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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "SCIENTECH IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Mary_Hain_Aug2000_Jul2001\Notes Folders\All documents X-Origin: Hain-M X-FileName: mary-hain.nsf Today's IssueAlert Sponsors:=20 [IMAGE] The IBM e-Energy Executive Forum =01) "Personalization, Partnership, and=20 Profitability" Designed for executives in the utility industry looking to leverage Custome= r=20 Relationship Management in the competitive marketplace. Topics will focus o= n=20 how process and technology can be leveraged to gain competitive advantage.= =20 Featured speakers will include IT analysts, solution partners, IBM=20 executives, and customers including: John Goodman, President of e-Satisfy;= =20 Richard Grimes, Director of CRM Energy Services; David Bonnett, Global=20 e-Energy Sales Executive, Siebel Systems.=20 www.ibm.com=20 Stay on top of the torrent of e-commerce information news and analysis with= =20 SCIENTECH'S E-Commerce InfoGrid. Get over 100 pages of daily tracked and= =20 verified information regarding what gas, water, electric and utility servic= e=20 businesses are doing to keep ahead in the e-commerce industry. Download a= =20 sample at www.ConsultRCI.com or contact Chris Vigil, toll-free at (888)=20 972-8676 for more information.=20 [IMAGE] The most comprehensive, up-to-date map of the North American Power System b= y=20 RDI/FT Energy is now available from SCIENTECH. =20 [IMAGE] IssueAlert for March 29, 2001=20 California Regulators Approve Massive Rate Increase: Who Benefits and Who Doesn't? by Will McNamara=20 Director, Electric Industry Analysis California regulators earlier this week approved electricity rate increases= =20 topping 40 percent, the largest in the state's history. The California Publ= ic=20 Utilities Commission (CPUC) voted unanimously to raise rates by 3 cents /= =20 KWh. The rate hikes, which take effect immediately but won't appear on=20 customer bills until May, apply to millions of customers of Southern=20 California Edison and Pacific Gas and Electric, the state's two largest=20 utilities. Low-income residents are exempt from the increases. =20 Analysis: For context, keep in mind that it was only two months ago that th= e=20 CPUC approved its first rate increase in response to the staggering debt of= =20 SCE and PGOand other factors related to the California energy crisis. In= =20 early January, the CPUC approved temporary rate hikes of 9 percent for=20 residential customers (about $5 a month for the average customer) and 7 to = 15=20 percent for businesses. The temporary increases were only to remain in effe= ct=20 for 90 days and will be expiring shortly. At that time, both PGOand SCE=20 denounced the temporary increase, which was not surprising considering that= =20 the 9 to 15 percent increase was much lower than the utilities had requeste= d=20 (PGOasked for a 26-percent increase and SCE had asked for 30 percent). The= =20 January rate increase was followed by an additional 10-percent increase tha= t=20 is set to take effect next year. =20 The CPUC's current ruling increases rates by about 42 percent at SCE and 46= =20 percent at PG&E. However, the CPUC's measure will most likely serve to=20 benefit the state more than SCE or PG&E. The CPUC clearly established that= =20 none of the additional revenue earned from the rate increases can be used b= y=20 the utilities to pay for past power purchase costs, which have amounted to= =20 about $13 billion. In addition, the CPUC adopted a proposal by consumer gro= up=20 Toward Utility Rate Normalization (TURN) that a rate cap preventing the=20 utilities from charging market rates should be extended. In other words, th= e=20 portion of the electric rates that PGOand SCE actually receive from=20 ratepayers will remain frozen for the foreseeable future. The CPUC has=20 established that the utilities must still recover billions of dollars in=20 stranded costs before the rate freeze can be lifted. =20 Thus, it appears that most of the revenue accumulated from the rate increas= es=20 will be used to reimburse the state of California for the power purchases i= t=20 continues to make on behalf of the utilities and will not be used to pay of= f=20 any existing debt held by the utilities. PGOalready has responded that the= =20 CPUC ruling attempts to "completely change the ratemaking rules that are us= ed=20 to determine the end of the rate freeze under AB1890." PGOhas said that it= =20 will challenge this and other aspects of the CPUC ruling.=20 However, even though most of the money from the rate increases will go to t= he=20 state, it is also not presently clear if the increases will be sufficient t= o=20 reimburse California for the $4 billion it has already spent to procure=20 power, or compensate for the anticipated $14 billion that it will have to p= ay=20 for power this year. Some of the funds generated by the rate increases must= =20 be used by PGOand SCE to pay for power that they still obtain from supplier= s=20 or to cover costs for their own power generation. Consequently, the CPUC ha= s=20 left open the possibility that additional rate increases may be necessary. = =20 Although it is still being evaluated how individual customer classes will b= e=20 impacted by the rate increases, it is fairly clear that large commercial an= d=20 industrial customers will end up paying the most. Loretta Lynch, president= =20 of the CPUC, maintained that an underlying goal of the increase is to force= =20 what she referred to as "electricity hogs," or those people who excessively= =20 use power without concern for the state's supply shortage, to conserve. Lyn= ch=20 has said that conservation is the key to staving off additional rate hikes,= =20 and that the higher rates should put financial pressure on Californians to= =20 conserve energy, which theoretically should help to reduce the risk of=20 blackouts in the state this summer. The average residential cost for a=20 kilowatt hour is about 12.5 cents for SCE customers and 10.5 cents for=20 PGOcustomers. The new rate increase will add about 3 cents / KWh for the=20 customers of both utilities, which as noted averages out to about a=20 42-percent increase at SCE and a 46-percent increase at PGO(for electricity= =20 alone). =20 However, Lynch also established that a "tiered" pricing structure, which ha= s=20 yet to be fully determined, will be put into place. The tiered pricing syst= em=20 will reward customers who conserve energy and penalize those who do not.=20 Essentially this means that those customers who use the most power will=20 ultimately pay the most, and could face additional rate increases this year= ,=20 which the CPUC did not rule out as a possibility. Under a tiered pricing=20 structure, those customers who conserve on their power usage may not see=20 their bills increase beyond the rate increase approved this week. =20 The CPUC also ruled that PGOand SCE must pay small independent generators i= n=20 the state (known as qualifying facilities) for energy within 15 days of=20 delivery. Over the last week, California has again issued Stage 3=20 emergencies, signaling that power reserves have fallen to dangerously low= =20 levels. Contributing to the problem is the fact that QFs have stopped=20 producing in recent weeks as a result of the financial problems of PGOand S= CE=20 and the fact that they have been paid only a small percentage of what they= =20 are owed for power previously produced. Under normal circumstances, the QFs= =20 can generate as much as 30 percent of the state's electricity needs. The CP= UC=20 ruled that PGOand SCE must pay the QFs within 15 days of the end of a billi= ng=20 period, or suffer from penalties equal to the amount of their outstanding= =20 payment.=20 Gray Davis, who throughout his tenure as California's governor assured=20 Californians that rates would not be increased, attempted to distance himse= lf=20 from the CPUC's ruling, and in fact issued a statement that he has no contr= ol=20 over the commission's decision. Further, Davis said that the rate increase= =20 was "premature" because the state is still evaluating the financial numbers= =20 that are needed to make a sound decision. In turn, the CPUC's Lynch=20 criticized both the governor and the Federal Energy Regulatory Commission= =20 (FERC) for "failing to act" on energy rates up to this point.=20 In addition to its comments regarding the rate freeze, PGOresponded with a= =20 mixed reaction to the CPUC's ruling on the rate increase. On one hand, the= =20 utility said the ruling offered a "welcome dose of realism." However, the= =20 utility also said that the rate increase "does not offer a comprehensive=20 solution, fails to resolve the uncertainty of the crisis and may even creat= e=20 more instability." Based on previous statements that PGOhas made, the utili= ty=20 believes that the state's fundamental problem has its origins in the=20 wholesale market, where prices have often exceeded $300/MWh. =20 Some power generators, many of whom have been lambasted by California and= =20 federal regulators for alleged price gouging, went on record with a favorab= le=20 response to the rate increases. Jeffrey Skilling, Enron's CEO, said, "There= 's=20 been a need to balance supply and demand [in California] and to date I don'= t=20 think anyone has been willing to let the prices rise to help balance supply= =20 and demand. So [the increases] are a huge step forward in reducing the odds= =20 of shortfalls." Keith Bailey, chairman and CEO of Williams, told Reuters= =20 that he thought the CPUC's rate increase was a rational decision and=20 something that the industry has been suggesting for some time. =20 Naturally, many consumer activists reacted vehemently against the rate=20 increases and protested during the CPUC's proceedings. The main argument of= =20 the consumer groups is that the CPUC, the governor and FERC have not=20 fulfilled their regulatory responsibilities in bringing down electricity=20 prices in the state and have not acted with enough force to restrict what= =20 they perceive as excessive prices for power owned by out-of-state generator= s.=20 This position gained momentum last week when the California ISO reported th= at=20 electricity wholesalers overcharged state utilities by $5.5 billion over th= e=20 past 10 months. Consumer groups also continue to oppose any sort of a=20 bail-out for PGOand SCE and believe that the utilities have hidden money=20 under the protection of other subsidiaries within their parent companies.= =20 Both utilities maintain that any financial restructuring activities they ha= ve=20 implemented have been legal. =20 Moreover, while the rate increases may help the state to continue securing= =20 power on behalf of the utilities, other fundamental problems related to the= =20 state's energy crisis remain unresolved. The CPUC has asserted that part of= =20 the benefit of the rate increases is to keep the utilities financially=20 solvent. However, at the same time, the commission clearly states that none= =20 of the extra revenue generated by the rate hikes can be used to pay down th= e=20 utilities' outstanding debt. Consequently, although the higher rates should= =20 significantly increase revenues for both utilities ($2.3 billion a year for= =20 SCE and $2.5 billion a year for PG&E), all of this money apparently will be= =20 turned over to the state and do little to alleviate the utilities' own=20 financial problems. This issue still remains unresolved and under the domai= n=20 of the state legislature. However, the likelihood that PGOand SCE would nee= d=20 to declare bankruptcy remains strong (unless additional rate increases or= =20 securitization takes place). In addition, other fundamental problems such a= s=20 the supply / demand imbalance in California and the related volatility of t= he=20 state's wholesale market continue to wreak havoc on the market's=20 stakeholders. While the CPUC's rate increases may be a positive step toward= =20 stabilizing the state's financial, the future remains quite uncertain for= =20 PGOand SCE.=20 An archive list of previous IssueAlerts is available at www.ConsultRCI.com Reach thousands of utility analysts and decision makers every day. Your=20 company can schedule a sponsorship of IssueAlert by contacting Nancy Spring= =20 via e-mail or calling (505)244-7613. Advertising opportunities are also=20 available on our website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us=20 know if we can help you with in-depth analyses or any other SCIENTECH=20 information products. If you would like to refer a colleague to receive ou= r=20 free, daily IssueAlerts, please reply to this email and include their ful= l=20 name and email address or register directly on our site. =20 If you no longer wish to receive this daily email, send a message to=20 IssueAlert, and include the word "delete" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= =20 of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlert= s=20 are not intended to predict financial performance of companies discussed, = or=20 to be the basis for investment decisions of any kind. SCIENTECH's sole=20 purpose in publishing its IssueAlerts is to offer an independent perspecti= ve=20 regarding the key events occurring in the energy industry, based on its=20 long-standing reputation as an expert on energy issues. =20 Copyright 2001. SCIENTECH, Inc. All rights reserved.
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