PUC’s Bond Debt Formula Doesn’t Equal Fairness

Civics textbooks, naive as they are, tend to describe regulatory agencies such as public utilities commissions as guardians of the customers’ right to fairness and equity.

They’re about to meet a challenge in explaining how that proposition applies to an upcoming attempt by the California PUC to stick customers of Edison International’s Southern California Edison with the burden of paying off $1.2 billion in expenses actually incurred by customers of the state’s two other power companies: PG&E; Corp.’s Pacific Gas & Electric and Sempra Energy’s San Diego Gas & Electric.

It isn’t clear why the PUC seems determined to undertake this huge shift in costs, although dissident PUC Commissioner Loretta M. Lynch suggests its goal is to sugarcoat the recent PG&E; bankruptcy settlement by awarding the Northern California utility’s customers an additional rate break.

The elaborate mathematical flimflam is scheduled to be implemented during the commission’s next meeting Thursday, when the commissioners enact a formula by which utility customers will repay the debt left over from the state’s electricity deregulation fiasco.

During the power crisis, it may be recalled, Edison, PG&E; and SDG&E; became so financially strapped that the state Department of Water Resources stepped in as an emergency purchaser of wholesale electrical power. DWR ultimately spent about $16.3 billion on the utilities’ behalf to avert widespread blackouts.

Of that sum, about $8.2 billion was paid off from customers’ current utility bills. The remaining $8.1 billion was borrowed from state funds and repaid from an $11.6-billion bond floated by DWR in 2002. The bond will be paid off from customers’ bills over the next 20 years.

Here’s the rub: The PUC’s proposed billing formula will result in Edison customers repaying a lot more than they owed. Although $3.06 billion of the bond proceeds were applied to cover Edison customers’ leftover debt to the state, the PUC is proposing that they repay about $3.6 billion. The discrepancy -- $532 million, to be exact -- would cost Edison customers a total of $1.2 billion, including interest.

As in a poker game, Edison’s loss would mean a gain for the rest of the table. PG&E; customers, who were credited with $4.1 billion of the bond proceeds, would repay only $3.6 billion. SDG&E; ratepayers, who owed the state $937.5 million, would repay only $858.2 million.

It should be noted that, in terms of individual bills, we’re probably not talking about breaking the average household budget. Edison, which has vociferously protested the proposal, estimates that the excess charges would cost its customers about a tenth of a cent per kilowatt-hour a month, or 50 cents on the average residential bill. If you have a pool and a spare refrigerator, it might be $1.

But if PG&E; were deprived of the $450-million break the PUC is proposing to grant it, that would wipe out more than half of the rate cut its customers are scheduled to receive as a result of the recent bankruptcy settlement between the commission and the utility.

In any event, the PUC’s reputation for equitable ratemaking is what’s really at risk in the bond repayment formula.

“It’s discriminatory under state law,” says Lynch, who has proposed an alternate formula to ensure that each utility’s customers repay only the proportion of the bond proceeds they received. She says that the commissioners opposing her plan are poised to violate the principle that “those who caused the cost should pay the cost.”

That principle, she notes, governed the way customers were initially charged for the DWR power purchases, as well as the way the bond proceeds were originally allocated. Edison customers consumed about 38% of DWR-purchased power during the crisis, and roughly the same proportion of the bond money was credited to Edison’s customer accounts when the DWR repaid the state. PG&E; customers used a little more than 50% of the DWR’s electricity, and about half the bond proceeds were credited to their account.

To justify cooking up an entirely different formula for how customers will repay the bonds, the PUC has developed a neat little rhetorical trope. The commission contends that the DWR power purchases benefited everyone in the state equally by “stabilizing the electrical grid” during the crisis. Therefore, there’s no reason to adhere slavishly to a crude formula that asks customers of each utility to pay for only the power their utility actually used.

In other words, the PUC is proposing to impose an equal surcharge per kilowatt-hour on the bill of every electrical customer in the state, regardless of how much power each utility bought from the DWR.

But the commission’s rationale collapses pretty quickly under its own weight. Saying the DWR “stabilized the grid” makes it sound as though the state’s electrical infrastructure would have suffered some apocalyptic, disaster movie-type collapse had the department not stepped in. That’s simply not the case.

Besides, why contrive such a tortured argument when a simpler method exists for allocating the costs and benefits of the DWR purchases?

“If there was no way to trace where the benefits went,” says Mike Florio, senior attorney for the Utility Reform Network, the San Francisco watchdog group, “you might make a case” for the general benefit argument. “But here you can follow precisely where the money went.”

Unsurprisingly, one big fan of the PUC’s cost-shifting formula is PG&E;, which said during hearings on the plan that it liked how it “shares the burden of the cost of the ‘energy crisis’ on each customer.” (PG&E; also appreciated how the formula is “easy to explain to customers” -- easier, no doubt, than explaining why its chairman, Robert Glynn, deserves a $17-million bonus for throwing his utility into U.S. Bankruptcy Court.)

But does PG&E; really believe in its heart that the PUC’s proposal represents “reasoned, rational ratemaking,” as it stated in a filing last week?

Let’s subject its position to what Einstein would have called a “thought experiment.” (This is a method of theoretical inquiry useful in subjects that have no apparent relation to real-world logic, such as quantum physics and utility ratemaking.) What would happen

if it were PG&E;’s ratepayers, not Edison’s, who would pay a disproportionately large share of the bond costs? My hypothesis is that you’d hear PG&E;’s geschrei from here to the Golden Gate.

By the way, whatever happened to PG&E;’s position during the energy crisis that it should be allowed to raise rates on customers on grounds that those who use the power should pay for the power?

The most confusing aspect of the PUC plan is why the agency should be determined to do the truculent PG&E; such a big favor.

“There aren’t many good reasons not to do the right thing,” observes Florio of TURN. “The equitable solution just sort of shouts out to you.”

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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.