Standard & Poor’s held a conference call Wednesday todeclare that Pacific Gas & Electric Co. and Southern CaliforniaEdison risk default and bankruptcy within weeks and are likely tosee their credit ratings fall to junk grades if they don’t get helpfrom regulators within 24 to 48 hours.

“S&P is prepared to take dramatic rating action,” saidS&P Analyst Richard Cortright. “The ratings are expected todrop deeply into speculative grade to reflect the likelihood ofimminent default.”

The California Public Utilities Commission plans to meet todayto consider whether to allow PG&E and Edison to pass through atleast some of the more than $8 billion in wholesale electricityoverpayments to consumers. The utilities operate under a ratefreeze through March 2002 as part of the state’s electricrestructuring plan. They also have been unable to negotiatelong-term supply contracts. Instead they have had to purchase poweron the spot market where wholesale power prices recently reached$1,400/MWh in contrast to the $35/MWh prices seen in 1999.

“For months California’s utilities, including Pacific Gas &Electric Company, have faced a growing financial challenge, due toa badly broken wholesale power market and price gouging bywholesale power sellers,” said Gordon R. Smith, CEO of PG&ECorp.’s combination utility subsidiary. “In order to ensurecontinued service to our customers during this time, Pacific Gas& Electric has virtually exhausted its financial resources,borrowing an average of $1 million per hour to pay for the power wedeliver to Californians. No company can continue to operateindefinitely under such conditions.

“Today’s S&P conference call sends a message to GovernorDavis and California’s leadership that now is the time for action,”Smith said. “We need to agree on a solution that immediatelyaddresses the problems created by the outrageous actions ofgenerators and marketers and the failure of the Federal EnergyRegulatory Commission to restrain them.”

Meanwhile, a collection of western power market stakeholdersgathered in Denver and Washington, D.C yesterday to discusspotential solutions to the continuing crisis. At the Washingtonconference, “several proposals were placed on the table by partieswhich may result in resolving the forward contracting issue in thenear-term future,” said Chief Administrative Law Judge Curtis L.Wagner Jr. in a report to FERC. “Statistics were gatheredconcerning available megawatt quantities and the needs of the[California] investor-owned utilities over a five-year period.”Another meeting between the parties will be held on Jan. 3.

Senior officials with California’s independent grid operator(Cal-ISO) expressed reservations about a “hard” $100/MW wholesaleelectricity price cap throughout the western states, which was oneof the proposals at the Western Governor’s Conference meeting inDenver yesterday. Several of the governors disagreed, concludingthat as a short-term, interim step the cap will help protect retailconsumers and bring some badly needed stability to the powermarket.

“The idea has been floated before — a fixed cap of anywherefrom $60 to $150/MW — in as many flavors as you can think of,”said Kellan Fluckiger, the Cal-ISO COO. “Whether or not that iseffective depends on a whole bunch of things, including forwardnatural gas prices.

“My experience here in California is that caps are not effectiveand they produce countervailing incentives and the very heart ofthem strike at the core of additional investment (for newgeneration and transmission infrastructure) that is badly needed.

“Caps generally are a difficult thing,” said Fluckiger, notinghe couldn’t comment on the specific proposals discussed by thegovernors. “While they may appear in the short-term to controlrates, our experience is that they are not very successful incontrolling overall costs, and there is really concern about havingsufficient incentives to get the investment to build the new powerplants we so desperately need.”

Ultimately, Fluckiger said he would have to see an actualproposal with all of the details before he could provide a “realanswer” to the question of a fixed western region-wide price cap.

A spokesperson in Gov. Gray Davis’ office said the governor wasunable to participate in the Western Governor’s Conference, but hesent a representative and would support a fixed $100/MW cap,although the California officials do not believe FERC will imposesuch a cap. It is clear, Gov. Davis is gearing up for some rateincreases for electric consumers to help, at lease partially, coverthe undercollections of the state’s two biggest utilities.

Late Tuesday, the governor announced the availability of $7.1million in federal low-income energy assistance funds for familieswith incomes less than 60% of the state’s median income. Davis saidthe funds were in direct response to a request he made to PresidentClinton for help back in August. California, he said, received thesixth largest allocation of the $155.6 million that was allocatedto all 50 states.

In the meantime, Edison is continuing a multi-million-dollaradvertising campaign featuring announcements by its parentcompany’s CEO, John Bryson, on television, radio stations and innewspapers, that there will be “rationing” of electricity if theregulators do not grant rate relief to the two major utilities.Although the PG&E utility is taking a lower key approachpublicly, Edison is openly taking about the need for the utility todeclare bankruptcy in the absence of emergency rate relief.

While the electricity situation, and to a lesser extent naturalgas prices, have become front-page news in general interest newsmedia throughout the state, the utilities and countering consumergroups have raised their rhetoric. Political correspondents are nowsaying this is the major issue for Gov. Davis, and consumer groupsare assuring everyone concerned that they will sponsor a statewideballot measure in 2002 asking the voters to approve a massive moveby the state to take over operation of the electricity generationand transmission infrastructure.

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