State-backed financial bailout options for California’s twocash-strapped utilities were being looked at Friday by the statelegislature and treasurer, including public takeover of the stategrid, as Gov. Gray Davis prepared to divulge his plan today priorto making another trip to Washington, D.C., in search of a federalcap on western wholesale electricity prices later this week.

“Some state action to bridge the period of time between now andwhen bond securitization can be pulled together is probablyneeded,” said Fitch’s Steven Fetter, noting that such action (ateither the state or federal levels) would cause the utilities’credit ratings that were lowered last Thursday to be re-examined.

“At this point, it really falls to policymakers to take someaction and do it quickly,” said Fitch’s energy analyst LoriWoodland.

Merchant generators expressed concerns that California officialswould take the wrong actions, moving toward public takeover,negating billions of dollars that are already being invested in newpower plants now under construction, review by state authorities orbeing planned. Through the California Independent Energy Producers,the generators are going to support state legislation that makesutility long-term power contracts the principal way to resolve thecurrent wholesale price debacle.

On Friday, State Treasurer Philip Angelides proposedestablishing a $10 billion “California Consumer Power andConservation Financing Authority” to expand state energy programsand finance conservation efforts, building at least a 15% reservecapacity of state generating plants.

“The state cannot stand by and hope that the private marketswill solve California’s energy problems,” Angelides said in aprepared statement during another day in which state officialsconcentrated on little else besides electricity. The proposed newstate entity would sell up to $10 billion in taxable and tax-exemptbonds to finance its operations.

“I am very suspicious of whether this (a state power authority)will solve any problems,” said Jan Smutny-Jones, head of thestate’s independent generators’ trade association in Sacramento.”The fact of the matter is there is more than $10 billion inprivate capital being targeted for California, so I don’t think theproblem is the state’s ability to attract private capital to buildpower plants; the problem is state regulation that restricts theutilities’ ability to buy long-term and protect their customersfrom the volatility of the market.

“This is the only market in the U.S. that acts like this. In theEast (PJM independent grid operators for parts of Pennsylvania, NewJersey and Maryland) all of the power is bought and sold underlong-term contracts. This is a California specific problem that, infact, can be fixed in California if the state exercises thenecessary leadership.”

Is there anything else that generators are going to offer to dobesides long-term contracts at fixed prices?

“That’s the best we can do,” Smutny-Jones said.

A proposed state power authority also surfaced earlier last weekfrom a surprising source, the free-market economist member of theCalifornia Public Utilities Commission, Richard Bilas, during lastThursday’s CPUC discussions of the two utilities’ emergency ratehike. Following the regulators’ meeting, Bilas called the proposala “crazy scheme that just might work,” although he left to thelegislators the details of how such a state agency might actuallyoperate.

Bilas said he reluctantly concluded the power authority might bethe only way to address the fact that California hasunintentionally replaced a power generation monopoly that used tobe centered in state-regulated utilities with what he calls a”monopoly of unregulated power generators who are game-playing andabusing the market” and no federal or state authorities (includingthe CPUC) are doing anything to correct the situation.

“Just having a power authority would put a club over the powerproducers,” Bilas said. “It would make them, I believe, act in thepublic good and in effect shape up. The power authority could setall the rules for how the game is played. And if it didn’t likewhat the producers were doing, it could buy the power plants(through condemnation) at fair market prices.”

In response to questions that the generators are being made the”villains” in the continuing drama in California’s electricityindustry, Smutny-Jones said he thought some officials are”scapegoating, rather than focusing on positive solutions.” He saidthe generators hoped to be “engaging the CPUC, the governor and thelegislature in trying to solve the situation. (The generators) havebillions of dollars invested in the state and are willing to investbillions of dollars more, and we’re not going to get there byname-calling.”

Meanwhile, the specter of bankruptcy hung over PG&E andEdison as their stocks fell significantly during the week. Fitchanalysts speaking in a conference call Friday noted that unlikeother utility bankruptcies, PG&E and Edison would be facingprospects that would make it difficult for them to quickly revertto a positive cash flow, given the outlook for continuing highwholesale power prices well above frozen California retail rates.

With financial crepe being hung over California’sonce-invincible-looking two major utilities, the CPUC Thursdayunanimously approved a temporary penny/kwh rate hike. Fitch said itviewed the state regulators’ temporary rate surcharge as “whollyinadequate to remedy the dire circumstances facing SouthernCalifornia Edison Co. and Pacific Gas and Electric Co.”

More permanent rate relief, including whether to lift thestate’s 4 1/2-year retail rate freeze, will be decided afteradditional regulatory hearings that get under way Wednesday (Jan.10). The temporary rate relief is basically what the utilities andFitch rating service already had dismissed as woefully inadequateto cut into the $11 billion in added debt the two utilities haveassumed over the past six months due to runaway wholesale powerprices they continue to pay. (The Cal-PX price was 28 cents/kwhThursday, according to a CPUC source. Frozen retail rates are atthe 7-cent/kwh level.)

CPUC commissioners noted in their pre-vote comments thatbankruptcy is not a viable solution to the utilities’ continuingrevenue shortfalls, and at least one of the commissioners calledconsumer activists “irresponsible” for advocating bankruptcy inlieu of rate relief. Another commissioner, Henry Duque, indicatedhe was voting for the rate hike, but agreed with the utilities thatit should be more — at least another penny/kwh more.

Consumers speaking at the CPUC meeting indicated that seriouspushes for government takeovers in San Francisco and San Diego aretaking hold, and the continuing economic and operating success oflarge municipal-run utilities in Los Angeles and the state capitalof Sacramento lend them moral support. “It would be much better tohave publicly run utilities rather than private sector companies,”a long line of consumer activists told CPUC commissioners.

Activists warned that unless Gov. Gray Davis takes drastic stepssoon, they will “guarantee” another statewide ballot measure tore-regulate the electric industry statewide and noting the City ofSan Francisco will have a measure to vote on regardless. Theytalked vociferously against the CPUC issuing any rate increase.

CPUC Commissioner Carl Wood said that “deregulation is dead” inCalifornia and no one should carry on the “fiction” that it isgoing to be salvaged in the state. He said the state is the victimof what he called a “western cartel” of generators and marketerswho are “profiteers” of the worst order, and who federal regulatorsare, in effect, protecting by not imposing a so-called hardwholesale price cap throughout the western states.

“Markets do not act in a responsible manner, it isn’t theirnature, and that is what makes them so exciting,” he said.”Reliability through reliance on markets is no longer possible.That is the reality we are facing. The deregulation project inCalifornia is dead because it is no longer defensible.

“What we are voting on today is the epitaph for deregulation inCalifornia,” Wood said before the unanimous vote by the CPUC.”Deregulation is dead.”

The generators’ association head Smutny-Jones said this”concerned” the power producers, acknowledging that the state’sderegulation efforts “need a mid-course adjustment in terms ofwhere we are in the restructured market. However, we need moregeneration in California and who is going to build that?

“Building generation is a very risky business, but what is beingmissed in this whole story about a state power authority is thathistorically public power has been involved in building powerplants, but sometimes they guess right and sometimes they guesswrong.”

He said up until a year and half ago, one of the City of LosAngeles Department of Water and Power’s biggest problems was alarge, expensive coal plant in Utah. That same plant coupled withLADWP’s gas-fired plants around Los Angeles has allowed themunicipal utility to make $200 million or more in the Californiawholesale power market. Prior to that they had built a power plantthey didn’t need that was too expensive. And if you look around theWest there are other examples, the Department of Water Resourcesbuilt a geothermal plant that never had adequate steam; SMUD inSacramento had to close a nuclear plant and there was the largestpublic power plant default ever in the Pacific Northwest.

“This concept that public power is going to somehow save the dayfor California is just misplaced. What we need to get out of anyauthority is what we started with — attracting private capital tobuild these power plants and giving customers meaningful choice. Itis doable and it is doable with real leadership in the state.”

In stark contrast to the surge of proposed solutions advocatingpublic sector solutions, Robert Mitchell, executive vice presidentwith Washington, D.C.-based private sector transmission operator,Trans-Elect, appeared at last week’s CPUC meeting to announce thathis firm is making an $8 billion offer to California’s privatesector utilities to buy and run the state’s grid, 70% of which isowned by the three major investor-owned utilities.ÿ He asked theCPUC for the opportunity to comeÿback to discuss Trans-Elect’sproposal more fully.

Earlier as part of some opening remarks, Commissioner Wood, aformer statewide utility union leader, said he stronglyÿopposedfurther divestiture of utility-owned generation in or outside ofthe state, in reference to aÿpostponed agenda itemÿon SouthernCalifornia Edison Co.’s pending sale of its portion of theÿMohavecoal-fired generation plant in Nevada.

Wood said all the state’s major electric industry stakeholdersagree that the previous sale of the utilities’ major in-stategas-fired power plants is a major reason forÿCalifornia’s currentelectricity supply/price predicament, and the trend should now bereversed with a return to more utility-owned generationassets.ÿBilas said he agreed to the extent that the sales of theutility ownership should not have taken place before “adequate newplants had been built.”

Richard Nemec, Los Angeles

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