California's top utilities regulator has formally suggested that billions of dollars in restricted money from last year's record electricity rate hikes now might be used to help place the state's largest investor-owned utilities on firm financial footing.

Public Utilities Commission President Loretta M. Lynch acknowledged that two surcharges adopted at the height of the energy crisis had been earmarked for future power costs, not the debts the utilities accrued in the runaway electricity market of 2000 and early 2001.

But Lynch invited public comment this month on a proposal to modify the use of money in light of subsequent legislation and commission actions.

"It may be appropriate to lift restrictions placed on the use of surcharge revenues," she said in an assigned commissioner's ruling on July 1.

"One potentially just and reasonable use of surcharge revenues, for example, might be for any purpose necessary to restore financial health" to Pacific Gas & Electric Co. and Southern California Edison.

The PUC is on record saying that it wants to use the money for a court-approved settlement of a federal lawsuit by Edison and for the commission's proposed plan to remove PG&E from bankruptcy.

Consumer advocates who are fighting the PUC plans in court say that Lynch is trying to strengthen the agency's legal position by going through the motions of taking public comment and offering to hold hearings.

"This is shameless," said Michael Strumwasser, a Santa Monica attorney who is appealing the Edison settlement for the Utility Reform Network.

"The PUC is already committed to the position Lynch proposes."

But, Lynch said, "I think it is an open question whether it is appropriate" to use money from last year's rate increases to help the utilities.

She said the proposal is part of an effort to sort out the factual and legal effects on the state deregulation law of commission decisions and Assembly bills AB 1X, which authorized the state Department of Water Resources to buy power and sell it to retail customers, and AB 6X, which prohibited utilities from selling any more generation facilities before 2006.

Edison President Robert G. Foster said in a statement that the utility supports Lynch's effort "to clarify its intent for the use of revenues generated by the rate surcharges."

PG&E spokesman Ron Low said the company believes that the PUC should use the surcharge revenue to help PG&E.

"As part of the settlement with Edison, the rules were changed to allow them to recover their under-collected costs," Low said. "We feel it is only appropriate to do that for the other utilities."

Edison and PG&E plunged into debt when frozen electricity rates could no longer cover the costs of procuring electricity in the deregulated wholesale market. The state began buying power for their customers in mid-January 2001.

The PUC stepped in and approved a rate increase of 1 cent per kilowatt hour in January 2001 and a 3-cent increase in March 2001 to cover the state's costs. PG&E filed for Chapter 11 bankruptcy protection from creditors in April 2001.

Now that wholesale prices have stabilized, the two utilities are collecting hundreds of millions of dollars a month above their electricity costs. And state regulators project that the companies will bring in a total of $2.7 billion extra this year.

That money is central to a fight that involves complex regulatory, accounting and legal issues that will help determine how the cost of the energy crisis will be borne.

The PUC wants to make the utilities creditworthy to help get the state out of the power-buying business.

The utilities want to recoup energy crisis-related losses that drove them to insolvency.

And consumer groups want utility rate reductions and rebates of the extra money collected by utilities over the past year.

The Consumers Union, in a PUC filing, urged the commission to reduce rates to the level needed to meet ongoing and future power costs and to refund any extra money.

"The PUC has no legal right to continue overcharging consumers without first determining that these rates are reasonable and should be paid by ratepayers," said Bill Ahern, a senior policy analyst with the Consumers Union.

Lynch said that rate relief should come in months, not years. But she said the timing hinges on a variety of factors, including the outcome of the Edison and PG&E litigation; the state's own estimates of next year's power purchase costs; and the tab of an upcoming bond sale to replenish the state treasury for power procurement.

"The big gorilla in the corner," Lynch said, is whether federal regulators will extend wholesale electricity price caps that are scheduled to expire this fall.

If effective caps are not established, Lynch said, there is a danger that wholesale prices again could skyrocket, so customer money would have to be kept in reserve to pay the bills.

"Somebody has to provide electricity to the state," she said. "It's going to be ratepayer or taxpayer dollars."

On a separate front, state officials are asking the Federal Energy Regulatory Commission to approve billions of dollars in refunds for consumers on grounds that energy companies gouged and gamed the market.

Nettie Hoge, executive director of the Utility Reform Network, said the PUC proposal for helping PG&E and Edison amounts to dunning customers for billions of dollars that the energy companies improperly charged the utilities.

"It's like offering someone who already robbed your house a couple of items they missed," Hoge said. "It's painfully clear that the wholesale prices that caused the utilities' debts were the result of illegal activity."