PG&E to Securitize Retail Gas Payments

Meeting in a special session last week, California's regulators gave PG&E's utility authority to amend its gas supply deals to keep supplies flowing to the state past Tuesday when the current federal DOE emergency order expires. But regulators postponed action on another PG&E request that Southern California Gas Co. over its strong protests be compelled to provide emergency supplies to PG&E's gas utility residential and small business customers. That issue is scheduled to come up Thursday when the regulators reconvene.

Given the utilities credit problems and other factors, it was still unclear at the end of last week whether the temporary measure will solve the utilities' severe credit problems.

Loretta Lynch, president of the California Public Utilities Commission, said PG&E's utility is a "victim --- a victim of circumstances and a victim of predatory practices by natural gas suppliers" now demanding payment for future supplies upfront --- not because the utility has failed to pay its past gas bills, but because the electricity crisis has sapped its credit-worthiness.

The CPUC action allows PG&E's utility to offer suppliers the option of securitization, or, in effect, a lien, in the utility's retail customers bills which cover the full cost of the wholesale gas prices as an incentive to have the suppliers extend contracts with PG&E's gas utility operations while the overall company is still covered with an erosion of its credit-worthiness. This week's negotiations for new contracts should offer some indication if the CPUC action will overcome the suppliers' growing reluctance to extend contracts under the continuing financial crisis circumstances in California, according to PG&E gas utility spokesperson Staci Homrig.

On the operational side, PG&E last Wednesday declared a low-inventory OFO because of a cold snap cau sing more supplies to be burned then pipeline shippers were bringing into the system. The action was thought to help cause the PG&E citygate price to jump from $11 to $17 Jan. 31. As for reports of low storage, Homrig said that while the utility's supplies are very low, they are adequate for the next week. They are not dipping into cushion or base gas at this point, Homrig said.

PUC President Lynch said that PG&E has not defaulted on any payments, but nevertheless in what she considers predatory practices, the suppliers have required advance payments or payment at the time supplies are provided. "These gas suppliers are taking advantage of an emergency situation to extract another pound of flesh," Lynch said in voting for the securitization measure. "Suppliers who have been paid when due are now saying regardless of existing agreements 'pay us today'. They are doing this in the coldest time of the year so the commissioners have to take these difficult steps to allow PG&E amend these agreements in order to keep the gas flowing."

Part of the CPUC's action places a 90-day limit on the securitization option, so the way gas contracts work, in effect, it only provides about another 30 days' worth of supplies, said Homrig, who noted that almost all of PG&E's 25 to 30 suppliers have asked for special payment arrangements (advances, cash-on-delivery or letters of credit) that the company cannot accommodate because of its cash-flow crisis.ÿ Out of ongoing negotiations, the parties came up with the securitization proposal in the customer account receivables, thus, assuring them they will get paid.

On the gas side, PG&E has had sufficient revenues (unlike in its electric business) but the suppliers have not wanted to let the utility stick to a normal payment arrangement because of the severe credit-rating decline in the past weeks.

"The CPUC seems to be optimistic that the legislature will come up with some solution that will improve our overall financial position (thus, eliminating the gas suppliers' present concerns over getting paid)," Homrig said. "The only thing keeping the gas suppliers from doing business with us is our poor financial state. If that improves, presumably everything will go back to normal.

"We'll probably have a better sense next week how many suppliers will work with us."

Richard Nemec, Los Angeles

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