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State Power Bill Fades as CA Utilities' Debts Mount

State Power Bill Fades as CA Utilities' Debts Mount

While power outages were still viewed as an inevitability this summer in California, a comprehensive legislative, regulatory and commercial solution to mounting energy debts was less certain last week as reports surfaced that creditors might force bankruptcy on the state's two ailing utilities.

Observers speculated that the state political leaders' three-pronged approach might be coming apart, and that is why both state and federal officials are ordering ever-more investigations of the energy transactions involving the state.

Both the financially-strapped utilities indicated they continued in "active" separate negotiations with the political leaders, but creditors and debtholders were growing obviously restless in the continuing conference calls held twice weekly.

The governor and state legislature were quiet Friday, and the week had few of the hyped news media announcements that became weekly, if not daily, occurrences throughout the first two months of the year. Most of the action and rhetoric regarding the California situation was emanating from FERC and Capitol Hill in Washington (see related stories). Indicative of the apparent inertia on the West Coast was the fact that the state grid operator's board meeting drew more attention than elected officials.

A second inevitability arose by week's end --- namely, that rate increases beyond the 19% accepted by Gov. Gray Davis will be needed to secure a widespread deal with the utilities and others. When pressed by bondholders at a conference call Friday, Southern California Edison officials indicated that all of the costs being accrued exceed the future revenues estimated to pay off those costs. That leaves higher utility rates as the only means --- short of higher taxes --- to cover the costs.

There is speculation that the Cal-ISO is going to propose to FERC that California's transmission grid operations in the future take steps to cap prices on bids into the state's market and prevent in-state generation from going out-of-state. The two moves are opposed by advocates for a wider, multi-state transmission grid operation (RTO) in the West because they see it as further attempting to isolate California, despite its dependency on imports from other states for up to 25% of its peak-demand needs.

Responding to what he interprets as positive feedback from the federal DOE, Davis last Thursday said Cal-ISO's new market stabilization plan will lower wholesale electricity prices in California. Meanwhile, a spokesperson for Cal-ISO said its board met Thursday, but did not act on an agenda item covering the new market plan.

Davis, in a prepared reaction statement, thanked DOE Secretary Spencer Abraham and the Bush administration for "their continued cooperation" and their agreement "not to oppose our efforts to purchase the transmission lines of our investor-owned utilities and improve California's transmission system."

A representative with one of the state's major energy companies, who attended the public part of the Cal-ISO board meeting, noted that the lack of tangible deals with the utilities and any more signed long-term contracts, have caused the state legislative leaders and governor to press ahead with more investigations and punitive actions against merchant generators and marketers. The idea apparently is "to divert attention" from the lack of success in addressing the basic problems.

"I'm sure there is a lot of pressure from the governor to have these parties show some real results," the source said.

Meanwhile, the issue of creditworthiness was spreading to the state from the two near-bankrupt investor-owned utilities.

SoCal Edison last Friday paid $8 million in interest on first mortgage bonds to avoid debts growing by more than $240 million and it continued discussions with its banks seeking extension of forbearance that expired last week (March 14). It continued to juggle court actions, with an added class action suit and rumors (still unsubstantiated) of groups of QF generators petitioning for involuntary bankruptcy.

Edison attorneys indicated the utility will resist an attachment of Edison's interests in two Nevada-based power plants by a QF generator who is not being paid by the utility.

"The increase in lawsuits is another indication that peoples frustration levels are rising in this whole situation," said Edison's Senior Vice President/Treasurer Ted Craver.

"The Cal-ISO and the Cal-PX are both no longer creditworthy and the utilities are closer to bankruptcy, that is pretty much the whole market in California and no one talks about that," said a California-based executive with one of the large national energy companies. "We talk about the high prices and how they continue to be high prices (in the wholesale markets) and there is a huge wealth transfer out of the state, but nobody talks about the fact that the state is asking suppliers to sell a product to people who aren't paying.

"If we are going to make that silly move, wouldn't you put a higher price on that product just to account for the additional risk for doing business in that state?" (The Western Power Traders Association has a consultant who is trying to quantify this premium being paid as part of broader work for generators' and marketers' trade group. It is expected to be filed as part of the association's comments to FERC due later this week.)

Traders privately will tell anyone who asks that California's "creditworthiness" status continues to be the biggest problem facing the state. Suppliers are understandably reluctant to sell to California, they say, and when they sell to the state they are marking up their prices.

"It is still a huge problem," said the energy company executive, "despite the fact that everyone from the governor on down is patting themselves on the back for the legislation they passed (AB 1X) and the long-term contracts, but how many have they actually consummated?

"It is a huge problem that is getting worse, but everyone is sort of sweeping it under the rug because the finger points directly at the governor."

While the state legislature expanded its special session to deal with related, and in some respects tougher, natural gas issues, there were not a lot of results in terms of new laws getting out of committee. Similarly, there was little publicly-acknowledged progress in discussions involving the governor's and legislative teams talking separately with utilities and qualifying facility power generations to reach some settlements that will restore creditworthiness and eventually bring down wholesale prices. The California Public Utilities held a public business meeting, but postponed most of its agenda items, except for one blocking utility downsizing plans.

On a strictly partisan 3-2 vote, the CPUC last Thursday blocked attempts by the state's two utilities that proposed further work force and service cutbacks to conserve cash, while awaiting a settlement with the state on its future financial viability. Two Republican-appointed CPUC commissioners opposed the move, calling it "micromanagement" on the part of the regulators.

SoCal Edison and the PG&E utility. were ordered to rescind "any layoffs of employees which are needed to fully staff customer call centers, read meters monthly, timely respond to service calls and outages, and connect new customers." Edison has laid off 400 workers in its transmission/distribution units and had proposed eliminating an additional 1,600 jobs in the months ahead; PG&E's utility had laid off 505 workers and announced plans to eliminate another 675 jobs it its cash flow situation was not resolved.

Other stopgap measures for California's expected summer power shortages included: the governor announcing rebates to customers cutting their summer power use by 20% and Calpine Corp. striking an immediate two-month deal for providing 550 MW to Southern California markets. The short-term power pact is an interim one with the state water resources department during the two-month test phase of a new generating plant being opened at the Fort Mojave Indian Reservation near the California-Arizona border.

Davis said the state will underwrite a "20/20" program (20% power bill rebates from 20% reduction of electricity use) that is designed to save 2,200 MW during summer peak-demand periods, saving the state up to $1.3 billion in wholesale power costs. The voluntary program applies to both households and businesses between June through September, the prime peak-demand months.

Richard Nemec, Los Angeles

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