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Inaction by Utilities, PUC Cost Chance to Avoid Crisis


SACRAMENTO — If long-term electricity contracts at fixed prices are a path out of the power crisis that the state's two major utilities say nearly bankrupted them, then why didn't those utilities take that route months or years ago?

The answer, depending on who's talking, is either miscalculation by the utilities or the stifling autocracy of the California Public Utilities Commission, the state's almost century-old regulator based in San Francisco. Records and interviews show that it is both.

The PUC sometimes took months to act on the utilities' requests for permission to sign long-term contracts they believed could save them money, and often allowed less latitude on the terms of those contracts than the companies sought. The utilities did not always use the authority they received, hesitating to enter such contracts for fear that regulators would second-guess them later.

Hindsight makes one thing clear: Had the state's two largest utilities--Southern California Edison and Pacific Gas & Electric--cut long-term deals with power sellers in 1999 and 2000 they would have saved billions of dollars last year. And, some experts say, the utilities' credit troubles that thrust California and its taxpayers' money into a wild power market might never have occurred.

"We just wouldn't have been in a position of firms losing gobs of money and teetering on bankruptcy," said Severin Borenstein, director of the University of California Energy Institute in Berkeley.

Electricity prices spiked in May, and unexpectedly rose even higher this winter. PG&E and Edison say that since May they have paid about $12 billion more for electricity than they can pass on to customers, who are protected by a rate freeze imposed by the state's 1996 deregulation law.

On Thursday, Gov. Gray Davis signed legislation that put California in the electricity business. The state will buy electricity on long-term contracts at fixed prices yet to be determined, and sell it to the utilities. The move was necessary, Davis said, because Edison and PG&E have borrowed so much money that banks will no longer lend to them so they can keep buying power.

"We were deliberately constricted in what we could do," said Stephen L. Baum, chief executive officer of Sempra Energy, the parent company of San Diego Gas & Electric. "They [the PUC] never went away. The idea that we were deregulated is preposterous."

Others say the utilities simply guessed wrong, hoping for a drop in prices that never came.

"They essentially bet that spot prices would be lower than forward [long-term] prices that were available at the time," the Western Power Trading Forum, a power sellers' group, wrote to federal regulators in November. "When they discovered that they had bet on a losing hand, their response was to deny their responsibility and allege that the game was somehow fixed."

As blame swirls, lawmakers promise to scrutinize the behavior of the PUC and the utilities in hearings that could begin this month.

"We'll go back in time to do so," said Assemblyman Darrell Steinberg (D-Sacramento), who is organizing the hearings. "We want to get all of the facts."

For nearly 100 years, the PUC and its predecessor have overseen California's for-profit electric utilities. The commission, five appointees of the governor, sets the rates the utilities can charge and reviews most major decisions. It must balance consumers' interests--reliable and reasonably priced power--with the utilities' need to make profits for their shareholders.

In the mid-1990s, the state decided to open California's $23-billion electricity industry to competition. The PUC split over a fundamental issue: Should California encourage long-term deals between individual buyers and sellers, or instead create a public market where prices would fluctuate with bids posted daily?

The bidding market was adopted 3 to 2 by the PUC in December 1995. That vote launched deregulation. The Legislature modified that plan slightly in 1996, primarily by freezing customer rates.

With high hopes, the state in March 1998 opened a computerized bidding market called the Power Exchange, where for a couple of years electricity was bought and sold for prices little different from those previously set by the PUC.

Still, utility officials were nervous. Forced by the PUC to buy all of their electricity from the Power Exchange, they began to feel vulnerable after brief but extreme price spikes in the summer of 1998. They wanted to protect themselves by buying at least some power at a locked-in rate.

In March 1999, Edison sought PUC permission to buy 2,000 megawatts--about 10% of the peak summer demand of the 11 million people it serves--outside the Power Exchange, where prices fluctuated hourly.

Consumer groups, electricity sellers and other parties protested.

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