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	"IssueAlert" <IssueAlert@scientech.com>
	10/10/2000 06:32 AM
		 
		 To: 
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		 Subject: PG&E's Rate Cap Proposal: Leading the Charge for Re-Regulation, or 
Protecting Itself from Economic Disaster?

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===============================================================
SCIENTECH IssueAlert, October 10, 2000
PG&E's Rate Cap Proposal: Leading the Charge for Re-Regulation, or Protecting 
Itself from Economic Disaster? 
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Pacific Gas & Electric Co. (PG&E), in filings with the California Public 
Utilities Commission (CPUC) and California Independent System Operator 
(Cal-ISO), has requested that a rate cap be placed on wholesale purchases 
in the state. The utility is asking the CPUC to lower the current rate 
cap from $250 per megawatt hour to $100, or 10 cents per kilowatt hour. 
In seeking the rate cap, PG&E is joined by Edison International, the parent 
company of Southern California Edison, and The Utility Action Network (TURN), 
a ratepayer advocacy group.

ANALYSIS: The current rate cap of $250 per megawatt hour in the wholesale 
market of California resulted from the price spikes experienced in San 
Diego this summer. As San Diego Gas & Electric had paid off its stranded 
costs, the retail rate freeze in its area was lifted and SDG&E customers 
were exposed to market-based prices, which doubled and at times tripled 
due to increased demand in the state and power supply concerns. PG&E 
customers 
were not exposed to the price spikes because, at the time, PG&E had not 
paid off its own stranded costs and was still under a retail rate freeze.

Yet the company has felt the impact from the price spikes just the same. 
PG&E buys a great deal of its power on the wholesale market, and as a result 
is about $2.2 billion in debt (some figures suggest it is as high as $2.7 
billion). Due to the retail rate freeze still in effect, PG&E has been 
unable to pass this debt on to customers by raising its rates. In real 
terms, PG&E was paying up to 19 cents per kilowatt hour on the wholesale 
market this summer, when by law it was only allowed to charge its customers 
on average 5 cents per kilowatt hour. In total, PG&E has paid about $2.7 
billion more to suppliers than it can bill customers for, and this amount 
is growing by hundreds of millions each month. This explains the utility's 
motivation in wanting to see the CPUC further lower the cap on wholesale 
rates in California.

However, even though PG&E as a whole is in debt, the utility*as well as 
other divisions under parent company PG&E Corp.*is still making money off 
deregulation in California. For instance, PG&E's Diablo Canyon nuclear 
plant has been able to capitalize on the high value of power on the wholesale 
market. The utility confirmed recently that altogether its power facilities*
the 
ones left after the utility was forced to divest the bulk of its power 
assets*still provide about $150 million a month to the utility. In addition, 
PG&E Corp.'s unregulated energy commodity trading operation has been doing 
very well. And the unregulated National Energy Group*which operates in 
markets outside of California, such as Massachusetts, Rhode Island and 
New Hampshire*posted a 233-percent profit increase for the second quarter. 
Thus, it is important to note the distinction between PG&E and its parent, 
PG&E Corp. Ironically, as a whole, PG&E Corp. has stated that it does not 
support rate caps, and has opposed the issue when it has surfaced in other 
states.

PG&E reported second-quarter earnings of $216 million on $2.3 billion in 
revenue, representing a 26-percent increase over the same quarter last 
year. Third quarter earnings also reportedly will be strong. This puts 
PG&E in an awkward predicament. On one hand, PG&E wants to convince 
shareholders 
that the company is doing well and making money from the commodities that 
it sells. On the other hand, PG&E is attempting to convince regulators 
that it is losing money due to the high wholesale prices that it must pay 
for power. In fairness, though, the revenue PG&E has earned cannot come 
anywhere near to paying off the massive debt the company has accrued due 
to its obligation of serving customers.

PG&E's rate freeze is scheduled to end March 31, 2002, at the very latest, 
or sooner if it is determined that PG&E's stranded costs have been repaid, 
something that utility executives say may already have taken place. Due 
to higher-than-expected revenues and higher-than-market valuations of the 
utility's assets, it may very well be the case that PG&E's stranded costs 
are already paid off. When this is officially determined by the CPUC, PG&E 
will argue that customers should be liable for some or all of the debt 
it has assumed while the rate caps were in place. The CPUC has scheduled 
a hearing to address these issues on Oct. 19. The core question of these 
proceedings will be whether or not PG&E should be allowed to turn over 
its debt to customers through rate increases once the rate freeze is lifted. 
PG&E wants to be able to retroactively bill customers for its debt, based 
on the date which the CPUC determines that PG&E had in fact paid off its 
stranded costs, a point groups such as TURN will surely protest.

It may seem surprising that TURN was among the group with PG&E that filed 
the petition to lower the rate cap on wholesale prices. Typically, TURN 
and PG&E (along with most utilities) are at polar opposites regarding most 
issues. However, both agree that wholesale rates are too high and want 
to see a new cap put into place, but for completely different reasons. 
TURN says that PG&E and other utilities took a risk when agreeing to the 
rate freeze and they should not be allowed to pass debts that resulted 
from that risk onto customers. TURN continues to retain a watch over the 
proceedings related to PG&E's proposal, specifically with regard to the 
possibility that the CPUC will allow the utility to raise rates on customers.

Within the course of these new developments, it's important to be clear 
on PG&E's motivations. Some California lawmakers and consumer advocates 
have called for a complete return to regulation, arguing that deregulation 
in California has become a failed experiment. Many have surmised that PG&E's 
proposal for wholesale caps is essentially a call to return California 
to a regulated structure. I think this is a misinterpretation. PG&E has 
very clearly stated that its proposal is a "necessary short-term step to 
try to bring prices back in line." PG&E's efforts really shouldn't be viewed 
as a move to return California to a regulated market. Rather, PG&E is merely 
attempting to protect its own interests. The utility wants to secure 
temporary 
lower rates for the power it needs to buy on the wholesale market and 
transfer 
its debts to customers once the rate freeze is lifted. A return to regulation 
via a permanent rate cap would not be in PG&E's best interests as it 
continues 
to sell power from its nuclear plant. In addition, PG&E probably recognizes 
that regulation would discourage additional companies from building new 
power plants in California, which would not be good for the long-term economy 
of the state. This also would do little to lower wholesale prices in 
California. 
As we discovered this summer, the less supply, the higher the price for 
power. 

PG&E's proposal to lower rate caps on wholesale prices is, more than anything 
else, an attempt to protect itself from what it perceives as disastrous 
economic impact if it is not able to transfer its debt to customers. A 
recent Wall Street Journal report inferred that if wholesale prices continue 
to exceed what PG&E can charge customers, the utility could become 
"technically 
insolvent" sometime next year. It will be interesting to see if the CPUC 
has the same perception when it evaluates PG&E's proposal later this month. 

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Sincerely,

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