NGI The Weekly Gas Market Report
As blackouts finally swept through California yesterday afterweeks of warnings, the initial reaction was negative to theCalifornia legislature’s proposals to cure the state’s powerproblems. Most observers concluded there was little indication thatthe proposals would either provide the power needed to keep thelights on in the state or solve the utilities’ financial woes.
The utilities’ creditworthiness continued to plummet yesterday.A day following Standard & Poors’ downgrade of PG&E’s andits subsidiary utility’s securities, Moody’s Investors Servicedowngraded the securities of the utility and its parent to junkstatus. The downgrades prompted the company to cancel payments ofcommercial paper obligations due this week and payments to severalpower generators in order to conserve cash to cover minimumoperating expenses, PG&E Corp. Chairman Robert D. Glynn Jr.said.
He said the downgrades constitute a default under the utilities$850 million revolving credit facility and entitle the banks torefuse a loan request under that facility. The default alsoprecludes PG&E Corp. from making further draws under itsfacilities, including further draws to repay maturing commercialpaper. PG&E has $501 million in commercial paper outstanding ofwhich $263 million will mature by Jan. 31.
“We are taking these steps reluctantly,” Glynn said. “But it iscritical that we extend our existing cash reserves in order to meetbasic expenses that are essential to providing safe and reliableservice to customers.”
PG&E’s upcoming payments to power generators include $583million due to the California ISO on Feb. 1 and more than $100million to the California Power Exchange on Feb. 15. Anotherpayment of $1.2 billion will be due March 2. The utility also haspayments of $420 million due to qualifying generators (QFs) inearly February and payments of $410 million due to QFs in March.These amounts far exceed the utility’s current cash reserves of$700 million. PG&E Corp. has cash reserves of $347 million.
On Tuesday, Southern California Edison defaulted on $230 millionof principal and interest on maturing five-year notes and parentcompany Edison International suspended payment of $366 million tothe California Power Exchange and several power generators. The twoCalifornia utilities owe more than $11 billion for power purchases.
Meanwhile, California’s legislature met again Wednesday inspecial emergency session, looking for both short- and longer termanswers to the state’s worsening electricity situation, but runninginto some literal and political roadblocks on the proposal to makethe state government a wholesale bulk power buyer. That legislationwould allow the state to buy power for the utilities at 5.5cents/kWh ($55/MWh) and resell it to the utilities. The utilitieswould then sell the power to retail customers for a penny and ahalf or so more and use the difference to pay off their unrecoveredcosts. Action on it is expected to resume today.
In the meantime, two other proposals were expected to hit thegovernor’s desk late Wednesday to block investor-owned utilitiesfrom selling their remaining generation plants and to completelyremake the state transmission grid operator’s (Cal-ISO’s) governingboard from a large stakeholder group to a three-member politicallyappointed panel.
Under the proposed reconstitution of the Cal-ISO 26-memberstakeholder board of governors (AB 5X), the proposed law wouldestablish a new oversight group of three members all appointed bythe governor. It is speculated that Gov. Davis will put the headsof the Public Utilities Commission, Energy Commission andElectricity Oversight Board on the newly created board to providemore political accountability.
The utility power plant bill (AB 6X) proposes to preventinvestor-owned utilities from selling their interest in generatingplants prior to Jan. 1, 2006.
Another proposed piece of legislation (AB 69) which is not beingconsidered in the special session would accelerate the process forsiting more temporary peaking plants and repowering existing powerplants in an attempt to meet the projected major shortfall insupplies the next two summers in California.
None of the proposals, however got very high marks fromobservers. Susan D. Abbott, Moody’s managing director of corporatefinance, said passage of proposed legislation does little to fixthe short power supply situation if generators aren’t on board.Passage also probably would not trigger an upgrade in theutilities’ credit ratings because too many questions remainunanswered. The utilities still could be forced into bankruptcy andthat could make matters significantly worse.
“For one, a Pacific Gas and Electric bankruptcy would reduce therole of the governor, the legislature, and the CPUC as manysubstantive actions would be under the direction of the bankruptcycourt,” Moody’s said in a statement yesterday. “Second, a PacificGas and Electric Company bankruptcy would do little to fix theunderlying problem, which in Moody’s opinion relates to adysfunctional market and a supply/demand imbalance. If anything, abankruptcy of Pacific Gas and Electric Company would greatlycomplicate the state’s power problems. Third, a utility bankruptcywould likely cause customers’ rates to increase above the currentlevel and would raise reliability issues for the state makingrolling brownouts a common occurrence for some period of time.”
Furthermore, just because the legislature passes a bill doesn’tmean that the state’s power generators are going to be willing tosign on the dotted line, “and that’s crucial,” Abbott noted.
Duke Energy spokesman Tom Williams confirmed that his companyhas not committed to anything yet. “We haven’t said that we would”sell power at that price, he said. “What we’ve said is we wouldparticipate in an auction process… But if it comes out that theauction process is not a good thing for us to do, [we will just sayno]. We have our own bills to pay. You don’t just say ‘I want powerand I’ll pay only this much’ and have it appear miraculously.That’s not the way things work.”
Both Reliant Energy and Enron also expressed disappointment withthe state’s plan for similar reasons.
Duke’s Williams noted that about 90% of the cost of producingpower is the fuel, and right now the five-year strip for naturalgas in California would make the price of power between 8 and 8.5cents/kWh. The price goes down if the term is longer. But Williamsdoesn’t recommend that the utilities or the state buy all therequired power under a long term contracts at fixed rates. Theutilities got into this mess by putting all their eggs in onebasket, he noted. They should have signed at least some forwardcontracts but instead played the day-ahead market and ended uppaying extremely high wholesale costs.
“We offered 5-cent power in August,” said Williams. “Due to theprice of natural gas that went up to 6 cents/kWh in mid-November.”Currently Duke has little or no power left to sell in the shortterm. Duke, with 3,351 MW at four power plants, has 5% of the stategeneration market. It has sold 90% of its power in the forwardmarket and left 10% in reserve to compensate for outages.
The other new “out-of-state” suppliers, including AES, Reliant,Southern, NRG/Dynegy and Calpine, who mostly purchased their plantsfrom the utilities, collectively have 30% of the market andprobably have some power to sell, Williams said. The qualifyingfacilities/cogens have 19% of the state’s generation market. Anysolution to California’s electricity crisis — long term contractsor additional generation — obviously must involve all the marketparticipants.
But bankruptcy of the two state utilities probably would make it”impossible” to solve California’s power woes, according to Abbott.”I still don’t know how they are going to keep the lights on. Thisis a very unusual situation. There have been a couple of otherutility bankruptcies in the last 20 years for totally differentreasons. The utilities that have gone bankrupt in the past ownedthe generation and could keep the lights on. They didn’t need todepend on somebody else to sell them the power.”
The California utilities either could decide it would be betterfor them to declare bankruptcy now under their own terms or theycould be forced into involuntary bankruptcy by their creditors.Their creditors have a right to force them into bankruptcy nowbecause both utilities are in default.
“It’s very hard to say whether [it will come to that],” saidAbbott. “It’s a matter of confidence and whether or not people feelthe actions that are being taken are going to be enough to get thecompanies out of this mess.”
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