VI. Interim Relief Should be Granted, Subject to Refund

PG&E and Edison contend that the rate freeze is over, that their respective TCBAs were overcollected as of the end of December at a minimum, and that ratepayers are responsible for undercollections that have accrued in the TRA since that time. In other words, the utilities insist that shareholders have achieved full recovery of transition costs and are therefore not at any risk. At the same time, the utilities demand that ratepayers now be required to reimburse the utilities for energy procurement costs, even while recognizing that rates were frozen in 1996 at an artificially high level to ensure that transition cost recovery.

In other proceedings at this Commission and before FERC, PG&E and Edison have specifically recognized the risk that the variable energy costs may create. For example, in early 1997, PG&E and Edison asserted that market-based rates were appropriate because they had no incentive to exercise market power. The utilities recognized that any increase in revenues obtained as a seller of energy in the PX would be offset by a greater loss in headroom revenues.¹¹ In its order conditionally approving the ISO and PX, FERC adopted market-based wholesale rates and confirmed that the existence of the rate freeze, the fixed transition cost recovery period, and the mandatory sale of energy by the utilities into the PX helped to mitigate market power concerns:

This finding is based in part on the existence of the retail rate freeze under the Restructuring Legislation during the transition period and the mandatory sale of energy by the companies into the PX. . . During the transition period while the retail rate freeze is in effect, the retail rate freeze in conjunction with the CTC will reduce the incentive to raise prices when the companies are net buyers. (Order Conditionally Authorizing Limited Operation of an Independent System Operator and Power Exchange, Pacific Gas and Electric Company, et al., Docket No. EC96-19-001, et al; 81 FERC ¶ 61,546, October 30, 1997.)

In D.99-06-057, the Commission discussed the risk of the utilities in this regard:

Edison believes that the UDC bears a significant energy procurement risk. During the transition period, utility rates are frozen at the June 10, 1996 level. Within the frozen rate level, the utility must recover its operating costs, the costs of procuring sufficient energy and capacity to meet its load, pay for mandated public purpose programs, and recover its transition costs. If its operating or energy procurement costs rise, the UDC's shareholders may not be able to fully recover transition costs. The energy procurement cost is the most highly variable component of the utility's frozen rate and is completely outside the control of the utility. Customers are shielded from the risk of price increase during the transition period; utility shareholders bear the entire risk. (D.99-06-057, mimeo. at Sec. IIIC.)

It is apparent that the utilities understood the risks AB 1890 and electric restructuring imposed. Nevertheless, in an abundance of caution, we take emergency action today because we believe that PG&E and Edison have raised sufficient concerns in their prima facie cases that each utility may be facing serious financial distress, at least in terms of cash flow and short-term access to capital markets, and that system reliability may suffer as a consequence.

PG&E witness Campbell (PG&E's Director of Business and Financial Planning) testified that PG&E expects to utilize all of its cash reserves within the next three to seven weeks. Moreover, Campbell testified that PG&E cannot raise additional cash through bank and capital market borrowings without action by this Commission. Edison witness Scilacci (Edison's Chief Financial Officer) testified that Edison will also run out of cash in the next three to seven weeks and that it cannot in the short-term raise equity or debt funds on reasonable terms.

We take this action recognizing that we have asked parties to participate in this proceeding under severe time constraints. As the Coalition of California Utility Employees points out, the world of utility electric restructuring has turned upside down in ways that no one anticipated. We have taken official notice of several documents that address the dysfunctional wholesale market. (See Appendix B.) We do not yet have the facts to evaluate the utilities' claims of their dire circumstances. We have called for an audit and must await the independent auditors' report. We have only part of the puzzle before us. Moreover, we do not have all of the facts related to the parent companies, the utilities, the affiliates, and the flow of funds among these entities. The independent auditors will also consider these questions in their reports. We must consider the overall financial position of the utilities and will do so expeditiously.

As in D.00-12-067, we note the utilities claims of an "extraordinary and unforeseen crisis in the wholesale and retail electric power markets in California" prompting urgent Commission action in this matter. We believe these extraordinary circumstances provide the justification for the Commission to pursue expeditious contracting for independent auditors provided for under Pub. Util. Code § 632.¹²

We are very troubled by the utilities' assumption that ratepayers must bear the burden of significant rate increases without the shareholders sharing in the pain. The utilities and their shareholders have received significant financial benefit from restructuring thus far. For example, PG&E and Edison have each received the benefit of over $2 billion in cash proceeds from rate reduction bonds. As reported in the monthly TCBA reports, PG&E has received over $9 billion in headroom and other transition cost revenues and Edison has received over $7 billion in such revenues. As revealed in cross-examination of PG&E witness Campbell, disbursements from PG&E to the parent company, PG&E Corporation (PG&E Corp.) during the transition period were approximately $9.6 billion. Out of this total, PG&E Corp. issued dividends (both common and preferred stock) of approximately $1.5 billion. PG&E also repurchased stock in the amount of approximately $2.8 billion and retired approximately $2.8 billion of debt. PG&E recognized that market problems were beginning to occur in June of this year, but decided to declare a third-quarter dividend. PG&E did not consider establishing a contingency fund or retaining cash to cushion its risk, because it believed that "its generally conservative financial profile and financing practices would adequately provide cushion against . . . a reasonable range of contingencies." (TR: 409.)

Now that such contingencies are outside the reasonable range, the utilities turn to the ratepayers for relief. It is decidedly not business as usual and the utilities need to realize that ratepayers are not the only answer to their dilemma. For example, parties have only just begun to explore the ability of the utilities' holding companies to participate in the solution. While the cash on hand in the holding companies may be insufficient when compared with the going-forward costs of procuring power, we are convinced that other potential solutions should be explored.

The interim relief granted here is on an emergency basis and is subject to refund. It is reasonable for this Commission to use its emergency authority to act to enable the utilities to provide reliable service as we explore other options for financing their future procurement costs.

¹² Pub. Util. Code § 632 allows the Commission to deviate from contracting procedures required by the Government Code and Public Contract Code for purposes of entering into contracts for consultant or advisory contracts, where the Commission makes a finding that "extraordinary circumstances" justify expedited contracting for such services.