Commentary: California's Utilities Doth Protest Too Much

Everything seems cold and dark at California's two biggest utilities these days. PG&E Corp. and Edison International say the deregulation of California's electricity market is killing them. The companies figure they have paid out nearly $12 billion more for power than they have collected from ratepayers in recent months. Edison Chairman John E. Bryson has been a fixture on TV, on the radio, and in newspapers in California saying that if Edison doesn't get some sort of compensation for those "undercollections," there could be blackouts in the Golden State.

Scary talk. And, no doubt, California's utility deregulation mess is dangerously close to spinning out of control. That's why on Jan. 3, the California Public Utilities Commission proposed a 9% residential rate hike for 90 days, a stopgap measure that will allow independent auditors to review the utilities as well as "their holding companies and affiliates." The PUC is expected to approve the measure on Jan. 4. That's a far cry from the 30% the utilities asked for.

Why so low? The commission isn't commenting. But even a cursory look at the books of both companies suggests that their claims of losses due to deregulation may be more than a bit overstated.

Behind the debate over how high rates should go, a huge battle is shaping up over who should foot the bill and how much the whole fiasco has really cost. Some longtime utility watchers say the amount the utilities claim they are being shortchanged should be looked at in the context of how much the utilities have earned as a result of deregulation.

The reason: Both still own a lot of power plants. And while their utility transmission businesses have been bleeding cash because of the high wholesale price they must pay for electricity, the soaring price of power has been a huge boon to the plants they still own in the state. What's more, deregulation has allowed the utilities to pursue a host of lucrative opportunities out of state. "These companies are crying poor, they are asking for a bailout, but I will bet you anything by the end of the year they won't show a loss," says Harry Snyder, head of the San Francisco office of Consumers Union.

So far neither company has shown a loss attributable to the power crisis. PG&E earned $753 million for the first nine months of 2000, on revenues of $18.1 billion, up 40% from 1999's earnings. Edison's profits rose 15% through Sept. 30, to $606 million, on revenues of $9.1 billion. The main driver in both cases: profits at their power plant units as well as from a slew of independent power plants they bought or built in recent years.

To be fair, those earnings don't include the $12 billion the utilities say they're out of pocket. They keep those debits in separate accounts. They're asking regulators to let them charge that amount back to ratepayers.

WINDFALL. But just how much of that should consumers--rather than the utilities or their shareholders--have to pay? In exchange for their willingness to deregulate, the utilities were given the chance to collect big sums as compensation for the amount they thought they would lose when their old plants competed in a deregulated power market. For starters, the sale of some California plants netted them a combined $2.7 billion. They also charged a special surcharge to consumers to help pay off $5.4 billion in bonds. In addition, PG&E figures its California power plants will produce profits of $2 billion this year. Edison will likely make more than $1.1 billion. And a windfall of several billion dollars was collected from ratepayers in the first few years of deregulation, when wholesale energy prices were far below what the utilities got from ratepayers.

Add it all up, and the utilities didn't lose out as expected, figures The Utility Reform Network, a San Francisco-based consumer rights group that has been critical of California's deregulation. Instead, PG&E and Edison have collected nearly $20 billion in post-deregulation profits from ratepayers through August of last year. "You need to subtract the $12 billion in losses they claim from the $20 billion they have earned since deregulation," says TURN's director, Nettie Hoge. "They are still in the black."

Of course, the utilities don't much care for that math. Kent Harvey, the chief financial officer at PG&E 's Pacific Gas & Electric unit, disputes TURN's analysis. Those billions of dollars are part of a separate deal, negotiated as part of deregulation. "We are talking about two different accounts," he says. "A transition account designed for us to recover our investment in past plants and the operating losses we are showing today."

That may be the case, but looked at as a whole, it's hard to argue that until the current debacle the utilities and their investors haven't benefited from deregulation. To hear the complaints, though, you'd think the financial impact has all been negative.

Moreover, deregulation allowed PG&E and Edison to aggressively enter lucrative new markets. In 1998, PG&E paid a then-record $1.6 billion for power plants owned by a New England utility. Months later, Edison topped that with its $1.8 billion deal for a plant near Pittsburgh. Then Edison paid $4.8 billion for plants from Chicago's Commonwealth Edison Co. So far those bets have paid off. Edison now gets more than half its earnings from deregulated power plants outside of California. Its Mission Energy unit owns more than 40 plants globally.

None of that is to argue that wholesale prices aren't too high in California, or that ratepayers shouldn't pay somewhat higher rates. But they shouldn't shoulder the costs alone. The California utilities have until recently profited from deregulation. Reaping the greater rewards of a free market also means facing up to the costs inherent in greater market risks.

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