Davis Optimistic Utility Deal Can Be Reached This Month

California ended last week without a definitive deal with the investor-owned utilities, but with the governor predicting a deal would be in place by the end of the month. Gov. Gray Davis' optimism didn't stop there, however. He also believes under-paid suppliers will accept partial payments for the their mounting bills, and federal regulators somehow will bless the state's takeover of the utilities' transmission assets on a lease-back arrangement.

Nevertheless, signals were mixed from other sources on the complex crisis that moved into its fourth month since the Federal Energy Regulatory Commission's Dec. 15 order.

California's independent transmission grid operator, Cal-ISO, filed with FERC seeking what could be refunds of more than $550 million from generators and suppliers that it alleges overcharged the state for emergency, real-time electricity in December and January.

Meanwhile, the governor and California's congressional delegation last week continued to push FERC for a wholesale price cap - not the so-called $150/MWh "soft cap" that has been in place since Jan. 1.

The reality that is recognized by both California and federal energy officials is that even months into the western regional energy crisis - not just California's - there is still a lot of work to do at all levels of government. Consider the major unfinished business confronting Davis and the state legislature that began its third month of a "special" legislative session dealing exclusively with energy-related issues:

  • Three separate utility deals involving the transmission assets and assurances that existing utility generation (in-state hydro and nuclear and out-of-state coal and nuclear) is sold to California.
  • Long-term power contracts in addition to some new ones announced last week with Calpine.
  • Re-negotiation of the over-market utility contracts with more than 200 qualifying facilities (QF) that are worth billions of dollars.
  • Bringing online enough new temporary peaking generation plants to meet the governor's goal of 5,000 MW of new in-state generating capacity by this summer, which is now four months away.
  • Hitting some aggressive conservation goals of reducing peak demand by several thousand megawatts for this summer with an $800 million crash program.
  • Getting suppliers and generators to accept partial payment for what is estimated to be more than $13 billion in unpaid wholesale power bills and related debt by principally two utilities, Pacific Gas and Electric Co. and Southern California Edison Co., both of which have been the beneficiaries of continuing forbearance by creditors at the same time that at least one of them (PG&E) is facing increasing lawsuits and formation of creditor committees.
  • Getting refunds and price caps from FERC.

Cal-ISO last week asked federal regulators for help in possible refunds of up to $550 million for December and January wholesale charges dealing with billions of dollars worth of power supplies purchased in the emergency real-time market. Cal-ISO alleged that prices it paid exceeded federally established benchmark levels. It was part of a motion to FERC that serves as a refund notice to suppliers, a request for data and a hearing request.

A Cal-ISO report based on a $250/MWh federal cap in December and $150/MWh in January concluded that net revenues earned by power suppliers "appear excessive when compared to their estimated operating costs." The report accompanied the filing to FERC seeking additional time, information and a formal hearing.

In the meantime, Davis was on the East Coast last week telling Wall Street and Washington, D.C. audiences that two suppliers have indicated a willingness to take partial payments for some of their past-due billing to the state and its major investor-owned utilities. Most generators confirmed the possibility has come up in negotiations, but publicly they maintain they expect to get all they are owed.

The mounting debt got a bit heavier for PG&E last week. In the midst of trying to hang tough in ongoing talks with the state over a bailout tied to selling its transmission assets it was hit with additional debt payments of more than $1 billion coming due. PG&E said it could pay only a portion.

To make matter worse, the once mighty combination utility faced charges imposed by the state water resources department for electricity purchases and faced a shareholder class action suit against its parent holding company for more than $2 billion based on past stock-buying requirements it placed on the utility.

PG&E's utility is challenging the way the water resource department wants to bill it for power, alleging it would prevent the already deeply cash-strapped company from covering the cost of its own generation and purchases from qualifying facilities (QFs). As of Wednesday, the utility had payments of $l.4 billion come due for QFs and the Cal-ISO emergency supply purchases, but was only able to pay $228 million of that total bill.

Although the companies' analysis of the shareholder lawsuit is only at a "preliminary stage," both the utility and parent PG&E Corp. told the SEC they think it is "without merit" and they intend to mount a "vigorous defense."

PG&E Finds Some Relief

Meanwhile, PG&E Corp. on Friday said it closed a $1 billion loan agreement with GE Capital Structured Finance Group, as lender and co-arranger, and Lehman Brothers as lender, administrative agent, lead arranger, and book manager, to restructure the corporation's debt and pay obligations on which it has defaulted.

The loans, secured by the corporation's equity interest in its unregulated arm, PG&E National Energy Group, LLC, enabled it to pay its outstanding debt obligations on which it has defaulted or would default in the near future. The obligations that have been paid include: $501 million in payments to commercial paper holders, $434 million in borrowings under a revolving credit agreement, and $116 million owed to PG&E Corp. common shareholders for the defaulted fourth-quarter 2000 dividend.

"The defaults created the risk that the Corporation might face a bankruptcy in the near future," said CEO Robert D. Glynn Jr., "and bankruptcy of the Corporation would benefit no one." Glynn emphasized that the financing would be repaid with PG&E Corp. shareholder dollars only. "Unlike the Utility's costs of procuring wholesale electricity for utility customers, this financing is a general corporate obligation of PG&E Corp., and it will be repaid entirely with shareholder dollars," he said. "It has no impact on the rates the Utility's customers pay now or in the future."

Calpine Makes Long-Term Commitment

On the more positive side for the governor's various initiatives, San Jose, CA-based Calpine, the super-aggressive power plant developer/operator, announced two more long-term contracts with California's water resources department (DWR) to provide up to 1,500 MW collectively in deals that span 10 and 20 years, respectively. The contracts' estimated value collectively was placed at $8.3 billion by Calpine.

The new contracts involve both baseload and peaking supplies of power. The latter are contingent upon Calpine developing 11 new generating units for operation in peak-demand periods. Until the company has more site-specific proposals it cannot make any estimates on the total added natural gas supplies it will have to line up for these projects. Calpine already owns both natural gas reserves and in-state pipelines in northern California.

The $5.2 billion, 10-year deal involves up to 1,000 MW, begins July 1 this year with 200 MW, growing to the 1,000-MW maximum volumes a year later (July 1, 2002). These supplies will be sold to the state on a 24/7 basis, according to Calpine.

The other deal is for up to 495 MW over a 20-year period, totaling $3.1. Deliveries under this contract will begin once the new units have been sited, fully permitted and brought into commercial operation, Calpine officials said. "The company is proposing to build these natural gas-fueled peaking generators to help ensure the reliability of California's power grid during high power demand periods."

While the negotiations and legislative activities continued, Cal-ISO declared a Stage Two power alert Feb. 28/March 1 after five days of adequate power reserves. The level-two alert, indicating reserves would drop below 5%, was caused by a combination of unexpected losses of generating units in northern California, Oregon and Montana, Cal-ISO said.

In total, 10,600 MW of generating capacity in California was out of service for planned or unplanned maintenance on Feb. 28 (that total had been at 8,000 MW or lower in recent days). The Oregon and Montana generating capacity decreased reduced the amount of power available for import into California.

Richard Nemec, Los Angeles

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