The Hearings are Alive with the Sound of Music

Covering hours-long hearings at the legislature or regulatory bodies has occasionally invoked memories of my law school days. And not the fond ones?rather, of those times I was overwhelmed by mind-numbing legalese. One memory that has popped up during energy-speak heavy meetings, when the caffeine has worn off and my rear is asleep, is a particular Real Property class. The law professor often went into excruciating detail about obscure 14th century property deals. To pique our interest, and according to tradition, the vying parties always had the same clever names: "A," "B," "C," and "O". One day the professor attempted to explain title transfers from "A" to "O," then to "B" and for some reason?probably because of the phased-out expressions on our faces?got hung up on a peculiar variation in which "O" was at the center of several property transfers. The professor droned on about switching title from "O to A, back to O, then to B to O and A..." Just before I nodded off, a fellow sitting next to me muttered, "God, she sounds like she is yodeling." To me, yodeling is about as appealing as tubby men in lederhosen eating weiner schnitzels, and sometimes so is energy-speak. Take the terms "regulatory asset" and "dedicated rate component," which refer to utility borrowing mechanisms. Although these phrases are not exactly music to the ears, they mean money in the pockets?but just whose pockets depends on the implementation. Consumer groups have taken issue with the tentative bankruptcy settlement between Pacific Gas & Electric and California Public Utilities Commission staff, which includes the creation of a $2.2 billion regulatory asset to help pay off PG&E's energy crisis debts, boost the utilty's credit rating, and lower its borrowing costs. The Utility Reform Network has complained the scheme would saddle ratepayers not only with the $2.2 billion phantom asset but also cost an additional $2.8 billion over nine years. The way to reduce the hit on innocent ratepayers, TURN says, is instead to give PG&E a $2.2 billion dedicated rate component. Like the yodeling-sounding property transfers, the two loan terms under debate have significant financial ramifications and are far from straightforward. So what exactly is a "regulatory asset?" It is an accounting term that has been around a long time and has traditionally been used for receivables. That is, payments due in one year that will be collected the following year but not subtracted from the current balance sheet. PG&E critics, however, say the utility has stretched the meaning of regulatory asset beyond recognition. "It is a pretty wild use of the term," said TURN attorney Mike Florio. The term "dedicated rate component" has also been around for a while and gained popularity with the passage of AB 1890, the 1996 bill that deregulated the energy industry. The law gave the green light to issue a new type of bond to be paid back with an earmarked stream of revenue in order to lower electricity rates. The same utility customers getting the rate cut, however, have been paying for it via a 10 percent charge in their bills. That's the dedicated rate component. During the state's energy debacle, there were attempts at the state Legislature to get approval to issue bonds securitized by rates in order to bail out Southern California Edison. At that time, ratepayer advocates fought tooth and nail against the creation of a dedicated rate component?bonds backed by ratepayer funds?to cover Edison's unprecedented wholesale energy costs. So why are they now insisting it is the preferable financing method to boost PG&E's bottom line? Essentially, it is seen as the lesser of two evils. "If we are going to get stuck bailing out PG&E, we might as well do it as cheaply as possible," Florio said. According to TURN's estimates, the $2.2 billion regulatory asset would require ratepayers to pay an additional $2.8 billion to cover associated taxes, interests and dividend costs. Economist Bill Marcus added that utility shareholders would reap more under the deal than if the company had avoided bankruptcy. PG&E, however, begged to differ and filed testimony from a dozen experts at the CPUC this week refuting TURN's analysis that replacing a $2.2 billion regulatory asset with a dedicated rate component (DRC) would come with a lower price tag. TURN's proposed savings "is not due to financial wizardry" but would only shift the cost of the loan to the shareholders, said PG&E attorney Joe Malkin. Both the regulatory asset and DRC are taxable events, and bonds secured by rates would end up costing the company $800 million in taxes, he added. PG&E sees TURN as taking everything the utility proposed to give up under the negotiated deal?including dropping its battle to free itself of CPUC authority and the vast hydroelectric dam-related watershed land set aside?and then demanding more. What else is in and behind a name? The $2.2 billion regulatory asset would be added to PG&E's rate base, which is about $15 billion. The new asset would boost PG&E's rate base by an additional $2 billion. This is where we come back the "A to O to B back to O" transfers. Think of PG&E as "O," as it is also involved in more than one transfer to bring money in the door. Not only does the utility get the $2.2 billion, which is neither a power plant nor other tangible asset, but it also makes money off that amount. The regulatory asset is divided into equity and debt?48 percent to 52 percent. The 52 percent equity part of the $17 billion rate base?close to $9 billion?under the proposed bankruptcy agreement would receive an annual 11.22 percent rate of return over nine years. In addition, PG&E would be allowed to deprecate its 48 percent debt, a little over $8 billion, over the same time period. And the chunk of the debt that remains over after the yearly write-off would receive a 9 percent rate of return because it is considered an investment. This week the state Senate debated a bill that would have given the CPUC authority to change the terms of the settlement and allow the creation of dedicated rate component if it benefited ratepayers. Some at the CPUC contended that the commission had to stick with a regulatory asset because it lacks the requisite authority to change the mechanism by which PG&E would recover its transition costs. Prior to the September 10 hearing, federal bankruptcy judge Randall Newsome, who refereed the June 19 settlement, jumped into the fray. He wrote a letter to Senator Debra Bowen (D-Redondo Beach), head of the Senate energy committee, asking that the lawmakers butt out of the matter. "I understand the temptation to 'improve' upon the agreement," Newsome wrote September 9, adding that it would cause more delays and possibly undermine the agreement. He said he believed the CPUC staff did not "overlook opportunities to reduce cost." The bill, sponsored by TURN, did not pass but Bowen stated that authorizing a dedicated rate component would give the CPUC another tool to potentially lower the cost of the energy crisis for ratepayers. It remains to be seen whether the CPUC?after concluding hearings on the settlement that began this week?will stick with a regulatory asset or switch in part or whole to a DRC to pay off PG&E debts. In the meantime, like my Real Property law professor, I will continue to perfect my yodeling.

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The Hearings are Alive with the Sound of Music

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