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A request by San Francisco-based energy giant PG&E to increase rates by $1 billion includes so much expense-padding that 90 percent of it should be thrown out, the consumer arm of the state Public Utility Commission says.
"We believe that the projected expenses would benefit the shareholders of PG&E, rather than ratepayers," said Martin Lyons, an official who deals with PG&E rate requests for the PUC's Office of Ratepayer Advocates. Lyons was commenting on a new report by his office that says a pending Pacific Gas & Electric rate request contains about $900 million in unwarranted rate increases.
In the eyes of the Advocates Office, the rate increase would not just reward PG&E for wasteful management and delays in necessary maintenance. The increase also could provide PG&E with an unfair advantage over competitors seeking to enter California's newly deregulated energy market.
Lyons says PG&E plans to ask the PUC to change how its rate increases are calculated. Now, PG&E asks for rate adjustments every three years, based on an item-by-item estimate of the company's expenses. This method of calculating rates is meant to compensate PG&E for its operating expenses and give it a reasonable rate of return on its investment.
The new rate-calculating scheme, which other California investor-owned utilities already use, would let PG&E tack inflation and an industrywide productivity standard onto a preset base rate. If PG&E gets its way, the base rate would include its proposed rate hike -- and the $900 million in annual revenues the Advocates Office says is unwarranted.
PG&E spokesman Bill Roake confirmed that the utility plans to seek a new rate-calculating formula. But he bristled at the notion that PG&E is looking to gouge customers or gain an unfair competitive advantage.
"Right now, they're $900 million short of what PG&E customers need to do to continue at the same level of service during the future," Roake said of the Advocates report. "Their recommendation is that we dismantle our operations and maintenance system."
The increase would raise the average gas bill by about $10. It would not immediately raise electric bills, but could keep them artificially high by delaying the date when competitors entering the energy market are allowed to undercut PG&E prices.
It is far from certain whether PG&E's rate hike will be scrapped, even though the Advocates Office conducted an exhaustive study that included the work of consulting firms in Massachusetts and Kansas and agency staff in San Francisco. The Office of Ratepayer Advocates is an independent division of the Public Utilities Commission, but the PUC does not always heed its recommendations. "There's often a compromise," Lyons says.
As might be expected, firms seeking to enter the California energy market view PG&E's rate request with jaundiced eyes. Any PG&E rate increase could skew state government efforts to bring free competition to the California electricity market, says Gary Foster, a spokesman for Enron, a Houston energy company.
"The dollar figure [of the PG&E request] is completely out of whack with reality," says Foster, whose company is among dozens hoping eventually to grab a piece of PG&E's electricity sales. But that goal will be made more difficult to achieve if PG&E gets its revenue hike.
The report by the Office of Ratepayer Advocates is specific in its criticism of the PG&E rate request.
One of the Massachusetts consultants hired to analyze the request contends that PG&E is seeking far more funding than is necessary for ordinary maintenance of its gas and electric system. PG&E, the consultant claims, wants to slip in excessive state-sanctioned spending under old monopoly rules before it enters the world of free-market energy competition. For example, the consultant writes, PG&E asks for money for new computer systems that could be used to best new competitors in customer service. The rate request includes $100 million for tree trimming, but, the report says, the state Legislature already has given PG&E tree-trimming money -- money, Lyons says, the utility has yet to use. Also, the report says, PG&E's cost estimates use 1996 as a benchmark -- a year of unusually high expenses.
Indeed, the standard of efficiency PG&E used to calculate the rate hike -- that is to say, the money the utility says it needs to produce each kilowatt of power -- is about 17 percent worse than that of the country's best utilities. And those efficient utilities are precisely the ones PG&E is likely to face in a new competitive marketplace.
If PG&E's San Francisco managers get their way, they'll begin competing against those utilities with a $1 billion leg up.