San Diego Business Journal Rate Increases Still Planned Despite Drop
In Wholesale Prices

The good news: After months of exorbitant prices, the wholesale cost of electricity has sharply fallen , thanks, in part, to the state's Department of Water Resources.

The not-so-good news: You may be expected to pay more at the retail level , thanks, in part, to the state's Department of Water Resources.

And the wholesale costs could climb again.

In the past few months, the wholesale price of electricity has fallen dramatically. After prices for power climbed to a record high of 25.784 cents per kilowatt hour in mid-December and hit a second peak of 21.734 cents in early April, the wholesale cost of electricity fell to 8.459 last week, according to the Utility Consumers Action Network.

The current wholesale price, though falling, is still more than double the 3.325 cents per kilowatt consumers saw in April 2000, according to UCAN. Gov. Gray Davis took partial credit for the dramatic drop in electric prices. The DWR has entered into several long-term contracts with generators, exerting downward pressure on the cost of electricity, he said.

Davis acknowledged that other factors led to lower prices, including unseasonably cool temperatures.

"The cold weather has brought prices down to a very, very low level. We expect those prices will go back up in July and August when the hot weather comes. But overall, you see a positive trend as the plan that we have announced over the last several weeks is beginning to take hold," he said in a press conference June 13.

Plants Coming Online

Meanwhile, when the higher temperatures do come, there will be more electricity available to meet the demand. There are three new plants coming on-line in the next 30 days, he said.

Shames agreed with Davis that the state's long-term contracts have played an important role in lowering electricity prices. However, there have been several other factors, as well, making it difficult to predict whether or not prices will climb again.

The cooler temperatures in the area, plus the easy availability of hydroelectric power from the Northwest have also exerted a downward pressure on prices. But add a few weeks of hot, dry weather and things could turn around very rapidly, Shames said.

Other factors that have played a part in lowering electricity include possible actions by the Federal Energy Regulatory Commission and the declining cost of natural gas , two other factors that could also change things quickly, he said.

"Those are the five factors that could have contributed to this reduction in price. We'll know soon enough, once the weather gets hot, and the hydro runs out," Shames said. "Stay tuned."

Shames added that it was possible that prices may stay low over the summer. If so, then the governor would probably be breaking out the champagne, he said.

Rates Still Going Up

Other people might not feel like celebrating, however. Customers of San Diego Gas & Electric Co. voiced their opposition when the California Public Utilities Commission held a series of hearings June 11 and 12 locally to discuss a possible rate increase.

If the rate increase goes through, residential and small business rates could rise by as much as 30 percent. But with wholesale prices falling, it's difficult for the CPUC to justify this particular rate hike, Shames said.

"(The increase will) pay for the money that's been spent out of pocket by DWR, both present and future expenses. But if prices go down, they don't need the increase," he said. "One of the reasons we objected to the PUC rate increase was the PUC was not questioning whether, in fact, the DWR needed all that money."

The commission had neglected to conduct a reasonableness review. Had that review been done, DWR would have been required to show projections of future costs, to determine whether the rate increase was necessary in the first place, Shames said.

Meanwhile, the DWR-triggered rate increase could be only the first of several this summer. Additional price hikes could be triggered if the wholesale cost for electricity does begin to climb again, he warned.

Rate Increase Goes To State

Ed Van Herik, a spokesman for SDG & E;, pointed out the extra money from the rate increase discussed last week goes to pay off DWR, not the local utility. Although SDG & E; will collect the money, it will flow straight through to the state to buy power for the next year.

"The DWR in early May told the PUC the revenue requirement for the (fiscal) year starting July 1 was going to be $915 million from our customers. The PUC asked us to put together a proposal on how that money might be collected, and that's what the hearings are about," he said.

SDG & E; had requested a separate rate increase of 2.3 cents per kilowatt hour, which the CPUC plans to schedule for later this year. That money would go toward the "balancing account," or the difference between the capped retail rates that SDG & E; customers are paying and the higher wholesale costs the utility itself pays, Van Herik said.

The utility is allowed by law to collect in full on that balancing account, now at about $750 million, he said.

Shames, meanwhile, added that Sempra Energy, the parent company for SDG & E;, is currently in secret negotiations with the governor and the CPUC on how the utility will be paid. The state may ultimately buy SDG & E;'s transmission lines, with the money wiping out all or part of the balancing account, he said.

However, since the terms of the deal have remained secret, it's impossible to know how much ratepayers will remain liable for. Shames joined with San Diego City Attorney Casey Gwinn and County Supervisor Dianne Jacob in criticizing the secret negotiations in a press conference June 13.