Focus Shifts to Legislature and Feds as California Crisis Deepens

State-backed financial bailout options for California's two cash-strapped utilities were being looked at Friday by the state legislature and treasurer, including public takeover of the state grid, as Gov. Gray Davis prepared to divulge his plan today prior to making another trip to Washington, D.C., in search of a federal cap on western wholesale electricity prices later this week.

"Some state action to bridge the period of time between now and when bond securitization can be pulled together is probably needed," said Fitch's Steven Fetter, noting that such action (at either the state or federal levels) would cause the utilities' credit ratings that were lowered last Thursday to be re-examined.

"At this point, it really falls to policymakers to take some action and do it quickly," said Fitch's energy analyst Lori Woodland.

Merchant generators expressed concerns that California officials would take the wrong actions, moving toward public takeover, negating billions of dollars that are already being invested in new power plants now under construction, review by state authorities or being planned. Through the California Independent Energy Producers, the generators are going to support state legislation that makes utility long-term power contracts the principal way to resolve the current wholesale price debacle.

On Friday, State Treasurer Philip Angelides proposed establishing a $10 billion "California Consumer Power and Conservation Financing Authority" to expand state energy programs and finance conservation efforts, building at least a 15% reserve capacity of state generating plants.

"The state cannot stand by and hope that the private markets will solve California's energy problems," Angelides said in a prepared statement during another day in which state officials concentrated on little else besides electricity. The proposed new state entity would sell up to $10 billion in taxable and tax-exempt bonds to finance its operations.

"I am very suspicious of whether this (a state power authority) will solve any problems," said Jan Smutny-Jones, head of the state's independent generators' trade association in Sacramento. "The fact of the matter is there is more than $10 billion in private capital being targeted for California, so I don't think the problem is the state's ability to attract private capital to build power plants; the problem is state regulation that restricts the utilities' ability to buy long-term and protect their customers from the volatility of the market.

"This is the only market in the U.S. that acts like this. In the East (PJM independent grid operators for parts of Pennsylvania, New Jersey and Maryland) all of the power is bought and sold under long-term contracts. This is a California specific problem that, in fact, can be fixed in California if the state exercises the necessary leadership."

Is there anything else that generators are going to offer to do besides long-term contracts at fixed prices?

"That's the best we can do," Smutny-Jones said.

A proposed state power authority also surfaced earlier last week from a surprising source, the free-market economist member of the California Public Utilities Commission, Richard Bilas, during last Thursday's CPUC discussions of the two utilities' emergency rate hike. Following the regulators' meeting, Bilas called the proposal a "crazy scheme that just might work," although he left to the legislators the details of how such a state agency might actually operate.

Bilas said he reluctantly concluded the power authority might be the only way to address the fact that California has unintentionally replaced a power generation monopoly that used to be centered in state-regulated utilities with what he calls a "monopoly of unregulated power generators who are game-playing and abusing the market" and no federal or state authorities (including the CPUC) are doing anything to correct the situation.

"Just having a power authority would put a club over the power producers," Bilas said. "It would make them, I believe, act in the public good and in effect shape up. The power authority could set all the rules for how the game is played. And if it didn't like what the producers were doing, it could buy the power plants (through condemnation) at fair market prices."

In response to questions that the generators are being made the "villains" in the continuing drama in California's electricity industry, Smutny-Jones said he thought some officials are "scapegoating, rather than focusing on positive solutions." He said the generators hoped to be "engaging the CPUC, the governor and the legislature in trying to solve the situation. (The generators) have billions of dollars invested in the state and are willing to invest billions of dollars more, and we're not going to get there by name-calling."

Meanwhile, the specter of bankruptcy hung over PG&E and Edison as their stocks fell significantly during the week. Fitch analysts speaking in a conference call Friday noted that unlike other utility bankruptcies, PG&E and Edison would be facing prospects that would make it difficult for them to quickly revert to a positive cash flow, given the outlook for continuing high wholesale power prices well above frozen California retail rates.

With financial crepe being hung over California's once-invincible-looking two major utilities, the CPUC Thursday unanimously approved a temporary penny/kwh rate hike. Fitch said it viewed the state regulators' temporary rate surcharge as "wholly inadequate to remedy the dire circumstances facing Southern California Edison Co. and Pacific Gas and Electric Co."

More permanent rate relief, including whether to lift the state's 4 1/2-year retail rate freeze, will be decided after additional regulatory hearings that get under way Wednesday (Jan. 10). The temporary rate relief is basically what the utilities and Fitch rating service already had dismissed as woefully inadequate to cut into the $11 billion in added debt the two utilities have assumed over the past six months due to runaway wholesale power prices they continue to pay. (The Cal-PX price was 28 cents/kwh Thursday, according to a CPUC source. Frozen retail rates are at the 7-cent/kwh level.)

CPUC commissioners noted in their pre-vote comments that bankruptcy is not a viable solution to the utilities' continuing revenue shortfalls, and at least one of the commissioners called consumer activists "irresponsible" for advocating bankruptcy in lieu of rate relief. Another commissioner, Henry Duque, indicated he was voting for the rate hike, but agreed with the utilities that it should be more --- at least another penny/kwh more.

Consumers speaking at the CPUC meeting indicated that serious pushes for government takeovers in San Francisco and San Diego are taking hold, and the continuing economic and operating success of large municipal-run utilities in Los Angeles and the state capital of Sacramento lend them moral support. "It would be much better to have publicly run utilities rather than private sector companies," a long line of consumer activists told CPUC commissioners.

Activists warned that unless Gov. Gray Davis takes drastic steps soon, they will "guarantee" another statewide ballot measure to re-regulate the electric industry statewide and noting the City of San Francisco will have a measure to vote on regardless. They talked vociferously against the CPUC issuing any rate increase.

CPUC Commissioner Carl Wood said that "deregulation is dead" in California and no one should carry on the "fiction" that it is going to be salvaged in the state. He said the state is the victim of what he called a "western cartel" of generators and marketers who are "profiteers" of the worst order, and who federal regulators are, in effect, protecting by not imposing a so-called hard wholesale price cap throughout the western states.

"Markets do not act in a responsible manner, it isn't their nature, and that is what makes them so exciting," he said. "Reliability through reliance on markets is no longer possible. That is the reality we are facing. The deregulation project in California is dead because it is no longer defensible.

"What we are voting on today is the epitaph for deregulation in California," Wood said before the unanimous vote by the CPUC. "Deregulation is dead."

The generators' association head Smutny-Jones said this "concerned" the power producers, acknowledging that the state's deregulation efforts "need a mid-course adjustment in terms of where we are in the restructured market. However, we need more generation in California and who is going to build that?

"Building generation is a very risky business, but what is being missed in this whole story about a state power authority is that historically public power has been involved in building power plants, but sometimes they guess right and sometimes they guess wrong."

He said up until a year and half ago, one of the City of Los Angeles Department of Water and Power's biggest problems was a large, expensive coal plant in Utah. That same plant coupled with LADWP's gas-fired plants around Los Angeles has allowed the municipal utility to make $200 million or more in the California wholesale power market. Prior to that they had built a power plant they didn't need that was too expensive. And if you look around the West there are other examples, the Department of Water Resources built a geothermal plant that never had adequate steam; SMUD in Sacramento had to close a nuclear plant and there was the largest public power plant default ever in the Pacific Northwest.

"This concept that public power is going to somehow save the day for California is just misplaced. What we need to get out of any authority is what we started with --- attracting private capital to build these power plants and giving customers meaningful choice. It is doable and it is doable with real leadership in the state."

In stark contrast to the surge of proposed solutions advocating public sector solutions, Robert Mitchell, executive vice president with Washington, D.C.-based private sector transmission operator, Trans-Elect, appeared at last week's CPUC meeting to announce that his firm is making an $8 billion offer to California's private sector utilities to buy and run the state's grid, 70% of which is owned by the three major investor-owned utilities.ÿ He asked the CPUC for the opportunity to comeÿback to discuss Trans-Elect's proposal more fully.

Earlier as part of some opening remarks, Commissioner Wood, a former statewide utility union leader, said he stronglyÿopposed further divestiture of utility-owned generation in or outside of the state, in reference to aÿpostponed agenda itemÿon Southern California Edison Co.'s pending sale of its portion of theÿMohave coal-fired generation plant in Nevada.

Wood said all the state's major electric industry stakeholders agree that the previous sale of the utilities' major in-state gas-fired power plants is a major reason forÿCalifornia's current electricity supply/price predicament, and the trend should now be reversed with a return to more utility-owned generation assets.ÿBilas said he agreed to the extent that the sales of the utility ownership should not have taken place before "adequate new plants had been built."

Richard Nemec, Los Angeles

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