California Chamber of Commerce Provides Update of Energy Crisis.

Business Editors

SACRAMENTO, Calif.--(BUSINESS WIRE)--March 27, 2001

Note to Editors: Attached is a letter from California Chamber of Commerce President Allan Zaremberg updating Chamber members on California's energy crisis. If you should have any questions, or would like comment on energy-related developments as they happen, please call Kathy Fairbanks at [phone].

TO: Members of the California Chamber of Commerce

FROM: Allan Zaremberg, President and Chief Executive Officer

SUBJECT: Electricity Rates

I know many of you have been reading that an electricity rate increase in the PG&E and Southern California Edison territory is inevitable. Although nobody wants to pay more for electricity, the rate increase is probably necessary to help keep the lights on.

Unfortunately, higher electric costs are coming at a time when inflationary pressures are building on California businesses. I'm sure many of you have experienced double-digit increases in health care premiums and workers' compensation premiums, and are paying higher rent, higher wages and higher natural gas bills. The California Chamber is working with the Legislature and the Davis Administration to ensure the business perspective is well understood, and to urge policy makers to think past the energy crisis and reject other policy proposals that would increase the cost of doing business in California.

When I last wrote to you, I identified the two major problems that led to California's electricity crisis: energy supply and demand out of balance, and wholesale and retail energy prices out of balance, the former helping to drive the latter.

Although there are many causes, two factors have contributed enormously to wholesale price increases: the high cost of natural gas, which fuels many California generating facilities; and the loss in hydroelectric power, due to the lack of rainfall throughout the Western United States. These supply issues, coupled with the increase in demand, have driven wholesale prices "through the roof."

When wholesale electric prices skyrocketed this summer, Southern California Edison and PG&E were still bound by a rate freeze that left them unable to raise retail rates to cover the cost of buying the power. The utilities literally financed the difference between escalating wholesale prices and stagnant retail prices until they became insolvent in December. Edison and PG&E are now billions of dollars in debt collectively.

Generators, who worried they wouldn't get paid, refused to sell to the utilities. In January, the state stepped in and took over the purchase of wholesale electricity. The State of California is now financing the difference, and faces the same financial fate as the insolvent utilities, unless retail and wholesale prices are brought into balance.

Both residential and commercial customers have enjoyed stable retail rates for the past nine months, even though wholesale prices have skyrocketed. (Many customers who receive both gas and electric service have seen increases in their bills recently, but that is largely due to natural gas price increases.) In order for the state or the utilities to continue to buy power for California, ratepayers must begin to cover the wholesale costs.

If there are any "silver linings" in these dark clouds, it is that price increases will help reduce demand this summer. Only by bringing supply and demand into balance will California be able to prevent blackouts. Preventing blackouts is one of the California Chamber's highest priorities. Conservation is an absolute necessity. Additional supplies also are critical. One action that will help provide additional power immediately is to allow facilities with backup diesel generators to operate the generators to help prevent blackouts, rather than authorizing such use only after blackouts occur.

If you have any questions, please feel free to contact us. We will continue to provide updates on our website at www.calchamber.com.