Davis Optimistic Utility Deal Can Be Reached This Month
California ended last week without a definitive deal with the
investor-owned utilities, but with the governor predicting a deal
would be in place by the end of the month. Gov. Gray Davis'
optimism didn't stop there, however. He also believes under-paid
suppliers will accept partial payments for the their mounting
bills, and federal regulators somehow will bless the state's
takeover of the utilities' transmission assets on a lease-back
Nevertheless, signals were mixed from other sources on the
complex crisis that moved into its fourth month since the Federal
Energy Regulatory Commission's Dec. 15 order.
California's independent transmission grid operator, Cal-ISO,
filed with FERC seeking what could be refunds of more than $550
million from generators and suppliers that it alleges overcharged
the state for emergency, real-time electricity in December and
Meanwhile, the governor and California's congressional
delegation last week continued to push FERC for a wholesale price
cap - not the so-called $150/MWh "soft cap" that has been in place
since Jan. 1.
The reality that is recognized by both California and federal
energy officials is that even months into the western regional
energy crisis - not just California's - there is still a lot of
work to do at all levels of government. Consider the major
unfinished business confronting Davis and the state legislature
that began its third month of a "special" legislative session
dealing exclusively with energy-related issues:
- Three separate utility deals involving the transmission assets
and assurances that existing utility generation (in-state hydro and
nuclear and out-of-state coal and nuclear) is sold to California.
- Long-term power contracts in addition to some new ones
announced last week with Calpine.
- Re-negotiation of the over-market utility contracts with more
than 200 qualifying facilities (QF) that are worth billions of
- Bringing online enough new temporary peaking generation plants
to meet the governor's goal of 5,000 MW of new in-state generating
capacity by this summer, which is now four months away.
- Hitting some aggressive conservation goals of reducing peak
demand by several thousand megawatts for this summer with an $800
million crash program.
- Getting suppliers and generators to accept partial payment for
what is estimated to be more than $13 billion in unpaid wholesale
power bills and related debt by principally two utilities, Pacific
Gas and Electric Co. and Southern California Edison Co., both of
which have been the beneficiaries of continuing forbearance by
creditors at the same time that at least one of them (PG&E) is
facing increasing lawsuits and formation of creditor committees.
- Getting refunds and price caps from FERC.
Cal-ISO last week asked federal regulators for help in possible
refunds of up to $550 million for December and January wholesale
charges dealing with billions of dollars worth of power supplies
purchased in the emergency real-time market. Cal-ISO alleged that
prices it paid exceeded federally established benchmark levels. It
was part of a motion to FERC that serves as a refund notice to
suppliers, a request for data and a hearing request.
A Cal-ISO report based on a $250/MWh federal cap in December and
$150/MWh in January concluded that net revenues earned by power
suppliers "appear excessive when compared to their estimated
operating costs." The report accompanied the filing to FERC seeking
additional time, information and a formal hearing.
In the meantime, Davis was on the East Coast last week telling
Wall Street and Washington, D.C. audiences that two suppliers have
indicated a willingness to take partial payments for some of their
past-due billing to the state and its major investor-owned
utilities. Most generators confirmed the possibility has come up in
negotiations, but publicly they maintain they expect to get all
they are owed.
The mounting debt got a bit heavier for PG&E last week. In
the midst of trying to hang tough in ongoing talks with the state
over a bailout tied to selling its transmission assets it was hit
with additional debt payments of more than $1 billion coming due.
PG&E said it could pay only a portion.
To make matter worse, the once mighty combination utility faced
charges imposed by the state water resources department for
electricity purchases and faced a shareholder class action suit
against its parent holding company for more than $2 billion based
on past stock-buying requirements it placed on the utility.
PG&E's utility is challenging the way the water resource
department wants to bill it for power, alleging it would prevent
the already deeply cash-strapped company from covering the cost of
its own generation and purchases from qualifying facilities (QFs).
As of Wednesday, the utility had payments of $l.4 billion come due
for QFs and the Cal-ISO emergency supply purchases, but was only
able to pay $228 million of that total bill.
Although the companies' analysis of the shareholder lawsuit is
only at a "preliminary stage," both the utility and parent PG&E
Corp. told the SEC they think it is "without merit" and they intend
to mount a "vigorous defense."
PG&E Finds Some Relief
Meanwhile, PG&E Corp. on Friday said it closed a $1 billion
loan agreement with GE Capital Structured Finance Group, as lender
and co-arranger, and Lehman Brothers as lender, administrative
agent, lead arranger, and book manager, to restructure the
corporation's debt and pay obligations on which it has defaulted.
The loans, secured by the corporation's equity interest in its
unregulated arm, PG&E National Energy Group, LLC, enabled it to
pay its outstanding debt obligations on which it has defaulted or
would default in the near future. The obligations that have been
paid include: $501 million in payments to commercial paper holders,
$434 million in borrowings under a revolving credit agreement, and
$116 million owed to PG&E Corp. common shareholders for the
defaulted fourth-quarter 2000 dividend.
"The defaults created the risk that the Corporation might face a
bankruptcy in the near future," said CEO Robert D. Glynn Jr., "and
bankruptcy of the Corporation would benefit no one." Glynn
emphasized that the financing would be repaid with PG&E Corp.
shareholder dollars only. "Unlike the Utility's costs of procuring
wholesale electricity for utility customers, this financing is a
general corporate obligation of PG&E Corp., and it will be
repaid entirely with shareholder dollars," he said. "It has no
impact on the rates the Utility's customers pay now or in the
Calpine Makes Long-Term Commitment
On the more positive side for the governor's various
initiatives, San Jose, CA-based Calpine, the super-aggressive power
plant developer/operator, announced two more long-term contracts
with California's water resources department (DWR) to provide up to
1,500 MW collectively in deals that span 10 and 20 years,
respectively. The contracts' estimated value collectively was
placed at $8.3 billion by Calpine.
The new contracts involve both baseload and peaking supplies of
power. The latter are contingent upon Calpine developing 11 new
generating units for operation in peak-demand periods. Until the
company has more site-specific proposals it cannot make any
estimates on the total added natural gas supplies it will have to
line up for these projects. Calpine already owns both natural gas
reserves and in-state pipelines in northern California.
The $5.2 billion, 10-year deal involves up to 1,000 MW, begins
July 1 this year with 200 MW, growing to the 1,000-MW maximum
volumes a year later (July 1, 2002). These supplies will be sold to
the state on a 24/7 basis, according to Calpine.
The other deal is for up to 495 MW over a 20-year period,
totaling $3.1. Deliveries under this contract will begin once the
new units have been sited, fully permitted and brought into
commercial operation, Calpine officials said. "The company is
proposing to build these natural gas-fueled peaking generators to
help ensure the reliability of California's power grid during high
power demand periods."
While the negotiations and legislative activities continued,
Cal-ISO declared a Stage Two power alert Feb. 28/March 1 after five
days of adequate power reserves. The level-two alert, indicating
reserves would drop below 5%, was caused by a combination of
unexpected losses of generating units in northern California,
Oregon and Montana, Cal-ISO said.
In total, 10,600 MW of generating capacity in California was out
of service for planned or unplanned maintenance on Feb. 28 (that
total had been at 8,000 MW or lower in recent days). The Oregon and
Montana generating capacity decreased reduced the amount of power
available for import into California.
Richard Nemec, Los Angeles