The good news is the lights are still on in California. But WallStreet will be watching closely this week as California legislatorson one coast and the Clinton Administration on the other attempt tostop the train wreck in the California power market and rescue thetraditional “widow and orphans” investments in PG&E Corp. andEdison International from the junk pile.
The President, taking time out for Mideast peace talks for acrisis closer to home, has summoned California Gov. Gray Davis tomeet with Energy Secretary Bill Richardson, Treasury SecretaryLawrence Summer and FERC Chairman James Hoecker, possibly as earlyas Tuesday. Details of the meeting, which will be jointly hosted bythe departments of Energy and Treasury, remained sketchy at presstime Friday.
Richardson Friday extended the emergency order for generatorsand marketers to make power available to the state through Jan. 11.However, for the order to remain effective beyond 9 a.m. on Jan. 9the state must certify it will reduce peak electricity demand by 5%by Jan. 15. Since some of the power provided will be flowing infrom other states that are also experiencing power shortages,California must show it is conserving and the additional suppliesare necessary to maintain grid reliability. Also, the modifiedorder prohibits the Cal-ISO from agreeing to a price for thesepurchases in excess of $64 MWh. If there is no agreement on priceFERC will determine the rate later, Richardson said.
In California Davis was preparing to disclose his own rescueplan today, before leaving for Washington. And a special session ofthe legislature was to continue meeting to consider emergencymeasures, including a state bond issue to pay off the more than $11billion debt of the two utilities, which represents the differencebetween wholesale rates paid and retail rates collected. On Fridaystate Treasurer Philip Angelides proposed establishing a $10billion “California Consumer Power and Conservation FinancingAuthority” to expand state energy programs and finance conservationefforts, building at least a 15% reserve capacity of stategenerating plants. The proposed new state entity would sell up to$10 billion in taxable and tax-exempt bonds to finance itsoperations.
In a teleconference Friday Standard & Poor’s analyst RichardCortright said the only thing that stood between the two utilitiesand a junk bond rating was S&P’s belief that “the legislatureis taking the prospect of insolvency very, very seriously and hasall the political tools at its disposal” to remedy the situation.”The only question is whether there is the political will to doso…on a timely basis.”
Paine Webber analyst Ron Barone, participating in theteleconference, said the legislature has the power to raise rates, andnoted the possibility of “a securitization package for prioruncollected revenue.” The conference was scheduled after S&P andMoody’s Investors Service downgraded the two utilities credit ratingsThursday to one notch above junk, while the Fitch rating serviceconsigned them to the junk pile. The action was a response to the CPUCdecision to impose only a temporary penny/kWr increase on rates,continuing the financial drain on the utilities (see Daily GPI, Jan. 4). Cortright said going forwardS&P’s surveillance of the situation would be “intense andconstant,” with the possibility of a further downgrade.
S&P excluded PG&E’s Transmission Northwest unit andSoCal Ed’s Mission Energy from the downgrading, affirming thecurrent ratings of those units. Also, Transmission Northwest willtake the place of PG&E Corp. as the guarantor its ET Holdingstrading operations. That would fence off the swap and hedgingoperations of the trading unit in case of bankruptcy of the parent.These units, S&P said, were “ring-fenced,” legally andstructurally from activities of the parent companies. S&P alsoaffirmed the ratings of Sempra Energy, saying that since costs arebeing passed through to customers of subsidiary San Diego Gas &Electric, the utility has not had to go to the credit markets topay its power bills. It also cited the Southern California Gasaffiliate as a stabilizing influence.
As the week ended the U.S. Court of Appeals in D.C. rejected SoCalEdison’s plea for a writ of mandamus directing FERC to reinstitutecost-based rates to tame power prices in the out-of-control Californiabulk market. In a one-page decision, the court also refused to orderFERC to decide rehearing of its now-famous Dec. 15 order limitingaction in the California market to a soft cap, saying “We anticipatethat the Commission will rule on the rehearing petition in a timelymanner.” (see Daily GPI, Dec. 18)
And, FERC’s Hoecker in a concurring opinion issued Thursday,three weeks after that decision, offered an olive branch of sorts.He acknowledged that since then the “western energy shortage hasmetastasized into a financial crisis of major proportions.” He saidwhile he regarded price caps as “arbitrary and potentiallyconfiscatory,” he could support them 1) to offer “a short ‘timeout’ within which parties could negotiate better ways to make themarket work for consumers, such as bilateral forward contracts,demand response programs or equitable relief; or 2) if they wereemployed as ‘damage caps’ to prevent clearly unwarranted priceexplosions, such as the $1,000 cap used across all threenortheastern ISOs.”
Hoecker moderated his stand on the issue of retroactive refundsfor California power customers, saying that while FERC did not havebroad authority under the Federal Power Act (FPA), Section 309 ofthe FPA provides the Commission with remedial authority that “couldapproximate” refunds.
This law “allows us to craft whatever equitable remedies arenecessary to remedy the impacts of [market] manipulation, including(in my view) disgorgement of unlawful gain,” he noted. “I fullyexpect the Commission to employ Section 309 to do justice” forcustomers in San Diego and elsewhere in California.
Citing the “general level of vituperation and lack ofconstructive discourse” to resolve California’s woes, he invitedparties to offer “a price cap proposal in the context of acomprehensive settlement.” As part of a “Workout Plan forCalifornia” that he proposed last week, Hoecker called for DOE’sRichardson and top economic officials to meet to work out acomprehensive solution. To succeed, “the state must be willing tohelp implement our Dec. 15 order and support longer-term reforms..”Hoecker still believes that order “offers the best opportunity tobegin rehabilitating the wounded California power market.”
The chairman’s decision to back price caps under limitedconditions can be viewed in part as a concession to California’sgovernor and the state’s investor-owned utilities, which have beenlobbying FERC for caps for months. It also is a departure from theCommission’s Dec. 15 order in which it enacted a series of reformsfor the California electric market, excluding hard price caps.
Agreeing to limited price caps was a big step for Hoecker, whoin his concurring opinion said they “create uncertainty forinvestors, discourage entry into the market, or even driveresources elsewhere, thereby fostering future scarcity.” They arethe “ultimate non-market solution that will work to disincentpolicymakers from undertaking more important reforms.” However, heconceded caps “can lower prices, at least temporarily.”
In the long term, though, California “cannot ‘price cap'” itselfout of the problems with its bulk power market, Hoecker noted. “Aresponsible course of action is to attack the current marketmeltdown on several fronts over a period of time — inCalifornia’s case, three to five years.”
Hoecker remained steadfastly opposed to cost-based rates forCalifornia. saying they “would not necessarily reduce currentproblems for consumers or their utility suppliers.” California’spolitical leaders should not to try to reinvent the state’selectric industry once again. While “competition is the solution,”he conceded “it was not well-conceived or well-executed inCalifornia and for that, we all share blame.”
A “serious and little-discussed structural flaw” in California’smarket that requires immediate attention is the lack of adequategenerating reserves, Hoecker wrote. As a potential remedy,California “should impose on load-serving entities and other’customers’ an obligation to build or buy sufficient capacity toserve expected requirements.” This is “admittedly a quasi-marketapproach,” but it “will be a small price to pay to avoid a cycle ofboom and bust.”
Hoecker noted California’s talk of “electrical secessionism”could be disastrous for the state and the entire western region.The state “once again wants to go it alone in finding ways tocorrect what is a regional problem.” He believes the current crisisunderscores the need for a regional transmission organization(RTO). “Therefore, I strongly recommend that the Commission mandatea West-wide RTO and publish its own requirements and timetable forachieving that end.”
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