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 legislation.

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 utilities.

"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 under contract.

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 winter.

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 bankruptcy.

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 delivery."

Richard Nemec, Los Angeles

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