For City of Industry meat processor Frank Pocino, last week’s settlement between Southern California Edison and state regulators aimed at keeping the utility out of bankruptcy confirmed his worst fears.

Over the last three months, Pocino has paid out nearly a quarter million dollars more in electricity bills than last summer, a big hit considering his annual revenues in this low margin business are about $35 million. He can only pass on a small portion of the increase to his customers.

“I can’t put up with the Edison bill the way things are right now,” Pocino said. “There is no way we can bear these higher costs through next year, let alone three or four years.” Among Pocino’s options: joining forces with a Midwest competitor.

“I really want to stay in the L.A. area, which has been (the company’s) home for nearly 70 years, but with this electricity situation, it’s looking less and less likely that I can afford to do so,” he said.

Pocino is far from alone. Throughout the L.A. region and the state thousands of businesses that were hit with sharply higher electricity rates earlier this summer now face the realization that those rates will be around to stay as a result of the settlement.

That settlement, concluded in secret and announced on Oct. 2, resulted from a lawsuit Edison filed last year against the state Public Utilities Commission after the commissioners denied an Edison request to raise electricity rates. It still must be approved by a federal judge and even then might be challenged in court.

Paying down debt

It essentially allows Edison to pay down $2 billion in debt by maintaining the higher-than-market electricity rates its customers now pay, at least through the end of 2003.

In other words, if the market rate that Edison pays for electricity is about 4 cents per kilowatt hour, and the rate Edison charges its customers is 8 cents, the difference is applied to Edison’s debt. (Another $1.2 billion in Edison debt would be paid down from money earmarked for shareholder dividend payments that the settlement has ordered be canceled.)

It was a virtually identical arrangement in the 1996 deregulation law that got Edison and the state’s two other investor-owned utilities into financial trouble. The utilities paid down more than $10 billion in past debts by being allowed to charge higher-than-market rates.

However, in the spring of 2000, tight electricity supplies forced wholesale spot market prices much higher than the mandated retail rate, causing each of the utilities to hemorrhage up to $1 billion a month before the state stepped in last January to buy power. (To guard against this now, the settlement allows for rates to go up if spot market prices spike.)

Last April, the state Public Utilities Commission ordered rate increases averaging 40 percent for all ratepayers but averaging 60 percent for major business customers, on the premise that large industrial users of electricity could better absorb the higher costs.

The settlement could not have come at a worse time for California businesses. A slowing economy has been plunged into recession by the Sept. 11 terrorist attacks. Meanwhile, other statewide business costs are rising, most notably a 50-cent hike in the minimum wage on Jan. 1 and another round of double-digit hikes in workers’ comp premiums.

“The electricity rate hikes mandated by the Public Utilities Commission in June went up too much for large industry in California,” said Gino diCaro, a spokesman for the California Manufacturers & Technology Association. “For many, these rates are not sustainable over a period of a year or more; their margins have shrunk tremendously already. There will be many companies that go out of business if there is not some relief.”

One company already feeling the heat is Poly-Tainer Corp., a Simi Valley-based manufacturer of plastic bottles that employs 285 people. When word of the PUC-mandated rate hikes was first revealed in May, Poly-Tainer budgeted for a 40 percent hike in its $60,000 annual electricity bill by adding a temporary 3-cent-per-bottle surcharge.

“But when we received our electric bills, they were 60 percent higher,” said Poly-Tainer owner Paul Strong. “We were already having trouble collecting the surcharge, so we couldn’t raise it any further, which meant we had to eat a third of the cost increase.”

Strong stressed to his customers that this was only a temporary surcharge that would come off once the anticipated summer power crunch was over.

“Now that surcharge is going to have to be permanent and I’m concerned that some of our customers will simply walk away,” Strong said.

Direct access forbidden

He had hoped to escape the higher rates by signing a power contract with a third-party provider (besides Edison). But, after months of speculation that the state would outlaw the ability of companies to sign up third-party contracts (a process known as “direct access”), the PUC finally did so last month.

(Hundreds of companies did sign up for direct access contracts earlier in the summer, but fears that any ban would be made retroactive to the beginning of the year and require huge paybacks to the utilities kept Poly-Tainer and thousands of other companies from taking that plunge. In the end, the ban was not made retroactive.)

“We’re in a jam, no question about it,” Strong said. “Manufacturers like us are on the low end of the totem pole. Our rates went through the roof and our only method of escape has been closed off. “This agreement is grossly unfair.”

The situation is not as dire elsewhere. At the Irwindale plant of Miller Brewing Co., which employs about 700, spokesman Victor Franco said the company had made significant adjustments to accommodate the increased costs.

“We installed new lighting and other energy-saving equipment, which shaved our energy use about 30 percent,” Franco said.