Calif Response To Power Crisis Will Harm Its Econ -CERA

Updated: Thursday, June 28, 2001 04:01 PM ET

By Jessica Berthold

Of DOW JONES NEWSWIRES

LOS ANGELES (Dow Jones)--California will still be saddled with $17 billion in debt in 2005 from its energy crisis and electricity rates will have to rise again if legislators proceed with planned remedies, a director of Cambridge Energy Research Associates said Wednesday.

CERA Director Michael Zenker spoke with Dow Jones Newswires about a research report detailing the effects of the energy crisis on California's economy, which CERA co-wrote with the University of California at Los Angeles' Anderson Business Forecast team. Many of the figures published in the report have since been revised due to a recent order by the Federal Energy Regulatory Commission to control wholesale power prices in the West, Zenker said. The $17 billion debt figure, for example, is revised down from $22 billion in the report.

California will still have debt in 2005, because its plan to smooth out its power purchases with a $13.4 billion revenue bond sale is flawed, Zenker said. The utility ratepayer revenue that will be used to repay the bonds and cover its debt service is inadequate, given that the revenue is meant to pay for some long-term contracts as well as spot-market power purchases, Zenker said.

"If you add in costs the state will incur from long-term power contracts, there is not enough revenue to pay down any of the debt," Zenker said. "The state will have to raise rates beyond the current level."

The revenue bonds will be used to pay back a $4.3 million bridge loan and $7 billion from the state's general fund borrowed for power buys. Any money left will go toward paying for the power under long-term contracts. California's Department of Water Resources began buying about one-third of the state's power needs in January, because the state's utilities lacked the cash and credit to do so.

State regulators passed a 3 cent per kilowatt hour rate increase for customers of PG&E Corp (PCG, news, msgs) unit Pacific Gas & Electric Co. and Edison International (EIX, news, msgs) unit Southern California Edison in March, and are expected to pass a similar increase for Sempra (SRE, news, msgs) unit San Diego Gas & Electric Co. in July.

Because revenue from those rate increases won't be enough, California's debt will climb to $12 billion by the end of the year unless lawmakers change their strategy for dealing with the crisis, Zenker said.

The state could pay off all its debt in two years if rates were increased an additional 35%, a prudent solution given that rates would likely need to rise anyway if the state still has debt in 2005, Zenker said.

"Some people say raising rates now is an aggressive remedy, but a rate increase will come either way," he said.

Raising rates now would also decrease the number of involuntary blackouts the state will experience this summer, from an estimated 36 hours to 12 hours of outages, he said. Electricity interruptions would also drop from 112 hours to 20 hours for larger customers who agree to voluntary outages in exchange for reduced rates, he said.

"Retail prices are a key element for determining demand," Zenker said. "Our research shows demand consistently drops when prices increase. With decreased demand comes decreased blackouts."

Response to retail rate hikes is greatest in the residential classes, because those customers have more flexibility in curtailing use, he said. As such, any rate increase should affect those customers as much as industrial customers, unlike the March increase, which hit industrial customers the hardest, he said.

Another measure the state should take is to allow for customer choice in electricity suppliers, otherwise known as direct access. The state also needs to ensure that enough power plants are built in coming years to create a capacity reserve, and that SoCal Ed and Pacific Gas & Electric are able to recover $14.5 billion in undercollected power costs from consumers, the report says.

The state's current approach is aimed at sheltering customers in the near term, but it will only make matters worse in the long term, both for customers and the economy, he said.

"Our study suggests that the advantages of a market where consumers see prices that more clearly reflect supply and demand, accumulated debts are paid off, new supply sources are brought to market quickly and the fundamental flaws of the market are fixed, outweigh the advantages of a market aimed at insulating residential, agricultural and small commercial customers from rate increases," Zenker said.

On its current course, the state will see its gross state product slow to 1.5% growth in 2001 and actually contract by 0.7% in 2002 before climbing back to 2.4% growth in 2005, the report says. But if the state raises rates and takes other market-based measures, the state will see a growth rate of 0.3% in 2001, a more modest contraction of 0.4% in 2002 and a climb to 3.2% growth by 2005, the report says.

Unemployment will also be nearly 1% less by 2005 if a market-based approach is taken, the report says.

One saving grace for the state is that some of its power costs will be reduced by a recent FERC order to impose price controls on spot market power through the West. The order will shave off $5 billion from the state's power costs in 2001 alone, Zenker said.

"The price controls will have the effect of bringing down the scarcity premium charge by generators over the next two years, and overall will have a tremendous impact on the market. But mild weather is contributing to today's low prices, too, and we expect the market to tighten up again in July," Zenker said.

-By Jessica Berthold, Dow Jones Newswires; 323-658-3872; jessica.berthold@dowjones.com

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-- Martin Thompson (mthom1927@aol.com), June 29, 2001