Focus Shifts to Legislature and Feds as California Crisis Deepens
State-backed financial bailout options for California's two
cash-strapped utilities were being looked at Friday by the state
legislature and treasurer, including public takeover of the state
grid, as Gov. Gray Davis prepared to divulge his plan today prior
to making another trip to Washington, D.C., in search of a federal
cap on western wholesale electricity prices later this week.
"Some state action to bridge the period of time between now and
when bond securitization can be pulled together is probably
needed," said Fitch's Steven Fetter, noting that such action (at
either the state or federal levels) would cause the utilities'
credit ratings that were lowered last Thursday to be re-examined.
"At this point, it really falls to policymakers to take some
action and do it quickly," said Fitch's energy analyst Lori
Merchant generators expressed concerns that California officials
would take the wrong actions, moving toward public takeover,
negating billions of dollars that are already being invested in new
power plants now under construction, review by state authorities or
being planned. Through the California Independent Energy Producers,
the generators are going to support state legislation that makes
utility long-term power contracts the principal way to resolve the
current wholesale price debacle.
On Friday, State Treasurer Philip Angelides proposed
establishing a $10 billion "California Consumer Power and
Conservation Financing Authority" to expand state energy programs
and finance conservation efforts, building at least a 15% reserve
capacity of state generating plants.
"The state cannot stand by and hope that the private markets
will solve California's energy problems," Angelides said in a
prepared statement during another day in which state officials
concentrated on little else besides electricity. The proposed new
state entity would sell up to $10 billion in taxable and tax-exempt
bonds to finance its operations.
"I am very suspicious of whether this (a state power authority)
will solve any problems," said Jan Smutny-Jones, head of the
state's independent generators' trade association in Sacramento.
"The fact of the matter is there is more than $10 billion in
private capital being targeted for California, so I don't think the
problem is the state's ability to attract private capital to build
power plants; the problem is state regulation that restricts the
utilities' ability to buy long-term and protect their customers
from the volatility of the market.
"This is the only market in the U.S. that acts like this. In the
East (PJM independent grid operators for parts of Pennsylvania, New
Jersey and Maryland) all of the power is bought and sold under
long-term contracts. This is a California specific problem that, in
fact, can be fixed in California if the state exercises the
Is there anything else that generators are going to offer to do
besides long-term contracts at fixed prices?
"That's the best we can do," Smutny-Jones said.
A proposed state power authority also surfaced earlier last week
from a surprising source, the free-market economist member of the
California Public Utilities Commission, Richard Bilas, during last
Thursday's CPUC discussions of the two utilities' emergency rate
hike. Following the regulators' meeting, Bilas called the proposal
a "crazy scheme that just might work," although he left to the
legislators the details of how such a state agency might actually
Bilas said he reluctantly concluded the power authority might be
the only way to address the fact that California has
unintentionally replaced a power generation monopoly that used to
be centered in state-regulated utilities with what he calls a
"monopoly of unregulated power generators who are game-playing and
abusing the market" and no federal or state authorities (including
the CPUC) are doing anything to correct the situation.
"Just having a power authority would put a club over the power
producers," Bilas said. "It would make them, I believe, act in the
public good and in effect shape up. The power authority could set
all the rules for how the game is played. And if it didn't like
what the producers were doing, it could buy the power plants
(through condemnation) at fair market prices."
In response to questions that the generators are being made the
"villains" in the continuing drama in California's electricity
industry, Smutny-Jones said he thought some officials are
"scapegoating, rather than focusing on positive solutions." He said
the generators hoped to be "engaging the CPUC, the governor and the
legislature in trying to solve the situation. (The generators) have
billions of dollars invested in the state and are willing to invest
billions of dollars more, and we're not going to get there by
Meanwhile, the specter of bankruptcy hung over PG&E and
Edison as their stocks fell significantly during the week. Fitch
analysts speaking in a conference call Friday noted that unlike
other utility bankruptcies, PG&E and Edison would be facing
prospects that would make it difficult for them to quickly revert
to a positive cash flow, given the outlook for continuing high
wholesale power prices well above frozen California retail rates.
With financial crepe being hung over California's
once-invincible-looking two major utilities, the CPUC Thursday
unanimously approved a temporary penny/kwh rate hike. Fitch said it
viewed the state regulators' temporary rate surcharge as "wholly
inadequate to remedy the dire circumstances facing Southern
California Edison Co. and Pacific Gas and Electric Co."
More permanent rate relief, including whether to lift the
state's 4 1/2-year retail rate freeze, will be decided after
additional regulatory hearings that get under way Wednesday (Jan.
10). The temporary rate relief is basically what the utilities and
Fitch rating service already had dismissed as woefully inadequate
to cut into the $11 billion in added debt the two utilities have
assumed over the past six months due to runaway wholesale power
prices they continue to pay. (The Cal-PX price was 28 cents/kwh
Thursday, according to a CPUC source. Frozen retail rates are at
the 7-cent/kwh level.)
CPUC commissioners noted in their pre-vote comments that
bankruptcy is not a viable solution to the utilities' continuing
revenue shortfalls, and at least one of the commissioners called
consumer activists "irresponsible" for advocating bankruptcy in
lieu of rate relief. Another commissioner, Henry Duque, indicated
he was voting for the rate hike, but agreed with the utilities that
it should be more --- at least another penny/kwh more.
Consumers speaking at the CPUC meeting indicated that serious
pushes for government takeovers in San Francisco and San Diego are
taking hold, and the continuing economic and operating success of
large municipal-run utilities in Los Angeles and the state capital
of Sacramento lend them moral support. "It would be much better to
have publicly run utilities rather than private sector companies,"
a long line of consumer activists told CPUC commissioners.
Activists warned that unless Gov. Gray Davis takes drastic steps
soon, they will "guarantee" another statewide ballot measure to
re-regulate the electric industry statewide and noting the City of
San Francisco will have a measure to vote on regardless. They
talked vociferously against the CPUC issuing any rate increase.
CPUC Commissioner Carl Wood said that "deregulation is dead" in
California and no one should carry on the "fiction" that it is
going to be salvaged in the state. He said the state is the victim
of what he called a "western cartel" of generators and marketers
who are "profiteers" of the worst order, and who federal regulators
are, in effect, protecting by not imposing a so-called hard
wholesale price cap throughout the western states.
"Markets do not act in a responsible manner, it isn't their
nature, and that is what makes them so exciting," he said.
"Reliability through reliance on markets is no longer possible.
That is the reality we are facing. The deregulation project in
California is dead because it is no longer defensible.
"What we are voting on today is the epitaph for deregulation in
California," Wood said before the unanimous vote by the CPUC.
"Deregulation is dead."
The generators' association head Smutny-Jones said this
"concerned" the power producers, acknowledging that the state's
deregulation efforts "need a mid-course adjustment in terms of
where we are in the restructured market. However, we need more
generation in California and who is going to build that?
"Building generation is a very risky business, but what is being
missed in this whole story about a state power authority is that
historically public power has been involved in building power
plants, but sometimes they guess right and sometimes they guess
He said up until a year and half ago, one of the City of Los
Angeles Department of Water and Power's biggest problems was a
large, expensive coal plant in Utah. That same plant coupled with
LADWP's gas-fired plants around Los Angeles has allowed the
municipal utility to make $200 million or more in the California
wholesale power market. Prior to that they had built a power plant
they didn't need that was too expensive. And if you look around the
West there are other examples, the Department of Water Resources
built a geothermal plant that never had adequate steam; SMUD in
Sacramento had to close a nuclear plant and there was the largest
public power plant default ever in the Pacific Northwest.
"This concept that public power is going to somehow save the day
for California is just misplaced. What we need to get out of any
authority is what we started with --- attracting private capital to
build these power plants and giving customers meaningful choice. It
is doable and it is doable with real leadership in the state."
In stark contrast to the surge of proposed solutions advocating
public sector solutions, Robert Mitchell, executive vice president
with Washington, D.C.-based private sector transmission operator,
Trans-Elect, appeared at last week's CPUC meeting to announce that
his firm is making an $8 billion offer to California's private
sector utilities to buy and run the state's grid, 70% of which is
owned by the three major investor-owned utilities.ÿ He asked the
CPUC for the opportunity to comeÿback to discuss Trans-Elect's
proposal more fully.
Earlier as part of some opening remarks, Commissioner Wood, a
former statewide utility union leader, said he stronglyÿopposed
further divestiture of utility-owned generation in or outside of
the state, in reference to aÿpostponed agenda itemÿon Southern
California Edison Co.'s pending sale of its portion of theÿMohave
coal-fired generation plant in Nevada.
Wood said all the state's major electric industry stakeholders
agree that the previous sale of the utilities' major in-state
gas-fired power plants is a major reason forÿCalifornia's current
electricity supply/price predicament, and the trend should now be
reversed with a return to more utility-owned generation
assets.ÿBilas said he agreed to the extent that the sales of the
utility ownership should not have taken place before "adequate new
plants had been built."
Richard Nemec, Los Angeles