Long-term power contracts
A ruling from the Federal Energy Regulatory Commission (FERC) in
late June continued a string of mostly bad news the state has gotten from that agency.
On June 25, FERC refused to order the renegotiation of some $12 billion
worth of long-term power contracts that the state says it signed at inflated prices with
companies accused of manipulating power markets during the state’s energy crisis.
In a 2-1 vote, the commission said there was ``no credible
evidence'' that the challenged contracts led to financial distress or harmed ratepayers.
Still pending is another request by California to have FERC
overturn $9 billion in contracts the state made on the spot energy market. FERC has
indicated the state may be entitled to only $3.3 billion.
However, in another ruling on June 25, FERC asked 60 companies
and municipal utilities to justify their bids that exceeded $250 per megawatt hour from
January 2000 through June 2001. If the sellers cannot prove they did not violate market
rules, FERC could order them to give up profits earned during the 18-month period,
although it did not indicate how much, if any, of those profits should be returned to the
state. The targeted power sellers include Pacific Gas and Electric, the city utilities of
Los Angeles, Anaheim, Azuza, Glendale and Pasadena, as well as major power vendors such as
Dynegy, Duke Energy, Sempra Energy and Williams.
The commission said that some of the manipulation of the
California power market was legal "and must be recognized as appropriate business
practices.'' But it also said that much of the behavior included illegal
"gaming" of the market and was "rooted in deception or misrepresentation.''
Similarly, a long-awaited FERC ruling on March 26 also
disappointed the state in its fight for refunds. On the one hand, FERC agreed that rampant
manipulation of California's electricity and natural gas markets in 2000 and 2001 had
boosted prices by billions of dollars, although it also said that significant energy
shortfalls and a fatally flawed market design were the root causes. It singled out 12
companies for potential discipline, issued an exhaustive explanation of how markets were
exploited and left open the possibility of additional investigations.
On the other hand, FERC didn’t agree with the state in its
claims that it was owed refunds for overcharges. State officials were disappointed with
both the March and June refund rulings, but pleased that the federal agency finally
recognized that the state had been a victim of market manipulation and illegal gaming.
A previous decision by a FERC judge in December 2002 was also bad
news regarding the long-term contracts. The state claimed in an appeal to FERC that it had
been overcharged by at least $9 billion during the 2000-01 energy crisis. On December 12,
a FERC judge ruled that the energy supply companies overcharged California utilities by
$1.8 billion, but that the state owed the companies $1.2 billion for unpaid bills.
The state has been able to reduce the power contracts tab by
re-negotiating with some of the suppliers. During 2002, the state re-negotiated a majority
of the deals and, as of November, had been able to get the contracts reduced by about $5
billion. However, consumer advocates said the reworked contracts won't cause consumer
rates to drop anytime soon.
The state, through its Department of Water Resources, was forced
to purchase the power because the deregulation law did not allow the investor-owned
utilities (IOUs) to pass along market prices to their customers. As a result, the two
largest IOUs claimed they were broke and could not get credit to purchase more power.
Critics of Governor Davis, who negotiated the contracts, said he paid too much –
reportedly average prices were $69 per MWH (prices as of September 2002 were less than $30
per MWH) – and locked the state into these prices for over a decade. The total
estimated cost of the contracts is $43 billion. Furthermore, due to a massive conservation
effort, milder weather, and lower prices, the state hasn’t needed all the power it
contracted for and has sold surplus power at a loss.
The financial condition of the two largest electric utilities
The utilities, PG&E and SCE, serve 68 percent of
California’s electricity customers. During 2001, PG&E filed for bankruptcy.
reorganization plan, after undergoing several revisions, was
tentatively approved by CPUC staff in June, and during August was the subject of public
hearings throughout the state. It must be approved by the CPUC, the bankruptcy court, the
utility and its parent company.
PG&E’s original plan would have removed the company from
state regulation and spun off all the most valuable assets to an unregulated affiliate.
The CPUC filed an alternative plan and the bankruptcy court ordered the two to negotiate
The agreement would keep PG&E a regulated company, but would
saddle ratepayers with most of the debt it incurred during the energy crisis – costs which consumer groups
say could be as much as $9 billion, while PG&E shareholders and executives will
continue to profit.
The CPUC projects that the utility’s rates, which currently
average 13.87 cents per kWh, will decline by about half a cent on January 1, 2004, and
continue falling to about 12.8 cents by 2008.
In late 2001, Southern California Edison reached a bail-out agreement with the state that allowed its $3.3 billion in debts to be repaid by
ratepayers and continued its current rates until 2003. This was contested by consumer
groups and held up in court until a ruling by the State Supreme Court on August 21
favoring the utility.
The court unanimously affirmed the CPUC’s authority to
require ratepayers to cover utilities' losses from the 2000-01 spike in power prices. The
justices rejected a consumer group's argument that the 1996 deregulation law required
utilities, not ratepayers, to bear any losses from energy costs through March 2002. The
justices also ruled that the CPUC's settlement of a lawsuit by Edison, approved in a
closed-door session in October 2001 after secret negotiations, did not violate
open-meeting laws. It overturned a federal appeals court decision, which had sided with
the consumer group TURN in challenging the bailout deal as
illegal. TURN had argued the state deregulation law (AB
1890) precluded the CPUC from permitting the electric utilities
to recover in their rates all of their costs incurred during a transition period when the
electric industry was being restructured.
The ruling will likely impact the CPUC’s pending bankruptcy
settlement with PG&E by giving the Commission the green light to require its customers
to pay most of PG&E's debt.
Suspension of direct access, end of deregulation
Another decision made by the CPUC at the height of the energy crisis
was to suspend direct access to electricity supply, one of the cornerstones of the 1995
restructuring bill, effective September 20, 2001. However, it did not affect direct access
contracts prior to that date, most of which had been made by large industrial and
commercial customers (less than 3 percent of residential customers had chosen new
suppliers). As a result, many large users left the system, leaving most of the burden for
the long-term contracts on residential and small business ratepayers. According to the
PUC's decision, customers can keep the power deals they made prior to September 20, 2001,
as well as renew these contracts or change their electricity providers.
In November 2002, the CPUC took up another issue related to
direct access by assigning a surcharge or "exit fee," capped at 2.7 cents per
kWh, to direct access customers. The CPUC said the surcharges would ensure that direct
access customers pay their share of electricity procurement costs incurred during the
energy crisis and prevent such costs from being unfairly shifted to residential utility
customers. The charges amount to about $500 million per year and will be reviewed
periodically. They apply to direct access customers of Pacific Gas and Electric Company,
Southern California Edison Company, and San Diego Gas & Electric Company. In June, the
CPUC voted to continue the exit fee at 2.7 cents per kWh.
On January 16, 2003, the CPUC unanimously voted to cancel an
order from April 20, 1994, that set the state on its disastrous course toward cheaper
electricity through free market competition. The order noted that restructuring the energy
market was now moot. "The commission should close this deregulation proceeding, not
just because there is no continuing need for it, but also because it was a disaster for
ratepayers, utilities and their employees," said Commissioner Carl Wood, a
Energy action plan
In May the CPUC approved an Energy
Action Plan for California that had been proposed by a
subcommittee of the PUC, the Consumer Power and Conservation Financing Authority (CPA),
and the Energy Resources Conservation and Development Commission (CEC).
The EAP is supposed to provide a blueprint for implementing a
unified state energy policy. It proposes six sets of actions that will help to: optimize
energy conservation and resource efficiency, accelerate the State's goal for renewable
generation, ensure reliable, affordable electricity generation, upgrade and expand the
electricity transmission and distribution infrastructure, promote customer and
utility-owned distributed generation, and ensure a reliable supply of reasonably priced
The CPUC website has information on the ongoing implementation of
Lawsuits, investigations against suppliers and utilities
In a move that was mostly seen as moot, the FERC in its
above-mentioned June 25 ruling, voted unanimously to revoke the authority of Enron Corp.,
now in bankruptcy, to operate in the deregulated power markets. Other companies involved
power market misdeeds may be required to return profits as punishment, according to the
The CPUC, the state Attorney General and FERC have been
investigating suppliers for price gouging, withholding capacity, and other misdeeds
leading up to and during the state’s power crisis. The state of California has filed
numerous suits against electricity and natural gas suppliers, as well as against the
parent company of PG&E. It is unclear how many of these are still active given the
FERC order, re-negotiated power deals and bankruptcy settlements.
The most complete list of charges came in March 2003 when
California submitted a 1,000-page final report to FERC that purported to name "almost
60 companies that participated in gaming our energy market." State officials said the
evidence, which was the result of a 103-day investigation, was just the "tip of the
iceberg" in a web of abuse.
The current rate story
On May 15, 2001, what was termed the largest electricity rate
increase in California history was adopted by the Public Utilities Commission for
customers of PG &E and Southern California Edison. At the same time the commission
made permanent a 1-cent per kWh rate increase it had set in January. However, the rate
increase was set up so that low-usage electricity consumers wouldn’t see much of an
increase, while high-usage consumers would. A baseline rate of consumption was
established, along with a five-tiered rate structure, wherein those whose usage was up to
130 percent of baseline are billed at the lowest two tiers, i.e., 12.3 cents or 14.3 cents
per kWh. (Baseline is a quantity of electricity, about 60 percent of the average
residential user's consumption, which is billed at the lowest rate. The amount of baseline
is based on climate zones and seasons.)
Customers who consume over 130 percent are billed at higher
tiers, which range from 19.3 to 25.8 cents per kWh, an increase of up to 47 percent.
Low-income customers on the California Alternate Rates for Energy (CARE) discount were
exempt from the increases. The CPUC estimated that 50 percent of users would see no
A review of the rates in December 2002 revealed that the CPUC was
mostly correct. A SCE spokesman said that approximately 41 percent of residential accounts
have never received a bill reflecting the 3 cents-per-kilowatt surcharge. The number of
customers billed the 3 cent surcharge varies from month to month based on consumption
patterns, with most of the highest billing occurring during the summer months. Likewise,
PG&E reported that about half of its customers had not incurred the higher rates.
In a controversial move, the CPUC in November 2002 revised a
previous restriction on the use of surcharge revenues collected as a result of two rate
increases, so that they might be used, if necessary as authorized by the Commission, to
return the utilities to reasonable financial health. The decision was criticized by
consumer groups such as TURN,
who said it extended the surcharges indefinitely and shifted a disproportionate share of
the costs of the long-term contracts onto small customers.
A significant move toward rate relief came when SCE dropped its
rates 8 percent to 19 percent effective August 1, 2003. The rate change was based on
SCE’s previous forecast that during July it would complete recovery of $3.6 billion
in uncollected power procurement costs incurred during the 2000-2001 California energy
crisis. A settlement was reached with representatives of various customer groups that
included the use of forecasted rather than after-the-fact cost-recovery verification.
Current (2003) rates for the
three investor-owned utilities are shown below:
0 – 100%
100 to 130%
130 to 200%
200 to 300%
|Source: California Public Utilities
*Includes August 1, 2003 rate reduction
**SDG&E has summer and winter rates. The table above shows
the summer rates. Winter rates are: Tier 1 - 13.4 cents/kWh, Tier 2 - 15.1 cents/kWh, Tier
3 - 16.0 cents/kWh, Tier 4 - 16.9 cents/kWh, and Tier 5 - 18.7 cents/kWh.
Here is a look at California’s residential electric rates
over the last 13 years.
Average Annual Price per
kWh (nominal cents)