CA Governor Signs Energy Bailout Bill
Following last week's flurry of state initiatives and an energy
roundtable among 10 western governors, California will be busy
sorting through the details full this week, including signing
initial long-term power contracts, which Gov. Gray Davis has
promised will begin to move the continuing "crisis" into the
longer-term "challenge" mode. In the interim retail direct-access
sales will be suspended among other provisions in the new
The bottom line emerging from Sacramento is that the state is
firmly involved in electricity supply and demand-side management
following last week's milestones, but it is placing limits on the
duration and depth of that involvement, pushed by an uneasy
Republican minority in a solidly Democrat-majority state
legislature and administration. State political observers say it
was Republican reluctance that has spurred Gov. Davis to launch
more aggressive power-plant siting plans that will be announced
some time this week, designed to get an extra 2,000 MW online by
the end of year and another 5,000 MW by the summer 2002.
Among the many details that were unclear even after the governor
had signed AB 1X into law was the question of how the state-backed
bonds destined to be paid back over a number of years through a
surcharge for utility ratepayers using 130% of baseline amounts of
electricity will be structured, and more important, how they will
be received by bond markets.
On the eve of the western governors' confab Friday in Portland,
California lawmakers Thursday passed by the minimum two-thirds
majority (54-25) a new law with a $10 billion price tag authorizing
the state to sign long-term electricity contracts and also
stabilize the financially troubled two largest investor-owned
"This marks the first critical step on the road to recovery in
California's energy challenge... without raising rates," said
Davis, who noted it was important for his state to "demonstrate we
are making progress" to the other western governors who gathered in
Oregon (see related story this issue). "But we shouldn't kid
ourselves, big challenges still lie ahead. We have to find other
ways to conserve electricity and increase generation capacity.
"I believe there are ways to speed up the permit process,
streamline it further, increase transmission capabilities, build
new power plants, and with no violence to the environment.
"With this law, I can assure everyone California can and will
pay its bills."
Gov. Davis said he directed his power contract negotiators to do
four things: (1) secure short- and long-term contracts so the state
relies on the spot market for no more than 5% of its supplies; (2)
finalize the bids received Jan. 23-24 no later than the end of
today (Feb. 5); (3) as soon as possible extend the earlier request
for bids to secure more short and long-term proposals; and (4) work
with the utilities to acquire their options for short-term power at
reasonably prices. Davis said he is prepared for the DOE not to
extend its current emergency order mandating suppliers to do
business with California.
Among its provisions, the new law allows the state water
resources department to issue revenue bonds to help finance its
power purchases, but it specifically prohibits the state agency
from taking ownership of transmission, generation or distribution
assets of the investor-owned utilities; prohibits rate increases
for residential customers' initial usage of 130% of baseline
quantities or power; and limits the state power buying to a period
running through next year (Jan. 1, 2003). The bill also "suspends
the ability of retail customers to select alternative providers of
electricity until the water resources department gives up its new
power-buying role. The head of the state's independent power
producers, Jan Smutny-Jones said Friday he understood some
"clean-up" legislation due out this week would attempt to
re-institute the last option, which was the centerpiece of the
state's 1996 electricity restructuring law.
Jones called AB 1X "very important," but only a first step,
agreeing that long-term contracts should have the effect of
bringing down wholesale power prices in the West. Just as important
as the new law last week, Jones said, was a report from the Federal
Energy Regulatory Commission concluding that none of the state's
merchant generating plants used planned or unplanned outages last
year to drive up wholesale prices.
"We're very hopeful that this report will quiet those who are
trying to blame the producers for the crisis and recognize that we,
in fact, are part of the solution," said Smutny-Jones, who said his
members are spending "billions of dollars" to try to modernize
generating plants to serve the California market.
Gov. Davis indicated the state still does not have sufficient
amounts of long-term bids, but that his negotiators want to sign
the best deals they have at this point by Monday and then use them
as leverage to sign up the additional supplies they need to get
Before finally getting a bill to sign, Gov. Davis early Thursday
afternoon announced the outline for an $800 million statewide
energy conservation program, including incentives to reduce
commercial lighting and he signed an executive order directing
reductions in outdoor retail lighting by March 15, 2001.
The action Thursday was to add $404 million to an already
designated $424 million conservation effort announced earlier by
the governor. In total, he said the results of the program are to
give the state an addition 3,200 MW savings by this summer when
power supplies are expected to be even tighter than they are this
Davis also announced that the McDonalds fast food chain has
joined the state's energy conservation campaign by printing 4
million tray liners for its 1,100 California outlets with energy
conservation messages under the heading, "Flex Your Power."
A different variation on that theme was provided by some of the
state's leading utility consumer watchdog groups that teamed up to
criticize the utility's alleged financial near-insolvency as a
conspiracy and urge the legislature not to provide a bailout.
Consumer activists went on the warpath Thursday in San
Francisco, calling the recently released independent audits of
California's financially threatened investor-owned utilities "very
revealing reports" that the state legislature should use as the
basis for refusing to grant any bail outs to Southern California
Edison Co. and Pacific Gas and Electric Co.
"The audits demonstrate no need to bail out the utilities," said
Bob Finkelstein, an attorney with the consumer group TURN.
Noting he thinks "crimes have been committed" and the utilities
should be "prosecuted to the full extent of the law," Harvey
Rosenfield, director of the Foundation for Taxpayer and Consumer
Rights, accused the holding companies of reaping excessive profits
from the utilities and going on a "spending spree" internationally
while their utility subsidiaries were preparing for the threat of
In an SEC filing Thursday, PG&E indicated that its utility
has defaulted on a combined $726 million in commercial paper and
that the utility intends to make only partial payment toward debt
approach $1 billion.
Meanwhile, state lawmakers struggled to come up with a long-term
solution to the state's power crisis yesterday, cash strapped
Pacific Gas & Electric Co. disclosed that will only be able to
cover about 15% ($161 million) of payments due to qualifying
facilities ($437 million) and the California Power Exchange and
California ISO ($611 million).
The utility and its parent company, PG&E Corp., also said in
a filing with the Securities and Exchange Commission that they have
defaulted on $726 million of short-term debt. Together they have
less than $1.2 billion of cash left.
PG&E said its intent is to "pay its ongoing costs of doing
business while seeking resolution of the wholesale power crisis."
In the meantime, it will examine restructuring its bank loans and
commercial paper. The company said it might take six months for
holders of defaulted debt to get back their principal.
"Making limited payments is the only responsible step we can
take to ensure that the utility retains sufficient funds to allow
essential ongoing generation and maintenance of both its gas and
electric transmission and distribution systems, as we work with
lawmakers and regulators to reach a solution to California's energy
crisis," said Gordon Smith, CEO of Pacific Gas and Electric. "We
are committed to maintaining normal operations and to paying as
much of our outstanding power bill as is available in rates, in a
manner that seeks to ensure the safety and reliability of power
Richard Nemec, Los Angeles