As Gov. Gray Davis made the rounds in Washington and New Yorkseeking support for California’s plan to buy and run powertransmission lines, Moody’s sounded a warning that the plan couldfalter if consumers balk at the price tag at the same time powershortages hit this summer. “Absence of progress on the state’sproposed solutions to the California power crisis could worsen thepower crisis and begin to seriously threaten the health of theeconomy,” Moody’s said in a report issued after the market closedTuesday.

The warning came as Davis emerged from a meeting with EnergySecretary Spencer Abraham which was described as “veryconstructive.” A spokesperson for the governorÿsaid, however,”there were no commitments or confirmation,” and Abraham agreed “towork with the governor and asked for details in the next few daysthat Davis has agreed to give him.”

Commenting off the record on the governor’s travels, several ofCalifornia’s merchant generators are saying they think stateofficials finally “get it” regarding the latest movements to quellthe state’s deeply troubled electricity market. They recognize thatfederal regulators will have to approve a now-proposed statetakeover of the transmission grid, and they want the generators tohelp make the state’s case with the Federal Energy RegulatoryCommission.

In the meantime, at least two of the generators, Duke andReliant, indicate they could sign some long-term contracts by theend of the week. Their spokespeople hint that there is moreunderstanding between the two sides.

“We don’t care who owns the transmission as long as there isopen access and nondiscriminatory pricing and the rules that applyto other transmission grids throughout the country,” said TomWilliams, Duke’s California-based spokesperson. “Clearly that is inCalifornia’s best interest since it is a net importer of power.”

Reliant Energy’s Houston-based spokesperson Richard Wheatleysaid Tuesday that his company now sees California as “definitely ontrack to get something done, but when it will happen to is still upto David Freeman (City of Los Angeles municipal utility head onloan to the state as its chief power contract negotiator) and thestate.” Reliant has reached a temporary agreement with California’sstate energy buyers to continue supplying the Cal-ISO withemergency real-time power, with payment backed by the state waterresources agency instead of the credit-compromised grid operator.

Ultimately Reliant, and several other generators who haverequested it, want FERC to force the Cal-ISO to abide by thefederal commission’s Feb. 14 order to uphold its tariff conditionson creditworthiness and stop supplying power to the defaultingutilities, Pacific Gas & Electric and Southern California Gas.

Another generator, not wishing to be identified, opined thatultimately the state might realize it would have been less costlyto have provided rate coverage to the utilities for theirdramatically increased wholesale power costs, along withaccelerating the processing of new power plants.

“Legislators are seeing money being drained away from all oftheir pet programs,” the generator said. “Legislators are learningthis is not a simple thing, and it is almost wearing them down.They realize now the utilities are definitely paying a premium ontheir debt because it has been so high for so long.”

Moody’s also worries that the state’s plan to issue bonds to buypower and power lines may prove to be too expensive.

“If the state’s plan results in significant rate increases forconsumers, the emerging fragile consensus could come apart,delaying actions to address the crisis and damaging the economy,”The Moody’s report, “California Power Crisis: The State’sSolutions,” says. “Significant rate increases also raise the riskof a voter initiative, which could derail the state’s plans.”

A key credit concern with legislation authorizing the state’sDepartment of Water Resources to issue revenue bonds is whetherretail rates can be set at a level sufficient to meet costs,including debt service. Also, there are the ticking clocks of notonly a possible worsening of supply/demand imbalance this summerwhen energy demand will be at its height, but also the utilities’possible bankruptcy filings.

Meanwhile, another financial advisory service, Fitch, has givenan initial thumbs up to California’s latest proposal to buy SoCalEdison’s transmission assets at reportedly 2.3 times their bookvalue. Fitch said it views the tentative Edison deal with the stateas “a favorable step to avoid bankruptcy” for the beleagueredutility.”The purchase is a healthy multiple on assets that earn asmall percentage of total utility revenues,” Fitch said in a newsrelease on the proposed deal. It pointed out that Edison’sremaining assets would be a combination of low-cost generation(primarily hydro-electric and nuclear, with some coal-firedcapacity) and a large distribution infrastructure.

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