Nettie Hoge, Executive Director of The Utility Reform Network (TURN) in San Francisco, Says the Golden State's Stranded Cost and Securitization Scheme Will Bring a Rate Revolt When Consumers Get their Bills Next Year.
The most appalling sleight of hand ever palmed off as public policy - stranded asset securitization - advanced another step in recent weeks. The California Public Utilities Commission (CPUC) approved financing orders that could allow California's three investor owned utilities (IOUs) to issue $7.3 billion worth of bonds. These bonds would be paid off over ten years by small businesses and residential customers only. This action is historic because it enables the largest bond issuance in California history - significantly larger than the bailout of Orange County. But it is historic for another reason. The transaction that was approved represents the nadir of public policy in electric deregulation. Hiding as beneficial rate reduction, this transaction creates a windfall for investor owned utilities. It gives them a huge infusion of cash that can be used to secure advantage in the future "competitive" market. The California market is shaping up to be a market custom built to IOU specifications. IOUs continue to enjoy financial advantages approaching what they enjoyed as monopolies but without the nasty nuisance of regulation.
California consumers were told that by "avoiding litigation" and "accelerating stranded asset recovery" they could usher in the benefits of competition - lower prices and higher quality. This would be a Faustian bargain even if all the representations had been true. Not the case. Instead the terms of the deal struck in Sacramento last year under AB 1890 mean that competition may be put on hold until the beginning of 2002. Collecting stranded investment as a floating non-bypassable surcharge makes it difficult if not impossible for competitors to lower prices enough to remain viable. By 2002 the game may be pretty much over.
One Public Utilities Commissioner acknowledged, during the deliberation on approval for the bonds, that the bond deal tilts the competitive field in favor of the incumbent utilities. He referred to the fact that Edison had re-purchased $1.5 billion of its stock. This move was paid for by what the Wall Street Journal called "an exotic new financing tool known as stranded investment securitization." Next the Commissioner reminded the audience that PG&E bid approximately $1.6 billion for New England Electric's generating assets. He warned the crowd that in the future all of his rulings would favor the competitors. Unfortunately there are no future decisions for him to make that could possibly compensate the competitors for the advantages that have already been given away to the incumbent IOUs.
During deliberations of AB 1890, its chief architect, State Senator Steve Peace, said more than once that it was his intention to assure that California utilities would be "predators and not prey." Seems like he is succeeding by feeding the voracious predators with small rate payers' wallets. The utilities argue that small ratepayers are getting a rate cut. Let's look more closely.
The average California residential rate payer uses about 500 kWh (kilowatt hours) a month and pays about 12.5 cents per kWh, or 150% of the national average. Round the average monthly bill from $62.50 to approximately $60, and apply a 10% rate cut. Now the average bill is $54. But what should it be? Well, of that $54, $21 represents stranded investment (nuclear mistakes, power supply contracts which are supposed to go away about now anyway, and other investments in uneconomic generation).
Of that $21 approximately $7.60 represents the finance charge on the $6.00 rate cut! The other $13.40 is just plain vanilla bad investment. The average bill should total $33 (inclusive of transmission, distribution and public goods surcharges!) Compare a $54 average bill (that includes a ten year debt overhang) to a "market price" of $33. Consider the fact that any competitor who comes to California must pass along a $21 non-bypassable surcharge to each of its customers. Remember, that surcharge pays for no new generation, no transmission and no distribution. It benefits only the incumbent utility. Now we can appreciate the true mischief of California style "restructuring."
The only reason that the utilities can get away with this sort of thing is that they have conditioned us over the years to expect increasing bills. And most folks don't understand the mechanics of this latest sleight of hand.
Many years ago TURN came to possess an internal IOU memo that asked all of its analysts for a determination of how high the utility could raise residential rates before a "rate revolt" would result. In those days the utilities were trying to "redesign rates" so that residential customers would pick up more of the burden of fixed costs. This would allow steep discounts for large customers.
The IOUs have done their homework again. They believe they can get away with proposing a transaction. They believe they can collect a cash windfall. They think they can get away with promising a bogus rate reduction where the finance charge exceeds the benefit of the reduction and puts residential rate payers into additional debt for ten years.
Maybe not. Deals this bad usually have within them the seeds of their own undoing. Overreaching may backfire. IOUs will be required to disclose all stranded investment on residential customers bills as of 1/1/98. How will mom and pop business react when they learn that a full 45% of their bill is for "stranded investment" (defined in AB 1890 as CTC or the Competition Transition Charge) and props up monopolies' past poor investment decisions?
At TURN we still believe in the power of knowledge and education. Guess what. The legislature and the CPUC also understand the power of knowledge. Until last week the proposed bond financing orders required IOUs to disclose the finance charge associated with the 10% rate reduction. When TURN publicly pointed out that the finance charge would exceed the rate reduction, the orders were changed. Under the revised orders, utilities are urged but no longer required to disclose this finance charge.
We are betting that this finance charge will have to be disclosed to satisfy Wall Street and bond investors that their security interest is real. When the disclosures are made, a rate revolt will be in the making. Lawsuits and ballot initiatives are likely to follow. The really bad deals don't have to survive.
Copyright 1997 by the American Local Power News