Prospects for a rescue of the California energy market grewdimmer yesterday as power and money ran low for utilities SouthernCalifornia Edison and Pacific Gas & Electric. The Cal-ISOdeclared its third Stage Three alert in less than a week Tuesday;Investors’ services Standard & Poor’s, Moody’s and Fitchvariously downgraded credit ratings applying to both utilities; andthe out-going Clinton Administration appeared to have bowed out ofthe crisis, leaving it up to California officials.

Hopes for a bail-out rested with the legislature which wasmoving rapidly on legislation. Late Tuesday, the Cal-PX was stillexpecting federal regulators to allow it to amend its tariffs soEdison could be given more time to make payments, and in Sacramentothe governor was still expecting to receive the first of a seriesof emergency new laws aimed the crisis — making the state a buyerof power supplies under long-term, fixed-price contracts. A numberof others are expected to follow, including provisions making iteasier for investor-owned utilities to sign long-term deals, buildtemporary new peaking generation plants and stepped up energyconservation statewide.

Yesterday afternoon, White House spokesman Jake Siewart saidPresident Clinton still had not acted on a weekend request byCalifornia Gov. Gray Davis to order natural gas suppliers whothreatened to cut off supplies because of the utility’s lack ofcash, to keep the gas flowing to the PG&E utility. “The partiesin the California electricity situation have at several times askedus to play a convening role, and the White House, Treasury andEnergy have done that,” Siewart said. “Now the parties are lookingat a proposal that’s on the table. They’re working through thedetails. It’s a serious situation, and they themselves have to comeup with some sort of solution.. [but] the federal government has alimited role. Obviously, the FERC has a role, but that’s anindependent agency,” he told reporters. Davis had asked Clinton todirect the energy secretary to invoke emergency provisions of theNatural Gas Policy Act.

Davis had warned that an “imminent gas shortage endangers thesupply of natural gas both for PG&E’s residential and businesscustomers and also for service to electric generating plants innorthern and central California.” He said that according toPG&E three gas suppliers who deliver nearly 25% of PG&E’sgas — Duke Energy, Western Gas, and J. Aron & Co. —threatened to stop supplying the utility with gas last week. DukeEnergy spokesman Tom Williams said that statement was “not exactlytrue.” Duke has requested that PG&E provide credit assurances,he said. The utility still has not responded. Without suchassurances, Duke would have to consider terminating sales to theutility, said Williams. Gas suppliers can’t be expected to supplygas to someone without the assurance of being paid, he noted.

A PG&E spokesman said last week that most of the company’s30 to 40 interstate gas suppliers are refusing to sell the giantutility gas beyond existing contract terms. “Many of them go untilthe end of the month, others go through February and beyond. Thesupplies include virtually our entire supply of long-termcontracts.”

The Cal-ISO’s Stage Three Alert Tuesday again raised the specterof of rolling blackouts caused by unplanned outages and diminishedoutput of San Diego generating plants due to a switch to oil;infrastructure bottlenecks; and out-of-state supplies drying upbecause of the lack of credit-worthiness among the utilities andstate power operators.

“This system is broken, and it is not just the market,” said onestate energy official, not wishing to be identified. “It is an old,aging system that has been held together with bailing wire.Somebody better figure out that part (of the state’s worseningdilemma) real fast.”

By issuing the third-stage alert, Cal-ISO was able to accesssome 600 MW of additional power it badly needed in the morning tokeep reserves above 1.5%, thus, rolling blackouts were not needed.Imports were down considerably, running around 700-800 MW whenideally 4,000 MW were needed.

“The credit-worthiness issue is impacting us severely. As ageneral matter, the financial situation is a continuing issue,”said Kellan Fluckiger, Cal-ISO COO. “It is also impacting lining upsupplies for next summer.” However, he also noted that a solutionto the credit crisis will not solve the fundamental operatingproblem that stems from too little generation available in and outof state because of an array of complex causes related to weatherand the aging state electricity infrastructure.

On the financial front, Southern California Edison on Tuesdayfiled with the federal Securities and Exchange Commission to be onrecord that it was not going to pay up to $445 million in wholesalepower charges and debt servicing charges, and that it was takingthis and additional steps to preserve what dwindling cash it has,estimated to be $1.19 billion as of last Monday, according to itsSEC filing.

“Although [the utility] currently has in excess of $1.2 billionin cash on hand, the company’s cash position would be depletedshortly after month-end due to required payments to the Cal-PX,Qualifying Facilities [QF generators] and creditors,” said Moody’sInvestors Service in an announcement Tuesday that it lowered theutility’s and Edison International’s security ratings on seniorunsecured debt and short-term debt. S&P also cut credit anddebt ratings of both utilities and their parent companies to lowjunk grades Tuesday.

It took the action despite Edison’s assurances in its SEC filingthat it is “working aggressively to cut costs and conserve cashuntil a permanent solution can be developed among the parties.”

“[The filing] is intended to allow [Edison] to continue tomaintain customer service while a [state] legislative andregulatory solution is finalized,” Edison said in a preparedannouncement accompanying the SEC filing.

Edison went on to note in the filing that a final regulatorydetermination by the California Public Utilities Commission is notexpected until late April, and only on a “limited number of theissues” outstanding. One of the pending issues is how much, if any,of the Edison parent company, Edison International, should providein terms of offsetting financing through its assets or guarantees.

In further lowering its ratings on several of Edison’ssecurities yesterday, the Fitch investors’ service said even if adeal is hammered out by Edison, legislators and power suppliers”there is no guarantee that [Edison] will receive sufficient cashto make timely debt and trade payments. Further a small group ofunpaid suppliers could file a petition for an involuntarybankruptcy, even if the principal group of creditors reaches anaggreement. Unless a rescue package emerges to provide immediatecash, a voluntary filing may become [SoCal Edison’s and EdisonInternational’s] most expedient option.”

In another action, the state power exchange made aneleventh-hour appeal to FERC Tuesday asking for an amendment to theCal-PX tariffs which require it by this Thursday to pay itscreditors. Without Edison’s payment it cannot make those payments.

“The resulting legal actions could cause a bankruptcy of(Edison),” the Cal-PX attorneys wrote in their emergency appeal toFERC. “Edison’s bankruptcy, in turn, could have a domino effect,damaging the credit of some creditors and forcing other creditorsinto bankruptcies of their own.” The proposed temporary deferral is”designed to allow the minimally required ‘breathing room’necessary for the major parties in the California markets tocontinue discussions toward a longer term solution,” Cal-PX’sattorney wrote.

Meanwhile, a Dynegy spokesman took issue with a Los AngelesTimes report that Dynegy Corp. President Stephen Bergstrom saidtime was running out for Edison and that a joint petition by threecreditors would be enough to start involuntary bankruptcyproceedings. “When and if they default on Thursday, it puts us in aposition where we have to take them into bankruptcy and I’m sureothers will be right beside us,” Bergstrom was quoted as tellingthe newspaper. The comment was taken out of context, said Dynegyspokesman John Sousa.

“Steve was talking about absent any of the legislation that hasbeen introduced that there would be no other choice butbankruptcy,” Sousa said. “It’s a minute-by-minute thing. SoCalEdison’s payment to the PX is due today, and then the PX pays us.That takes place on Thursday, so if they are going to be in defaultto us that would take place on Thursday.”

The state, however, is taking some action. In the statelegislature yesterday, a bill (AB 1X1) was passed by the Assemblyauthorizing the state water resources department to enter into”long-term power contracts with electricity generators for a pricenot more than 5.5 cents/kWh, and to sell the power directly orindirectly to electric consumers in California.” It does notmention the investor-owned utilities to which all of the consumersare connected. As a result, the utilities still could easily beforced into bankruptcy.

Another large and unanswered question is how the state wouldattract power supplies with a limit on the price it is willing topay for power. As part of the proposed new law, the statedepartment, which operates California’s massive state water projectamong other duties, would be authorized to borrow money to carryout its energy-buying role. It was not immediately clear whetherany private sector power producers would be willing to selllong-term power within the proposed price limitations.

Expectations Tuesday afternoon were that the legislation wouldpass the senate side of the state legislature and go to Gov. GrayDavis for signature by the end of the day or early on Wednesday.

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