percent for medium users to 27 percent for heavy users.
These increases would be on top of January's rate increases, which ranged
from 9 percent for residential customers to 15 percent for large industrial
users.
Investors saw this as manna from heaven for California's cash-strapped
utilities. PG&E's stock soared 29 percent yesterday to $13.75, while Edison's
shares climbed 30 percent $14.55.
The increase would generate about $2.5 billion a year for PG&E and $2.3
billion for Edison.
Yet many uncertainties remain. For example, the rate increase would not
affect about $13 billion in debt racked up by the utilities as a result of
runaway wholesale power prices.
That issue will be left for the governor to tackle in his bailout talks.
Maviglio, Davis' spokesman, said yesterday that the negotiations are making
progress, but he could not say whether a deal at last is taking shape.
ALTERNATIVE ENERGY PLANTS
Another wild card is the matter of alternative-energy providers, which have
cut back production in recent days because they no longer can pay their
natural gas bills.
The companies -- known as "qualifying facilities" or "QFs" in industry
parlance -- say they are owed millions of dollars by PG&E and Edison.
The PUC will vote today on forcing the utilities to pay the alternative
energy providers for all power received, but only on a forward-looking basis.
Past debt would not have to be paid right away.
It remains to be seen whether the qualifying facilities, half of which were
shut down during last week's blackouts, will be able to resume operations.
"We cannot direct the gas suppliers to sell to them," admitted PUC member
Carl Wood.
The commission also is expected to vote today on requiring PG&E and Edison to
repay about $4 billion paid by the state Department of Water Resources to
purchase electricity for the utilities' customers.
However, it is not yet clear how revenue from ratepayers will be divvied up
in the future. The utilities and the Department of Water Resources are at
odds over which would get first crack at the funds to cover expenses.
BLAME GOES TO PROFITEERS
Lynch, the PUC president, laid blame for California's troubles on profit-
hungry power companies that she said have gouged the state's consumers, as
well as on a reluctance among federal regulators to limit how much generators
can charge for electricity.
"The federal market cops need to get back on the beat because they're nowhere
to be found," she said.
A spokeswoman for the Federal Energy Regulatory Commission in Washington, D.
C., declined to comment.
Nettie Hoge, executive director of The Utility Reform Network in San
Francisco, questioned the wisdom of raising consumers' rates as long as
wholesale prices remain unchecked, especially going into a summer of expected
shortages.
"Neither the commission nor the governor are willing to say no to the cartel
that is gouging us and extracting obscene profits," she said. "Every time we
put a burden on ratepayers and ask them to dig deeper in their pockets,
the cartel smells money and moves in for the kill."
Lynch stressed that the burden on ratepayers would be eased under a tiered
system that she said would promote conservation.
'HOGS' WILL BE SLAUGHTERED
"Electricity hogs will need to pay more," she said. "If you want to run your
pool pump during peak hours this summer, you will pay for that."
Tiered rates have found support virtually across the spectrum, from the
governor's office to consumer watchdogs. The PUC is expected to have no
difficulty adopting such a system.
But Snyder at Consumers Union took issue with Lynch's characterization of
higher rates as a conservation tool.
"That's total bull," he said. "She's just trying to rationalize the increase
by saying it's all the consumer's fault.
"The governor said there would be a sharing of pain," Snyder added. "This
isn't sharing. This is nothing but pain for consumers."
The Agenda
Regulators will vote today on:
-- Immediately raising electricity rates 30 percent and making permanent a
"temporary" 10 percent rate increase adopted in January.
-- Forcing utilities to pay smaller power companies for their output. Half of
such generators were shut down during last week's blackouts because they
could not afford fuel.
-- Requiring utilities to reimburse the state Department of Water Resources
for $4 billion in power purchased on behalf of utility customers.

E-mail David Lazarus at dlazarus@sfchronicle.com.
Heavy Electricity Users to Bear Brunt of Increases
PG&E households that use more than 130 percent of their baseline allowance
would pay more for power if state regulators get their way.
.
  BASIC USAGE
                                                 Current  Average
Percent of  Percent of   monthly  increase in households  consumption  bill
monthly bill
Low to medium users     1,645,100                $60      $0 (0%)
(up to 130% of baseline)     48%         24%
.
Medium users              872,884                $65      $5.60 (9%)
(130% to 200% of baseline)   25%         26%
.
"Heavy users"             907,511               $132     $47.52 (36%)
(more than 200% of baseline) 26%       50%
.
Source: Public Utilities Commission
Chronicle Graphic

,2001 San Francisco Chronicle ? Page?A - 1
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Governor's Static Cling May Cost Him Politically
Davis acts stunned at PUC's proposed rise in energy rates
Lynda Gledhill, Chronicle Sacramento Bureau
Tuesday, March 27, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/27/M
N129191.DTL
Sacramento -- Gov. Gray Davis clung yesterday to his expectation that energy
rates won't have to go up and insisted that he didn't know one of his top
political appointees would propose a 40 percent increase.
Those comments drew shaking heads from many lawmakers, both Republicans and
Democrats, who believe that the governor was an active participant in the
plan announced by the head of the Public Utilities Commission.
"I don't believe it," said Sen. Jackie Speier, D-Hillsborough. "I think the
governor has been real clear from day one how he views everyone else in state
government. He certainly believes his appointees should reflect his vision.
I'd be very surprised if he isn't communicating. And if he isn't, he should
be. "
Political observers say Davis may have thought he had found a political out
by having the commission -- which is accustomed to making unpopular decisions
- - take the lead on raising rates.
But the strategy could backfire as lawmakers from both parties say the
governor's refusal to acknowledge the necessity of rate increases -- a
position held by even his top advisers -- is making the energy crisis worse.
Pollster Mark DiCamillo of the Field Institute said Davis is making a
political calculation by keeping to his word on not needing rate increases.
"I think it may be a public posture he wants to consistently maintain -- he
may not prevail -- but they may have to drag him kicking and screaming to
raise rates," DiCamillo said. "But if his will is not carrying the day, he
may be seen as powerless and that could drag him down."
While PUC chairwoman Loretta Lynch announced that that rates will probably go
up 40 percent, Davis stayed far away from the firestorm enveloping the
Capitol, instead handing out academic performance bonuses at a school in
Southern California.
The governor has often tried to have it both ways with the PUC. Last week he
held a press conference to say he was going to direct the commission to act
on a plan to bail out alternative power generators. Yet yesterday a spokesman
insisted Davis knew nothing of Lynch's plans to propose a tiered rate
increase.
Davis has appointed three members of the PUC, giving his members a majority
on the five-member board.
But this isn't the first time Davis has tried to shy away from PUC decisions.
In December, when he had appointed just two members, he said, "It doesn't
matter what I think. The PUC is the legal body that will make a determination
as to what, if any, rate increase is appropriate."
Assembly Republican leader Dave Cox of Fair Oaks, elected to his new
leadership role just yesterday, said Davis cannot run away from this rate
increase.
"My guess is he has everything to do with it," Cox said. "My guess is Ms.
Lynch at the PUC doesn't work independently of the governor."
But sources in the governor's office insisted that the governor had no
knowledge of Lynch's press conference. In fact, they said the governor was
frustrated by not knowing the announcement was coming.
Lawmakers could only shrug yesterday when told that the governor yesterday
said in written comments that it is his "hope and expectation that this
matter can be resolved within the existing rate structure."
Assemblyman Fred Keeley, D-Boulder Creek, the lower house's point man on the
energy crisis, called Davis' attempts to keep rates stable "noble."
"We are now past the time of pursuing noble goals -- we're at a time when it
is important to problem solve," he said. "One of the tools absolutely
necessary to solve this problem is to raise rates. I don't like it, I don't
think there is anybody who does. But to continue now to maintain the fiction
that rates don't have to go up, will cause rates to go up more when they do
go up and will make it take longer to solve the problem."
Speier said she believes the problem is "spiraling out of control."
"It is a time to take bold steps, such as seizing assets," she said. "This is
how leadership is tested."
Davis has taken pride in being cautious, but in an emergency that lack of
decisiveness could be his downfall.
"As this goes on and the treasury is barren, he is going to be attacked for
other reasons," DiCamillo said. "As other things get cut from the budget,
this will loom in the backdrop."
One advantage for Davis is that the PUC has often been a scapegoat for
unpopular regulatory decisions, DiCamillo said.
But on a day when Secretary of State Bill Jones became the first Republican
to announce that he will oppose Davis in 2002, GOP lawmakers grew bolder in
their criticism.
"Regretably, I don't think the governor even today understands the magnitude
of the problem," Cox said. "The governor has to be engaged."
Assemblyman Bill Leonard, R-San Bernardino, said ratepayers will be faced
with a "Davis price surcharge."
"The indecision, the lack of a plan for the last four months has resulted in
increased costs that have to be laid at the governor's door," he said.
Energy Crisis Jolting Sacramento What Gov. Gray Davis has said this year
about the possibility of rate increases: . After a plan for the state to
purchase electricity directly from power generators and sell it at cost to
cash-strapped utilities:
JAN. 14 -- "There will be no rate increases."
After announcing that California would begin signing long-term contracts with
power generators at prices lower than those available on the open market:
FEB. 2 -- "This will allow us to enter into and sign long-term contracts that
I believe will allow us to resolve our energy challenge without raising
rates."
FEB. 3 -- "I believe we can get through this without the need for raising
rates," he said. "But it's going to take a very substantial effort on the
part of every citizen. They will have to consume considerably less energy
than they did last summer. My office is so dark you can nearly develop film
in it."
FEB. 17 -- "Believe me, if I wanted to raise rates I could have solved this
problem in 20 minutes. . . . It is my plan that all this can be done in the
existing rate structure."
FEB. 27 -- "I have been telling people I think we are on the back side of the
crisis."
E-mail Lynda Gledhill at lgledhill@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 11
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Pleas for Warning Of Next Blackout
ISO to address customers' biggest gripe about outages
Chuck Squatriglia, Chronicle Staff Writer
Monday, March 26, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/26/M
N160850.DTL
Under intense public pressure, state power regulators will try to solve a
widespread complaint about the rolling blackouts plaguing California: how to
warn people that the lights are about to go out.
One of the biggest gripes people have about the outages is getting no advance
warning of outages that render everything plugged into a wall socket utterly
useless.
While many people say they understand blackouts are, for now, a fact of life,
they also want to know when the next one will roll through their
neighborhood.
Jillian Hom, an employee at a San Francisco branch of Baskin Robbins, said it
would sure come in handy to get advance notice of a power outage --
especially in the ice cream business.
"It would give us time to cover up all the flavors of ice cream so they would
stay colder longer" she said. "It would also give us time to prepare because
we're not supposed to stay open during a blackout."
Although the utilities pull the plug, the decision to start a rolling
blackout is made in Folsom by the Independent System Operator, which manages
the state's massive power grid. The outages begin whenever California's
electricity reserves dip below 1.5 percent, threatening to bring the grid
crashing down.
ISO board member Carl Guardino thinks it might be time for the agency and the
utilities to begin warning people before cutting the juice. He plans to raise
the issue during Friday's board meeting.
Guardino could not be reached for comment but purportedly wants to balance
protecting the grid with allowing people to prepare for a blackout.
"He understands the situation the ISO is in, and he understands that PG&E is
doing the best that it can," said Michelle Montague-Bruno, spokeswoman for
the Silicon Valley Manufacturing Group -- which Guardino leads. "He's
completely sympathetic to everything everyone is dealing with. But he also
thinks we have to do something to improve the system."
The inconvenience of a sudden outage goes far beyond missing your favorite
soap opera or even having the ice cream melt. Businesses lose money.
Researchers working with radioactive, infectious or corrosive materials face
grave risks. High-tech firms spend hours or even days recalibrating
equipment. The list goes on.
These hassles could be minimized, if not avoided, if PG&E would tell people
when and where the outages will strike, Montague-Bruno said.
"The more warning they can give, the more we can prepare," she said.
Although the outages often come out of the blue, PG&E's 4.8 million customers
have a vague idea of when it's their turn in the rotation.
Customers are assigned to one of 14 blocks, and power is cut to each block
sequentially. Customers can determine which block they're in by looking at
the lower left corner of their bill.
"If you're in block 14 and we're (cutting power) in block 4, you know you can
breathe fairly easily," said utility spokesman Scott Blakey. "But if you're
in block 5, you know you can expect an outage."
But the blocks cover vast swatches of the state, and power can be cut to a
portion of each block. That leaves critics complaining that block numbers are
all but meaningless.
Brandie Spencer, a shift manager at the Pasta Pomodoro chain in Berkeley,
said the restaurant's accounting department deals with the power bills so she
has no clue what her block number is.
"I have no idea when they plan to pull the plug on us," she said. "But I do
know that it will be bad if it comes as a surprise in the middle of a busy
day.
We don't have back-up generators, so food orders won't be able to be filled,
cash registers won't work and I can't very well send customers home."
PG&E argues providing more specific information could jeopardize public
safety. It claims criminals would know which neighborhoods and businesses
aren't protected by burglar alarms, security cameras and the like.
But authorities in Palo Alto and Alameda -- two cities with municipal
utilities that actively tell customers where the next outage will strike and
roughly when it's coming -- haven't found any evidence supporting that view.
"I can't think of a major increase in crime during the blackouts," said Agent
Jim Coffman, spokesman for the Palo Alto Police Department.
Others note that outages typically come during daylight hours, when criminals
are less likely to strike, or early in the evening, when most folks are home.
PG&E also argues there isn't time to alert millions of people to rolling
blackouts, which often start with just a few minutes notice from the ISO.
"We often do not have any lead time," Blakey said. "The last time we had
outages, (the ISO) lost two power plants just like that. Bing, bang, boom and
we were in the middle of a Stage 3 alert."
Municipal utilities also have a fraction of the customers that PG&E does,
which makes it far easier for them to notify people, Blakey said.
"We have an average of 225,000 people in each block," he said.
That's about 10 times as many people as the Palo Alto Utility Department
serves. But municipal utilities said notifying customers isn't particularly
difficult -- or costly -- thanks to the Internet.
Alameda Power and Telecom spent about $20,000 creating a system using a
telephone hot line, e-mails and faxes to provide information to its 32,000
customers, said utility spokesman Matt McCabe. The information is available
within minutes of an ISO call for outages, he said.
"It wasn't a tremendous expenditure of money, but it has been a lot of time,
" McCabe said. "But Alamedans have a very high expectation, and rightfully
so, that we should keep them apprised of the power situation. That's an
obligation that we have."
Chronicle staff writer Stacy Finz contributed to this report / E-mail Chuck
Squatriglia at csquatriglia@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 1
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PUC set to give up on rate freeze; increases up to 36% likely
Posted at 11:29 p.m. PST Monday, March 26, 2001
BY VBY JOHN WOOLFOLK

vMercury News

State regulators today are poised to deliver consumers a jolt by boosting
residential electric bills as much as 36 percent or $47 a month.
The California Public Utilities Commission's proposed rate increase comes on
top of a 9 percent ``temporary'' increase approved in January and despite
Gov. Gray Davis' promises to solve the state's crisis without higher rates.
Regulators plan to make that 9 percent increase permanent as well. The higher
rates would take effect immediately upon expected approval at today's meeting
and would appear on bills beginning in May.
``We have unfortunately come to the conclusion that a rate increase is
needed,'' said Loretta Lynch, the commission's president. ``It's time to pay
the power bills for California.''
Under the tiered-rate proposal, more than half of residential customers would
see their bills jump by $6 to $47 a month. But energy misers and the poor
won't see any increase.
Industrial customers, who historically enjoyed lower rates than homeowners,
would see their bills soar more than 40 percent. Commercial customers would
pay 22 percent more than they do now.
Lynch described the plan as a way to encourage conservation and help avoid
blackouts this summer.
``Electricity hogs will need to pay more for the energy they use this
summer,'' she said.
Davis, who appointed a majority of the utilities commissioners, including
Lynch, was said to be fuming over Monday's announcement.
``It is still his hope and expectation that this matter can be resolved
within the existing rate structure,'' Davis spokesman Steve Maviglio said.
Consumer advocates blasted the increase as a betrayal.
``It's obviously a huge disappointment for consumers,'' said Robert
Finkelstein, an attorney for The Utility Reform Network.
``Up to this time, the Davis administration and the PUC, in particular, had
made encouraging noises about getting the money out of the generators,''
Finkelstein said, referring to private companies charging high wholesale
rates for power. ``This draft decision seems to be an abandonment of that
position in favor of taking it out of the consumers' hides.''
But most state lawmakers have abandoned hope of avoiding higher consumer
rates. In recent weeks, they've seen negotiations to prop up the foundering
utilities stall and the administration's efforts to secure low-cost power
contracts fall far short of expectations.
Meanwhile, the state has been spending more than $1 billion a month buying
power for the major utilities, mostly on short-term markets, where prices
have risen eightfold.
``I don't think anybody is fooled about the inevitability of a rate
increase,'' said Assemblywoman Carole Migden, D-San Francisco.
Assembly Speaker pro tem Fred Keeley, D-Santa Cruz, a central figure in the
state's efforts to resolve the crisis, called Davis' rate-increase resistance
a noble but unrealistic goal.
``We are now past the time of pursuing noble goals,'' Keeley said. ``We are
at a time where it is important to problem-solve.''
Commissioners, who hastily drafted the rate increase over the weekend, said
it was needed to keep the major utilities from sinking into bankruptcy, which
they fear could unravel the state's electric system. Pacific Gas & Electric
Co. and Southern California Edison have been nearly bankrupted by soaring
wholesale power costs that aren't covered by their state-frozen rates.
Officials at PG&E and Southern California Edison were combing through the
PUC's rate-increase proposal Monday. PG&E declined to comment.
Commissioners blamed the Federal Energy Regulatory Commission for failing to
rein in wholesale power costs with price caps despite mounting evidence that
independent energy companies are gouging California consumers.
U.S. Sen. Dianne Feinstein, D-Calif., said a rate rise could ease approval of
legislation she is carrying that would force federal regulators to enact a
regional price cap.
``There has been some resistance by members of Congress who feel the people
of California have not fully faced up to the energy crisis,'' said Feinstein
spokesman Howard Gantman.
The proposed rate increase of 3 cents per kilowatt-hour, along with the
1-cent increase in January, would push California residential rates over 15
cents, among the highest in the nation.
Rates will be based on how much electricity customers use. Power-pinching
residential consumers who use no more than 130 percent of their ``baseline''
allotment, an amount based on regional climate, would see no further rate
increase at all. Poor customers who qualify for rate assistance also would be
exempted.
But PG&E residential customers who exceed 130 percent of the baseline --
currently more than half -- would see their bills rise 9 to 36 percent.
State regulators said they needed to quickly boost the utilities' revenues
with higher rates to keep small energy producers from cutting off supplies.
Another concern was that the utilities haven't paid the California Department
of Water Resources for the power it has been buying since January for their
customers, draining billions from the state's general fund.
In approving the rate increase, regulators plan to order the utilities to pay
the small generators and the state for their ongoing power costs, and to
reimburse the state for its past purchases.
PG&E and Edison have received some $400 million in additional revenue from
the earlier rate increase and now have more than $4 billion in the bank,
regulators said.
Even so, regulators say utilities still face a cash-flow problem. The new
increase will add $4.8 billion to their annual revenues.
The commission, however, is ordering the utilities only to pay power
companies for ongoing costs. It does not address the $1.5 billion owed to the
small generators or the billions in debt to large power suppliers.
Lynch said no further rate increase should be necessary, and that consumers
could be refunded if investigations show they've been overcharged.

Staff writers Jim Puzzanghera, Jennifer Bjorhus, Dion Nissenbaum and Michael
Cronk contributed to this report.
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Gov. Davis' hard line against higher rates is fuel for challengers
Posted at 10:44 p.m. PST Monday, March 26, 2001
BY DION NISSENBAUM AND HALLYE JORDAN

Mercury News Sacramento Bureau

SACRAMENTO -- The political sharks are starting to circle Gov. Gray Davis as
the state's energy crisis threatens to drain the average Californian's
wallet.
With energy regulators -- most of them Davis appointees -- preparing today to
raise rates, opponents on his left and right are beginning to smell blood,
raising their hopes of making Davis the first one-term California governor in
more than 50 years.
Republican Secretary of State Bill Jones, sounding what is expected to be a
key theme, announced his long-expected plan Monday to challenge the
Democratic governor next year by accusing Davis of putting ``his head in the
sand'' during the energy crisis.
Consumer groups are vowing a ``ratepayer revolt'' and ballot measure that
could batter Davis during his re-election campaign.
And Davis is facing the growing possibility that a member of his own party
may view the governor as vulnerable enough to challenge him for the
Democratic nomination.
``The political danger is in rates,'' said Mark DiCamillo, director of the
non-partisan Field Institute. ``That's when the political punch hits.
``If the rates rise and the governor hasn't been able to hold them back, his
standing would start to crumble.''
For weeks, Davis has been expressing his ``hope and expectation'' that energy
bills wouldn't need to rise more than the 20 percent that's already been
approved. He has sought to portray himself as a staunch defender of the
average Californian.
Once again, Monday, even as his own political appointees to the Public
Utilities Commission were proposing immediate and stunning rate hikes, Davis
again expressed his ``hope and expectation'' that such a move would not be
necessary.
But as the crisis appears to worsen, there seem to be few people left,
including those on governor's own staff, who believe the problems can be
solved without asking Californians to pay more -- dramatically more -- for
power.
In some ways, Davis has painted himself into a corner much the way President
Bush hurt his 1992 re-election chances by breaking his ``no new taxes''
pledge.
Two options for Davis
Davis faces two options: oppose rate increases that nearly everyone else sees
as inevitable and take continuing hits for failing to lead, or reverse course
and face criticism for abandoning his longstanding opposition.
Either choice could hurt his political prospects -- both for governor and as
a potential presidential candidate in 2004.
In the Capitol, some lawmakers, Democrats included, are becoming increasingly
frustrated at his refusal to talk about raising rates and have begun to raise
questions about his leadership.
Assemblyman Fred Keeley, D-Santa Cruz, called the governor's stand against
rate increases ``a noble goal,'' but added, ``We are now past the time of
pursuing noble goals.''
``One of the tools that will be absolutely necessary to solve this problem is
to raise rates,'' said Keeley, one of the Legislature's key energy
negotiators. ``To continue now to maintain the fiction that rates don't have
to go up will cause rates to go up more when they go up and will take longer
to solve the problem.''
Another senior Democratic lawmaker likened the governor's position to
President Lyndon B. Johnson during the Vietnam War when the violent morass
engulfed his administration, created a national crisis and pressured him to
abandon his 1968 re-election bid.
``There will inevitably be people surfacing who will challenge the governor
from within the party,'' the lawmaker said.
Jones to challenge Davis
On Monday, Secretary of State Jones -- the only Republican in statewide
office -- said he would challenge Davis next year and used the energy crisis
as his major hammer.
Jones told reporters in Sacramento that Davis turned a blind eye to
skyrocketing energy costs in San Diego last summer, an early warning that
could have helped the state avert the electrical mess.
``Instead, the governor chose not to have a bold, aggressive plan,'' Jones
said. ``He chose to basically put his head in the sand, and hope that the
problem would go away.''
But Davis still holds some commanding advantages. He has raised an
intimidating $26 million for his re-election campaign -- compared with
$118,000 for Jones. And he continues to receive strong support from
Californians in polls.
``I think that one of the reasons that the governor's public standing has
remained favorable is because the average person out there clearly
understands that he has been fighting the good fight on behalf of
ratepayers,'' said Garry South, the governor's chief political consultant.
Even so, more and more lawmakers are urging Davis to take more decisive steps
to bring the crisis under control, which could undermine the image of Davis
as a methodical, but sure-footed chief executive.
``I think the governor should peek out from behind the curtain'' and tell
Californians what he intends to do to solve the crisis, said Assemblywoman
Carole Migden, D-San Francisco.

Mercury News Staff Writer Mark Gladstone contributed to this report.

Contact Dion Nissenbaum at dnissenbaum@sjmercury.com or (916) 441-4603 or
Hallye Jordan at hjordan@sjmercury.com or (916) 441-4602.
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Consumer frustration keeps pace with rate hikes
Posted at 10:44 p.m. PST Monday, March 26, 2001
BY MICHAEL CRONK

Mercury News

Faced with yet another surge in their monthly utility bills, consumers have a
couple of questions they'd like answered:
Is there ever going to be a limit to energy costs? And just how much money do
the power companies really need?
Oh, and Carol Wilson of Campbell has another. What more can be expected of
her and other residents who have significantly cut back on their energy usage
``other than freezing to death or not cooking.''
Officials with the state's Public Utilities Commission say the proposed
average hike in residential electricity rates of more than 20 percent is
meant, in part, to encourage energy conservation and to avoid power problems
this summer.
But residents, who point out that they don't have money to burn, say they've
had no choice but to conserve energy anyway.
``We're keeping use down to the best of our ability. My husband, Jerry, and I
sit home nights wearing jackets, huddled under blankets. We eat out more and
prepare more cold meals so we don't have to use our gas burners,'' said
Wilson, a retired director of medical records for Alexian Brothers Hospital
in San Jose. ``What's so maddening is we're doing things so our bill will
come down a bit, and then we look around and see so much waste from the
bigger users. For example, why don't they shut off some of the lighted signs
when their businesses aren't open?''
Jose Artellaga, a father of three who collects shopping carts for a Redwood
City supermarket, said he can weather the increase, but he worries about his
friends who wash dishes or flip burgers for a living.
``For me it won't be hard, because I make a good salary,'' he said. ``But how
are they going to pay? It's a massacre.''
Artellaga said individual families shouldn't be the ones to pay higher rates
-- the businesses that consume most of the energy should.
Art Carey, a retired college instructor from Fremont, has installed
fluorescent rather incandescent bulbs in his home, lowered the thermostat,
and runs the swimming pool filter at night. But he said that conservation by
individual homeowners won't be enough to solve the energy shortfall problem,
and he worries that low-income families won't be able to absorb the cost
increases.
``I'm still convinced that energy supplies are being manipulated by
out-of-state providers,'' he said. ``It's one of the principal reasons for
the price increase in gas and electricity.''
For Jessica Powers, a 22-year-old who moved to San Francisco from Ohio nine
months ago, a rate hike could have some practical effects.
``It could be `no eating out Wednesday nights,'?'' said Powers, who described
herself as ``just scraping by'' financially.
Powers and her two roommates have been vigilant about keeping the lights off
and energy use to a minimum in their Lower Haight apartment, and she
acknowledged an increase would amount to a minor inconvenience.
``But for the elderly, immigrants and low-income people, it will more
drastically change their lives,'' said Powers, a development assistant for
the San Francisco-based National Center For Lesbian Rights. ``That bothers
me.'' Contact Michael Cronk at mcronk@sjmercury.com or (408) 343-4523.

Staff writers Ken McLaughlin, Karen De Sa and Alexis Chiu contributed to this
report.

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Seeing the light in energy crisis
Tuesday, March 27, 2001
Reality finally seems to be breaking through a little on the electricity
crisis: "California's top power regulator proposed a 40 percent hike in
electricity rates Monday, saying such an increase should encourage customers
to cut back on usage and conserve enough power to get through the hot summer
months," AP reported yesterday.
"Loretta Lynch, president of the Public Utilities Commission, said rates
should increase by an average of 3 cents per kilowatt hour. The current rate
averages 7.5 cents per kilowatt hour."
The PUC could vote as early as today to increase rates, with the effective
date as early as April 1. A rate hike of less than 40 percent also is
possible. Although Gov. Gray Davis continues publicly to oppose rate hikes,
Ms. Lynch is a close political associate of his and was appointed by him.
"It's a move in the right direction," Robert Michaels, a professor of
economics at Cal State Fullerton, told us. But he said he didn't know how
much prices should go up because of uncertainty in other areas. "Even in
Sacramento everybody is saying rates could double in a year. Nobody knows
what's being spent by the state on short-term energy. Or long-term energy. Or
knows all the unknowns of the long-term contracts" the state signed earlier
this month.
A 40 percent rate increase also wouldn't cover "all the things from the past
- the bills the utilities have to pay" to the independent electricity
generators. But there is one positive aspect, he said: "It will convince
consumers that there really is a scarcity in electricity."
Unfortunately, a rate increase could come in a politically manipulated form.
"Gov. Gray Davis, faced with the near inevitability of raising consumers'
electricity bills, is leaning toward a rate system whereby those who use more
power pay more than those who conserve," reported the San Francisco
Chronicle. "Sources close to the governor said he is being lobbied by his own
staff members to accept a so-called structured rate system."
"I am a fan of restructuring rates to exempt conservation," Ms. Lynch told
the Chronicle. "People who use a whole lot of power should pay more."
"It's an idea we can use rates to redistribute wealth," Mr. Michaels said. He
also pointed out that the crisis really doesn't involve large, industrial
users, who use a mostly constant amount of electricity in their business and
manufacturing processes year-round. Rather, the problem mainly is with
residences, which comprise one-third of usage but which are the "main users
of the peak time, the evening, when air conditioning is turned on."
Can't the state politicians look beyond the current crisis, for once? As the
state heads into a recession, do we really want to charge more to large
electricity users, such as businesses? And what if the many new Internet
"server" businesses can't cut power, just to name one industry? Businesses
would begin avoiding this state like a cow avoids an electric fence.
And what about people who stay home because they're retired, sick or for some
other reason? Should they pay more if they can't cut back? We don't charge
more for gasoline for people who drive 50 miles to work than for people who
drive 10 miles. Why should electricity be different?
Even as the state moves toward more rational pricing of electricity, the
mistake would be compounded by a rate structure that might be difficult to
dismantle as more power plants come on line and the crisis passes.
Finally, this crisis began with a flawed approach to free markets, misnamed
deregulation, and last fall deepened quickly as Gov. Davis and the
Legislature responded with every possible government solution that might
avoid the inevitable - higher electric rates. Now, the state faces the worst
of all possible worlds: a future with high electrcity prices, inadequate
power production particularly for summer, a massive debt for power bills owed
and a potential large deficit blown through what was once a state budget with
a surplus.
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Power rates may surge
PUC chief proposes a tiered structure that could raise costs for some
businesses and other big users by up to 36%.
March 27, 2001
By KATE BERRY
The Orange County Register
California's top electricity regulator Monday proposed a rate increase of as
much as 36 percent that would be shouldered primarily by businesses and
energy-guzzling consumers.
The plan by Loretta Lynch, president of the California Public Utilities
Commission, would attempt to solve part of the state's energy crisis by
raising electricity rates 3 cents per kilowatt-hour. The plan is expected to
be approved by the commission today.
The increase would later be subjected to a tiered-rate structure so that the
more consumers use, the more they would pay, Lynch said.
"Electricity hogs will need to pay more for the energy they use this
summer,'' Lynch said at a news conference.
About 40 percent of residential customers would not be hit by any rate
increase, Lynch said, because their usage is 130 percent or less of
"baseline," a subsistence level that varies regionally in the state.
Consumers who use between 130 percent and 200 percent of baseline would face
increases of as much as 9 percent, while those who use more than 200 percent
of baseline would pay the biggest increases.
Since January, the state has put itself in the precarious position of buying
power for the utilities at a rate of $45 million to $66 million a day - with
no mechanism to recoup the funds.
The rate increase would pay for the state's current and future power
purchases - which are estimated at $23 billion through 2002. It also would
cover power purchases from independent producers, known as qualifying
facilities, whose unwillingness to operate without being paid contributed to
last week's rolling blackouts.
The proposed rate increase would come on top of January's increase of 9
percent to 15 percent. An additional 10 percent increase is planned for next
year.
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Energy notebook
Senators struggle with PG&E rescue talks
March 27, 2001
Bloomberg News
SACRAMENTO PG&E Corp.'s negotiations with the state of California on a
financial rescue package are "not encouraging" and the state Senate is
consulting with bankruptcy lawyers, a top Democratic state senator said.
The Senate is discussing the possibility that PG&E and aides to Gov. Gray
Davis won't reach an agreement and creditors will force the state's largest
utility into bankruptcy, Senate Utilities Committee Chairwoman Debra Bowen
said. The Legislature has renewed talks in the past week with lawyers on
potential responses to a bankruptcy filing, she said.
PG&E and Davis aides are negotiating the sale of the utilities' transmission
lines in return for billions to help them pay down more than $6 billion in
past debts. Those talks have so far failed to produce an agreement.
"Much of what I've heard has not been encouraging" Bowen told reporters
Monday. "I've been working with utility bankruptcy counsel to make sure we
have a strategy for what to do if those talks fail."
PG&E declined to comment on the negotiations.
California has given PG&E a "detailed offer" and the utility has responded
with a list of questions, said Joseph Fichera, chief executive of New
York-based investment adviser Saber Partners LLC. Fichera is leading the
negotiations for Davis and the state.
The state is close to an agreement with Edison International, Fichera said.
Edison's Southern California Edison, the state's No. 2 investor-owned
utility, has already announced a framework agreement with the state to sell
its transmission lines for $2.76 billion.
Generator says it will lower price if assured payment
CHARLOTTE, N.C. Duke Energy Corp., responding to federal regulators'
accusations of overcharging in California, said it would take less money if
given guarantees of payment for the power it has sold.
The Federal Energy Regulatory Commission accused Duke earlier this month of
overcharging California customers by $17.8 million during power shortages in
January and February. Duke says the prices were reasonable, given the high
risk that generators won't be paid, company spokesman Jeremy Dreier said.
California's Independent System Operator, which runs most of the state's
power grid, had accused generators of overcharging by $6.2 billion since May.
FERC has ordered Duke and other power generators to refund or justify $124
million in sales in January and February.
California's grid operator and the California Power Exchange, where most of
the state's power was once traded, have paid only "a small percentage of the
amounts owed" for past electricity purchases, Duke said in a statement.
Duke said Monday that, though its prices were reasonable, it's willing to
accept lower payments, provided it receives the rates FERC has deemed
acceptable.
"We could be willing to forgo collection of the credit premiums for these
months, provided we receive the FERC" price, Jim Donnell, president and chief
executive officer of Duke Energy North America, said in a statement. "If we
are not assured of payment, the credit premiums are obviously appropriate,
and we would reserve our right to collect the entire amount."
FERC set a $273 a megawatt-hour limit on power sales to California during the
Stage 3 emergencies in January and February.

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Resigned to higher rates
Business officials see little option, though product prices will likely go
up.
March 27, 2001
By KATE BERRY, JOHN HOWARD,
MARY ANN MILBOURN AND TONY SAAVEDRA
The Orange County Register
The proposal by California's top energy regulator Monday to raise electricity
rates will have a significant effect on companies, but business officials
said they see little alternative.
"It just doesn't work when you charge a lower price for something that costs
more to produce," said Kathy Fairbanks, a spokeswoman for the 13,000-member
California Chamber of Commerce. "We don't want the state of California to end
up the way PG&E and Southern California Edison ended up. In a perfect world,
this wouldn't happen. It's not a perfect world."
The proposal Monday by Loretta Lynch, the president of the California Public
Utilities Commission, for an electricity rate increase of 3 cents a
kilowatt-hour also marks a flip-flop by the Davis administration.
Gov. Gray Davis, who appointed Lynch, has been adamant that a plan to solve
the state's energy crisis could be worked out without raising consumer rates.
Lawmakers and energy-industry experts said the change of plan could backfire,
possibly damaging Davis' political career.
Steve Maviglio, a spokesman for the governor, said Davis had "not had
conversations with any commissioners about a potential rate hike," adding
that "it is his hope and expectation that this matter can be resolved within
the existing rate structure."
But lawmakers said the continued high cost of energy and the likelihood of
more blackouts created pressure for a rate increase.
"Look at the numbers,'' said Assembly Speaker Bob Hertzberg, D-Los Angeles.
"When they started looking at this a couple of months ago, they had hoped to
do it without any rate increase. But the numbers are what they are. It's up
to the PUC to keep rates as low as possible."
Republicans believe Lynch is fronting for Davis, taking the political heat
for an increase Davis is loathe to endorse.
"Make no mistake about it - this is a Davis rate hike," Assemblyman Bill
Campbell, R-Villa Park, said shortly before he was ousted Monday as the
Assembly's GOP leader.
Secretary of State Bill Jones, the state's lone Republican statewide
officeholder, announced his intention Monday to run for governor next year.
Jones has been sharply critical of Davis' handling of the state electricity
crisis, saying the governor passed up the chance last fall to buy cheaper
energy under long-term contracts.
"He has done great damage to California in the past six months. He has been
focused on re-election, not policy, and that makes me mad," Jones said.
Assemblyman Fred Keeley, D-Boulder Creek, said lawmakers have been talking
about a $23 billion bill to buy power for the state, which would require
rates to double.
"That's what changed the landscape," Keeley said.
Sen. John Burton, D-San Francisco, was more blunt, saying it was clear
earlier that more money was needed to resolve the energy crisis.
"It's obvious to me that unless you rob a bank or win a lottery, you are not
going to be able to do this without raising rates," he said.
Meanwhile, economists and business leaders seemed resigned to the need for
rates to rise.
Economist Tom Liezer of the University of California, Los Angeles, called the
plan another blow to business, but a minor one compared with wages and other
costs.
The bigger issue, he said, is the state's lack of generating capacity, which
may discourage businesses from locating in the state.
Energy supplies this summer are expected to fall short by 5,000 megawatts
during the midday peak, said Jack Stewart, president of the 800-member
California Manufacturers and Technology Association. He said the rate
increase "will have a dire impact on many manufacturers."
"You may see production shifting out of California or closing down,'' he
said. "But something had to give."
Stewart forecast companies would have to pass on the rate increase to
consumers.
"I don't know how consumer prices can help but go up," he said.
"There's no question a 40 percent increase would have an impact on
businesses, but not doing it would have a greater impact," he said, pointing
to the uncertain power supply and utilities on the verge of bankruptcy.
Ron Danfield, energy manager at B. Braun Medical Inc. in Irvine, was
surprised by the proposed increase.
"Oh, man," Danfield said. "It's going to make our bottom line have some
problems. We've been trying to enact (energy) saving programs to offset the
costs we already have. So, how we (conserve more) will require us to be much
smarter than we already are."
Hans Biermann, owner of Hans Homemade Ice Cream in Santa Ana, isn't certain
what he's going to do.
"I don't know how I can save electricity. If I turn the air conditioning
down, then my 17 freezers have to work harder," said Biermann, who currently
pays about $1,200 a month for electricity for his Bristol Avenue shop. "We're
going to raise our prices a small amount and hope for the best."
Heino Nurmberg, owner of the two-man Estolith Printing Co. in Santa Ana, said
he doesn't expect to be hit by the rate increase because he uses so little
electricity. But he's concerned about placing the burden on the biggest
users.
"If the big users that make the products really get hit hard, then everybody
gets hit because they will raise their prices," Nurmberg said.