Crucial Week Facing CA as Legislature Returns, CPUC Faces Key Decisions

Given the lack of widely agreed-to solutions and an increase in disagreements among parties, anticipation will be high and expectations low this week in California's complicated political and regulatory energy landscape that promises to heat up with the return of the state legislature and a crucial business meeting of the state regulatory commission.

It was hoped that during the now completed month-long legislative recess a broadly supported compromise between senate and assembly bailout bills would be developed for state lawmakers to dig into today (Aug. 20), their first day back. That didn't happen.

With blackouts so far avoided, conservation programs kicking into high gear and financial analysts predicting that Southern California Edison Co. will be able to stave off bankruptcy at least until the federal decision on wholesale power refunds is decided in the fall, California's fragmented legislature may not be inclined to push through bail-out legislation for the utility.

Complicating efforts to find a grand overall settlement that lawmakers and regulators can quickly adopt is the friction that flared again last week surrounding the proposed revenue needs of the state Department of Water Resources (DWR), which is awaiting a series of decisions from the California Public Utilities Commission Thursday (Aug. 23) so it can reimburse the state treasury for some $8 billion in wholesale power purchases. California's two financially wounded investor-owned utilities and consumer groups all contend DWR is miscalculating its needs, inflating the state's bill to the private-sector utility customers.

Legal challenges to CPUC action, which at least one of the utilities has indicated it might pursue, could further frustrate the state's already long-delayed plans for $12.5 billion public bond offering to repay the state's general fund for wholesale electricity purchases.

Meanwhile, deadlines have passed and the legislative efforts have floundered in trying to carve out a solution to Edison's credit crunch, along the lines of the utility's deal with Gov. Gray Davis in which originally the transmission system would be sold to the state in exchange for the utility regaining its creditworthiness.

Pacific Gas and Electric Co. and Edison once again reiterated their strong criticism of DWR's filings with the CPUC that the regulators will use to determine how much of the private-sector utilities' retail power rates will be used to pay back the state for its past and future electricity buying.

"Based on the limited information provided by DWR, we believe DWR has substantially overestimated the forecast cost of spot power purchases, and substantially overestimated the forecast cost of natural gas," the PG&E utility said in a prepared statement. "These overestimates combine to make DWR's 2001-02 revenue requirement more than $3.1 billion higher than it would be if estimates which reflect the current market realities, rather than financial or political considerations, were used.

"More than $1 billion of this apparent `padding' of the revenue requirement has been assigned to PG&E's customers; and the other two utilities' customers are assigned the remaining $2 billion."

Like PG&E's utility, Edison contends the DWR filing leaves them in the dark as to how the state agency's revenue requirements have been determined and that the agency should be subject to the same cost-of-service ratemaking principles as the traditional investor-owned utilities are.

The Edison utility and its creditors appeared to be unfazed last week by the utility's (Aug. 13) filing with the federal Securities and Exchange Commission that shows it has $200 million more in debt and an equal amount of less cash than it report three months earlier. The increased red ink prompted business wires to carry stories on the SEC filing, raising the specter of bankruptcy closing in on the Edison utility.

In the filing, the utility parent company, Edison International, reiterated that the utility might be unable to avoid bankruptcy if it does not get help soon. Ted Craver, Edison's CFO, indicated in response to a debtholder's question in a conference call that without legislative and regulatory action in the next few weeks all bets would be off in terms of the utility being able to return to creditworthy status anytime soon.

"If the legislative/regulatory solution provides for sufficient cash to pay off all of unpaid bills and clear the defaults, and very important, also provides investors with enough clarity that we won't end up in the same hole a few months down the road--namely that the CPUC puts in mechanisms in place to assure that rates will adjust should wholesale costs spike, then we will become creditworthy and will be able to access the banks and capital markets for financing," Craver said.

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