California Utilities Fast Approaching Bankruptcy

Standard & Poor's held a conference call Wednesday to declare that Pacific Gas & Electric Co. and Southern California Edison risk default and bankruptcy within weeks and are likely to see their credit ratings fall to junk grades if they don't get help from regulators within 24 to 48 hours.

"S&P is prepared to take dramatic rating action," said S&P Analyst Richard Cortright. "The ratings are expected to drop deeply into speculative grade to reflect the likelihood of imminent default."

The California Public Utilities Commission plans to meet today to consider whether to allow PG&E and Edison to pass through at least some of the more than $8 billion in wholesale electricity overpayments to consumers. The utilities operate under a rate freeze through March 2002 as part of the state's electric restructuring plan. They also have been unable to negotiate long-term supply contracts. Instead they have had to purchase power on the spot market where wholesale power prices recently reached $1,400/MWh in contrast to the $35/MWh prices seen in 1999.

"For months California's utilities, including Pacific Gas & Electric Company, have faced a growing financial challenge, due to a badly broken wholesale power market and price gouging by wholesale power sellers," said Gordon R. Smith, CEO of PG&E Corp.'s combination utility subsidiary. "In order to ensure continued service to our customers during this time, Pacific Gas & Electric has virtually exhausted its financial resources, borrowing an average of $1 million per hour to pay for the power we deliver to Californians. No company can continue to operate indefinitely under such conditions.

"Today's S&P conference call sends a message to Governor Davis and California's leadership that now is the time for action," Smith said. "We need to agree on a solution that immediately addresses the problems created by the outrageous actions of generators and marketers and the failure of the Federal Energy Regulatory Commission to restrain them."

Meanwhile, a collection of western power market stakeholders gathered in Denver and Washington, D.C yesterday to discuss potential solutions to the continuing crisis. At the Washington conference, "several proposals were placed on the table by parties which may result in resolving the forward contracting issue in the near-term future," said Chief Administrative Law Judge Curtis L. Wagner Jr. in a report to FERC. "Statistics were gathered concerning available megawatt quantities and the needs of the [California] investor-owned utilities over a five-year period." Another meeting between the parties will be held on Jan. 3.

Senior officials with California's independent grid operator (Cal-ISO) expressed reservations about a "hard" $100/MW wholesale electricity price cap throughout the western states, which was one of the proposals at the Western Governor's Conference meeting in Denver yesterday. Several of the governors disagreed, concluding that as a short-term, interim step the cap will help protect retail consumers and bring some badly needed stability to the power market.

"The idea has been floated before --- a fixed cap of anywhere from $60 to $150/MW --- in as many flavors as you can think of," said Kellan Fluckiger, the Cal-ISO COO. "Whether or not that is effective depends on a whole bunch of things, including forward natural gas prices.

"My experience here in California is that caps are not effective and they produce countervailing incentives and the very heart of them strike at the core of additional investment (for new generation and transmission infrastructure) that is badly needed.

"Caps generally are a difficult thing," said Fluckiger, noting he couldn't comment on the specific proposals discussed by the governors. "While they may appear in the short-term to control rates, our experience is that they are not very successful in controlling overall costs, and there is really concern about having sufficient incentives to get the investment to build the new power plants we so desperately need."

Ultimately, Fluckiger said he would have to see an actual proposal with all of the details before he could provide a "real answer" to the question of a fixed western region-wide price cap.

A spokesperson in Gov. Gray Davis' office said the governor was unable to participate in the Western Governor's Conference, but he sent a representative and would support a fixed $100/MW cap, although the California officials do not believe FERC will impose such a cap. It is clear, Gov. Davis is gearing up for some rate increases for electric consumers to help, at lease partially, cover the undercollections of the state's two biggest utilities.

Late Tuesday, the governor announced the availability of $7.1 million in federal low-income energy assistance funds for families with incomes less than 60% of the state's median income. Davis said the funds were in direct response to a request he made to President Clinton for help back in August. California, he said, received the sixth largest allocation of the $155.6 million that was allocated to all 50 states.

In the meantime, Edison is continuing a multi-million-dollar advertising campaign featuring announcements by its parent company's CEO, John Bryson, on television, radio stations and in newspapers, that there will be "rationing" of electricity if the regulators do not grant rate relief to the two major utilities. Although the PG&E utility is taking a lower key approach publicly, Edison is openly taking about the need for the utility to declare bankruptcy in the absence of emergency rate relief.

While the electricity situation, and to a lesser extent natural gas prices, have become front-page news in general interest news media throughout the state, the utilities and countering consumer groups have raised their rhetoric. Political correspondents are now saying this is the major issue for Gov. Davis, and consumer groups are assuring everyone concerned that they will sponsor a statewide ballot measure in 2002 asking the voters to approve a massive move by the state to take over operation of the electricity generation and transmission infrastructure.

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