While power outages were still viewed as an inevitability thissummer in California, a comprehensive legislative, regulatory andcommercial solution to mounting energy debts was less certain lastweek as reports surfaced that creditors might force bankruptcy onthe state’s two ailing utilities.

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

Both the financially-strapped utilities, Southern CaliforniaEdison and Pacific Gas & Electric, indicated they continued in”active” separate negotiations with the political leaders, butcreditors and debtholders were growing obviously restless in thecontinuing conference calls held twice weekly.

The governor and state legislature were quiet Friday, and theweek had few of the hyped news media announcements that have becomestandard fare. Indicative of the apparent inertia on the West Coastwas the fact that the state grid operator’s board meeting drew moreattention than elected officials.

A second inevitability arose by week’s end – namely, that rateincreases beyond the 19% accepted by Gov. Gray Davis will be neededto secure a widespread deal with the utilities and others. Whenpressed by bondholders at a conference call Friday, SouthernCalifornia Edison officials indicated that all of the costs beingaccrued exceed the future revenues estimated to pay off thosecosts. That leaves higher utility rates as the only means – shortof higher taxes – to cover the costs.

There is speculation that the Cal-ISO is going to propose toFERC that California’s transmission grid operations in the futuretake steps to cap prices on bids into the state’s market andprevent in-state generation from going out-of-state. The two movesare opposed by advocates for a wider, multi-state transmission gridoperation (RTO) in the West because they see it as furtherattempting to isolate California, despite its dependency on importsfrom other states for up to 25% of its peak-demand needs.

Responding to what he interprets as positive feedback from thefederal DOE, Davis last Thursday said Cal-ISO’s new marketstabilization plan will lower wholesale electricity prices inCalifornia. Meanwhile, a spokesperson for Cal-ISO said its boardmet Thursday, but did not act on an agenda item covering the newmarket plan.

Davis, in a prepared reaction statement, thanked DOE SecretarySpencer Abraham and the Bush administration for “their continuedcooperation” and their agreement “not to oppose our efforts topurchase the transmission lines of our investor-owned utilities andimprove 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, notedthat the lack of tangible deals with the utilities and any moresigned long-term contracts, have caused the state legislativeleaders and governor to press ahead with more investigations andpunitive actions against merchant generators and marketers. Theidea apparently is “to divert attention” from the lack of successin addressing the basic problems.

“I’m sure there is a lot of pressure from the governor to havethese parties show some real results,” the source said.

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

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

Edison attorneys indicated the utility will resist an attachmentof Edison’s interests in two Nevada-based power plants by a QFgenerator that is not being paid by the utility.

“The increase in lawsuits is another indication that peoples’frustration levels are rising in this whole situation,” saidEdison’s Senior Vice President/Treasurer Ted Craver.

“The Cal-ISO and the Cal-PX are both no longer credit-worthy andthe utilities are closer to bankruptcy; that is pretty much thewhole market in California and no one talks about that,” said aCalifornia-based executive with one of the large national energycompanies. “We talk about the high prices and how they continue tobe high prices (in the wholesale markets) and there is a hugewealth transfer out of the state, but nobody talks about the factthat the state is asking suppliers to sell a product to people whoaren’t paying.

“If we are going to make that silly move, wouldn’t you put ahigher price on that product just to account for the additionalrisk for doing business in that state?” (The Western Power TradersAssociation has a consultant who is trying to quantify this premiumbeing paid as part of broader work for generators’ and marketers’trade group. It is expected to be filed as part of theassociation’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 problemfacing the state. Suppliers are understandably reluctant to sell toCalifornia, they say, and when they sell to the state they aremarking up their prices.

“It is still a huge problem,” said the energy company executive,”despite the fact that everyone from the governor on down ispatting themselves on the back for the legislation they passed (AB1X) and the long-term contracts, but how many have they actuallyconsummated? It is a huge problem that is getting worse, buteveryone is sort of sweeping it under the rug because the fingerpoints directly at the governor.”

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