While power outages were still viewed as an inevitability thissummer in California, a comprehensive legislative, regulatory andcommercial solution to mounting energy debts was less certain lastweek as reports surfaced that creditors might force bankruptcy onthe state’s two ailing utilities.

Observers speculated that the state political leaders’three-pronged approach might be coming apart, and that is why bothstate and federal officials are ordering ever-more investigationsof the energy transactions involving the state.

Both the financially-strapped utilities indicated they continuedin “active” separate negotiations with the political leaders, butcreditors and debtholders were growing obviously restless in thecontinuing conference calls held twice weekly.

The governor and state legislature were quiet Friday, and theweek had few of the hyped news media announcements that becameweekly, if not daily, occurrences throughout the first two monthsof the year. Most of the action and rhetoric regarding theCalifornia situation was emanating from FERC and Capitol Hill inWashington (see related stories). Indicative of the apparentinertia on the West Coast was the fact that the state gridoperator’s board meeting drew more attention than electedofficials.

A second inevitability arose by week’s end — namely, that rateincreases beyond the 19% accepted by Gov. Gray Davis will be neededto secure a widespread deal with the utilities and others. Whenpressed by bondholders at a conference call Friday, SouthernCalifornia Edison officials indicated that all of the costs beingaccrued exceed the future revenues estimated to pay off thosecosts. That leaves higher utility rates as the only means — shortof higher taxes — to cover the costs.

There is speculation that the Cal-ISO is going to propose toFERC that California’s transmission grid operations in the futuretake steps to cap prices on bids into the state’s market andprevent in-state generation from going out-of-state. The two movesare opposed by advocates for a wider, multi-state transmission gridoperation (RTO) in the West because they see it as furtherattempting to isolate California, despite its dependency on importsfrom other states for up to 25% of its peak-demand needs.

Responding to what he interprets as positive feedback from thefederal DOE, Davis last Thursday said Cal-ISO’s new marketstabilization plan will lower wholesale electricity prices inCalifornia. Meanwhile, a spokesperson for Cal-ISO said its boardmet Thursday, but did not act on an agenda item covering the newmarket plan.

Davis, in a prepared reaction statement, thanked DOE SecretarySpencer Abraham and the Bush administration for “their continuedcooperation” and their agreement “not to oppose our efforts topurchase the transmission lines of our investor-owned utilities andimprove California’s transmission system.”

A representative with one of the state’s major energy companies,who attended the public part of the Cal-ISO board meeting, notedthat the lack of tangible deals with the utilities and any moresigned long-term contracts, have caused the state legislativeleaders and governor to press ahead with more investigations andpunitive actions against merchant generators and marketers. Theidea apparently is “to divert attention” from the lack of successin addressing the basic problems.

“I’m sure there is a lot of pressure from the governor to havethese parties show some real results,” the source said.

Meanwhile, the issue of creditworthiness was spreading to thestate from the two near-bankrupt investor-owned utilities.

SoCal Edison last Friday paid $8 million in interest on firstmortgage bonds to avoid debts growing by more than $240 million andit continued discussions with its banks seeking extension offorbearance that expired last week (March 14). It continued tojuggle court actions, with an added class action suit and rumors(still unsubstantiated) of groups of QF generators petitioning forinvoluntary bankruptcy.

Edison attorneys indicated the utility will resist an attachmentof Edison’s interests in two Nevada-based power plants by a QFgenerator who is not being paid by the utility.

“The increase in lawsuits is another indication that peoplesfrustration levels are rising in this whole situation,” saidEdison’s Senior Vice President/Treasurer Ted Craver.

“The Cal-ISO and the Cal-PX are both no longer creditworthy andthe utilities are closer to bankruptcy, that is pretty much thewhole market in California and no one talks about that,” said aCalifornia-based executive with one of the large national energycompanies. “We talk about the high prices and how they continue tobe high prices (in the wholesale markets) and there is a hugewealth transfer out of the state, but nobody talks about the factthat the state is asking suppliers to sell a product to people whoaren’t paying.

“If we are going to make that silly move, wouldn’t you put ahigher price on that product just to account for the additionalrisk for doing business in that state?” (The Western Power TradersAssociation has a consultant who is trying to quantify this premiumbeing paid as part of broader work for generators’ and marketers’trade group. It is expected to be filed as part of theassociation’s comments to FERC due later this week.)

Traders privately will tell anyone who asks that California’s”creditworthiness” status continues to be the biggest problemfacing the state. Suppliers are understandably reluctant to sell toCalifornia, they say, and when they sell to the state they aremarking up their prices.

“It is still a huge problem,” said the energy company executive,”despite the fact that everyone from the governor on down ispatting themselves on the back for the legislation they passed (AB1X) and the long-term contracts, but how many have they actuallyconsummated?

“It is a huge problem that is getting worse, but everyone issort of sweeping it under the rug because the finger pointsdirectly at the governor.”

While the state legislature expanded its special session to dealwith related, and in some respects tougher, natural gas issues,there were not a lot of results in terms of new laws getting out ofcommittee. Similarly, there was little publicly-acknowledgedprogress in discussions involving the governor’s and legislativeteams talking separately with utilities and qualifying facilitypower generations to reach some settlements that will restorecreditworthiness and eventually bring down wholesale prices. TheCalifornia Public Utilities held a public business meeting, butpostponed most of its agenda items, except for one blocking utilitydownsizing plans.

On a strictly partisan 3-2 vote, the CPUC last Thursday blockedattempts by the state’s two utilities that proposed further workforce and service cutbacks to conserve cash, while awaiting asettlement with the state on its future financial viability. TwoRepublican-appointed CPUC commissioners opposed the move, callingit “micromanagement” on the part of the regulators.

SoCal Edison and the PG&E utility. were ordered to rescind”any layoffs of employees which are needed to fully staff customercall centers, read meters monthly, timely respond to service callsand outages, and connect new customers.” Edison has laid off 400workers in its transmission/distribution units and had proposedeliminating an additional 1,600 jobs in the months ahead;PG&E’s utility had laid off 505 workers and announced plans toeliminate another 675 jobs it its cash flow situation was notresolved.

Other stopgap measures for California’s expected summer powershortages included: the governor announcing rebates to customerscutting their summer power use by 20% and Calpine Corp. striking animmediate two-month deal for providing 550 MW to SouthernCalifornia markets. The short-term power pact is an interim onewith the state water resources department during the two-month testphase of a new generating plant being opened at the Fort MojaveIndian Reservation near the California-Arizona border.

Davis said the state will underwrite a “20/20” program (20%power bill rebates from 20% reduction of electricity use) that isdesigned to save 2,200 MW during summer peak-demand periods, savingthe state up to $1.3 billion in wholesale power costs. Thevoluntary program applies to both households and businesses betweenJune through September, the prime peak-demand months.

Richard Nemec, Los Angeles

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