State Forges Ahead Despite PG&E Bankruptcy
The bankruptcy of Pacific Gas & Electric Co. may stand as a large roadblock in the state's plan to make wholesale changes to the electric industry, particularly buying up all existing transmission, but the governor last week seemed determined to persevere. The signing of a landmark "memorandum of understanding" (MOU) between the state of California and Southern California Edison last week, the beginning of talks with San Diego Gas and Electric Co. and verbal olive branches to PG&E reflect the governor's resolve to dig the state out of hole it finds itself in. He hopes to reach an agreement with SDG&E before the end of this month.
However, skeptics are questioning whether the governor's proposed deal with Southern California Edison Co. and the regulatory and legislative actions that will be required to seal it can be realistically achieved in the tight 60- to 120-day timeframe called for in the Edison MOU.
While lifting review for further credit downgrades on Edison, Moody's expressed continuing concerns about "the implementation risk" (of the MOU), including obtaining legislative approval to complete the transaction and securing the numerous approvals from the California Public Utilities Commission.
The prospects for the state's record public sector bond sale in excess of $10 billion also were becoming uncertain although state officials were staying tight-lipped, as were there financial advisers.
"My initial reaction after the PG&E bankruptcy was that things were getting worse because that brought in the whole issue of timing," said Mary Beth Syal, municipal bond fund portfolio manager at Paydenfunds, a part of Payden & Rygel, Los Angeles. "Now with the Edison MOU, we're trying to work out the numbers, and that makes things even murkier.
"Originally, I thought it would be good because at least maybe they could go through with the portion (of the state bond sale) related to Edison's rate component, but I am not sure they are going to be doing that. In addition, all or parts of the agreement can be terminated at random."
Further insights into the difficult road ahead may come this week in annual reports of the holding companies for the two financially strapped California utilities. Multi-billion dollar write-offs for one or both could be included.
While the governor kept a positive outlook last week, signing laws for an $850 million conservation program and new peaking generation, Edison filed a negative 8-K with the Securities and Exchange Commission, citing a number of sobering details lurking behind the MOU. Edison referred to a potential $2.5 billion write-off unless recent regulatory decisions regarding past collections of stranded investments are not modified.
As a result, Gov. Davis is putting on a full-court political press, reaching out to legislators and regulators alike and trying to gain as much promotional value as he can related to power plant sitings and demand-reduction programs. He talked last week to one of President Bush's two newest appointees to the Federal Energy Regulatory Commission, Texan Pat Wood, to brief him on the state's energy situation and the steps being taken to begin to resolve things.
The governor said Wood expressed "interest in making sure there were refunds," and although the new commissioner would not commit to them, he appears to be what Davis called a "kindred spirit when it comes to responsible pricing."
The governor still does not have a "definitive contract" with Edison. In essence, either the state or utility can walk away from the MOU if the regulators fail to act within 60 days and/or the legislature doesn't do its part by Aug. 15. The transmission sale also ultimately requires federal approval, which undoubtedly will be difficult to obtain.
Growing court litigation --- some brought by the utility and some against it --- is expected to be resolved through a combination of the state regulatory and legislative action. With those actions, Edison's federal lawsuit against the CPUC on the so-called "filed rate doctrine" would be settled or dropped, and the still-growing number of lawsuits --- a dozen at last count --- against the utility by qualifying facility (QF) cogenerators and generators should be resolved by the ongoing case at the CPUC.
"It has gotten to the point where there are too many of these lawsuits to count," said an Edison senior attorney. "We hope the CPUC will give us a forum to resolve these cases (out of court) as part of the MOU for both past debts and charges going forward."
So creditors still had lots of questions last week when they listened to another of SoCal Edison's twice-weekly conference calls. Will a write-off still be required for Edison's 2000 financial report (for the difference between the $5-plus billion gross undercollections and net $3.5 billion being covered in rates and transmission sales revenue)?
"In the absence of regulatory or legislative action, we may have to take a write-off in the neighborhood of $2 to $2.5 billion," said Ted Craver, Edison senior vice president and CFO, indicating that Edison had said as much in its 8-K it filing last week.
In the meantime, Edison said that it would be making interest payments on its debt going forward until the final agreement is reached.
"What we tried to do in this MOU is have a better understanding with the CPUC and eliminate as much of the uncertainty as possible," said Craver, noting that it should mean that once the utility resumes procuring power in the wholesale market it will have "reasonable" assurance of covering its costs. "Some of this is contemplating being able to craft some new approaches to procurement going forward to get some certainty [ahead of the purchases] through a plan to handle the various purchases [spot, short-term, long-term]. We are definitely seeking to have more certainty and clarity going forward."
Craver said the "unifying theme" for Edison's deal is restoring the utility's creditworthiness and liquidity so it eventually will be back in the procurement business and back paying dividends to its parent firm's shareholders.
Details of Edison's MOU
The comprehensive MOU involves not only Edison's sale to the state Department of Water Resources (DWR) of its 12,000 miles of transmission assets and land rights of way for $2.76 billion, but 10-year commitments to sell utility and unregulated affiliate electric supplies totaling around 6,000 MW on a cost-based, below-market basis; $3 billion in capital infrastructure investments in its distribution operations over the next five years; and granting perpetual easements (not a "sale") and nondevelopment status to 20,000 acres of watershed tied to Edison hydroelectric generating system, all contingent on some heavy lifting by state lawmakers and the CPUC, along with continued forbearance by Edison's long list of high-powered creditors, including major lenders and power suppliers.
What Edison gets in addition to a chance to return to investment-grade creditworthiness is the prospect for increased earnings off of its remaining generation-in and out of state. There is an estimated $1.5 billion equity interest on the books for nuclear, hydro and coal generation in which Edison owns substantial interests, and the MOU will allow the utility to keep its 11.6% return on common equity.
CPUC President Loretta Lynch and some of her senior staff were present for parts of the negotiations last weekend, according to Edison, as were key state lawmakers, who are committed to pass need legislation within the next 120 days. The prospective legal contract is with the state DWR technically, but this is "the governor's deal and he is committed to being personally involved in the implementation details," said Edison's Craver.
Despite pleas from the utilities to act more quickly, Lynch last Thursday set a schedule for formal evidentiary hearings with a target of putting the increased retail electricity rates in effect June 1. The commission president also proposed straw man approaches for tiering of rates and use of time-of-use pricing and smart meters to allow customers to react to real-time price signals. The CPUC's regulatory schedule set last week calls for a final decision May 14 to be effective June 1.
Separately at its regular meeting last Wednesday, the California Energy Commission approved a 99-MW, natural gas-fired combined cycle addition to an existing cogeneration facility in the central agricultural valley town of Hanford. The operator, GWF Power Systems, also has submitted a proposal to construction a 95-MW simple-cycle plant at the same 10-acre location that would come on line this summer. The combined-cycle plant is scheduled for 2003.
This is the third peaking plant approved under an expedited process for this summer. Those projects collectively represent 276 MW. Three others, totaling 130 MW are due to be acted upon under a special 21-day process; and two others, totaling 152 MW have been filed under the accelerated process, according to the energy commission.
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