NY Times January 4, 2001



LOS ANGELES, Jan. 3 Under enormous pressure to bring some relief to California's struggling utilities, the state's Public Utility Commission proposed a roughly 10 percent increase today in what consumers would pay for electricity, but financial analysts said it was too little and that the state's energy crisis was likely to grow far worse.

Even as some consumer groups said no increase was justified, the utilities complained that the proposals, far below the nearly 30 percent rise they had been seeking, would not stop their slide toward bankruptcy because of the rocketing prices they are being forced to pay for power on the wholesale market. The agency's commissioners are expected to vote on the rate proposals on Thursday.

The proposed rate changes came on a day when the state's energy problems started to move from the regulatory realm to the political realm, as Gov. Gray Davis opened a special session of the Legislature to consider suggestions for fixing a power system that most experts have declared a near total failure in market deregulation.

The financial implications of the utility commission's proposal were clear immediately. On a day that stock markets shot up because of a big cut in interest rates by the Federal Reserve, the shares of the state's two largest utilities, Southern California Edison and the Pacific Gas and Electric Company, plummeted.

In addition, some analysts said the agencies that rate the utilities' creditworthiness could immediately downgrade them substantially. That would make it harder for the companies not only to borrow more money, but also to buy the power they need to operate on the open market.

"We don't think we even got close to what the financial community needed," said John Fielder, the head of regulatory affairs for Southern California Edison, a unit of Edison International. "Either they don't fully understand what the situation is or they may not believe it's such a bad thing to put the utilities into bankruptcy."

As the utilities struggle, Governor Davis outlined modest proposals for reform. He is expected to present more details at his annual address to the Legislature, scheduled for Monday. Politically, the governor and the Legislature face an almost impossible balancing act, trying to mediate the needs of the utilities and the demands of consumers.

Governor Davis, who has fashioned himself a centrist and a New Democrat inclined more toward markets than state control, must take strong actions that protect both businesses and consumers, political experts said, while not intervening in the markets so much that he would be vulnerable to criticism that he is an old-fashioned liberal.

"Whatever the solution is, it's going to be tough," Robert M. Hertzberg, the speaker of the State Assembly, said. "It's going to have to be strong, but that is going to bring it up against those philosophical issues."

Democrats control both houses of the Legislature and have suggested several proposals, most more radical than the governor's, which would reimpose more state control over the power system.

John Burton, the president of the State Senate, said in an interview that about the only proposal not on the table was the only one that just about everybody would support: going back to the regulated system that existed until a few years ago, when the state began its experiment in deregulation.

"I wish we could do that, but we don't know how at this point," Senator Burton said. "It's like putting toothpaste back in the tube."

He predicted that the issue had become such a lightning rod that it was bound to exact some political price for all those involved, especially Governor Davis, whose two years in office have left him with high marks and mention as a potential candidate for the White House in 2004.

Mark Baldassare, a senior fellow at the nonpartisan Public Policy Institute of California, said, "I believe the governor's quite concerned that if there are brownouts around the state this summer or worse he will pay a high political price."

When the Legislature unanimously passed the deregulation law in 1996 under Mr. Davis's predecessor, Gov. Pete Wilson, a Republican, there was a large surplus of power in the West and California's consumers were expected to be the beneficiary of strong price competition.

Since then, however, demand has grown strongly in California and other states because of the robust economy and an expanding population.

At the same time, the Legislature had put the utilities in a vise. While the companies have to pay market rates for their power, the rates they can charge consumers remain regulated until March 2002. As a result, the utilities say, they have been paying as much $1 for each kilowatt of power, but can charge only about 6.5 cents.

Southern California Edison said that in December alone it paid $1.1 billion more for its power than it could charge, and that the rate increase proposed today would allow it to recoup just $65 million of that, not enough to stave off bankruptcy.

The markets expressed their disappointment today by driving down Edison's stock $2.75 to $12.25, while Pacific Gas and Electric shares fell $2.56 to $17.

The utility commission's proposals were for an initial 90-day period and included increases from 9 percent for most residential users to 15 percent for large industrial users. Low- income people would be exempted, and the increase in rates would go not to the utilities directly but to a special account that the commission would manage.

Some experts say there may not be much time to act. In the summer, which comes early in the state, demand is expected to soar to as much as 50,000 megawatts in the deregulated part of the market, according to the Independent System Operator, the state body created to oversee the wholesale power market, creating the prospect of even higher prices and rolling blackouts because of shortages in supplies.

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