By Kathleen Davis, Associate Editor
Wednesday, Jan. 17, 2001. A day that will live in infamy-at least in California.
Not since the fear of an American blitz darkened the West Coast in those last days of WWII have officials called down mandatory blackouts in the state. Now the plunge into black draws from a less explosive, but no less im-minent, enemy: the tangle of electric deregulation.
And just about every single political and industrial entity is caught in that web: Gov. Davis, the Federal Energy Regulatory Commission (FERC), the ISO, the PX and those desperate utilities, who are hanging on by the last nubs of their fingernails to keep from plummeting into bankruptcy.
At press time, Southern California Edison was taking a long, hard look at that dark pit below them. On the Thursday morning following those blackouts, they defaulted on a $215 million payment to the California Power Exchange (PX). While they had received a two-day extension from FERC to make the payment, the extension seemed to do nothing but delay the inevitable.
In response, Standard & Poor’s downgraded the short-term credit rating of the PX, knocking it to C from A-3 status.
According to a statement released by Standard & Poor’s, “The default of the $215 million and ongoing lack of a solution to the utilities’ financial crisis translates into a heightened probability of insolvency.”
The money pit
This blow to the PX follows closely on the heels of FERC’s mandate lifting the requirement that power must be secured through the PX for utilities. The PX made a last ditch effort to stabilize by seizing a handful of forward contracts to use as leverage against Southern California Edison’s power purchases.
“Those are expected to pay the $215 million,” says Jesus Arredondo, a spokesman for the PX.
But beyond that immediate solution, the future is still as dark and bleak as those blackouts.
Faced with junk bond status, both utilities have been unable to secure credit for further power purchases, and the additional “temporary” default of $230 million of principal and interest on notes and $151 million to qualifying facilities, both due January 16, did not help Southern California Edison’s financial standing. Moody’s Investor Service weighed into the mess by stating that there’s a “high likelihood” of bankruptcy for the utility. Moody’s also pointed out that such action would likely cause both higher customer rates and rolling brownouts.
Standard & Poor’s brought the mess back to Gov. Davis’ front door with a release tying both utilities’ problems directly “to the mechanisms underlying California’s restructuring of its electric industry.”
It’s certainly not the first cry of “foul” that Davis has heard, and he doesn’t want to see Southern California Edison and Pacific Gas and Electric (PG&E) go bankrupt anymore than the utilities do. No matter how emotional the responses from consumer groups and irate customers, even Davis sees that bankruptcy will effectively cripple California’s power market. And such action has the exponential potential to bring down the state’s economy, which is the sixth largest in the world-heavy issues for a politician who’s been embroiled in this crisis since last summer.
At the urging of the governor, the state legislature approved an emergency plan to bail out PG&E to the tune of $400 million, but it wasn’t even close to the open-ended funnel the governor had asked for. While nearly 700,000 Northern Californians lost power for the second time in two days, Davis proposed that the state buy power and resell it through the Department of Water Resources, which could have racked up $900 million in cost to the state in as little as two weeks, given current market prices at press time.
He did not get what he wanted.
What he did get was that $400 million dollar check by a 34-2 vote and an expiration date of February 2. While that is the last day the Department of Water Resources will be allowed to buy power, it will be allowed to resell power through February 15.
“If we were going to do this for more than a couple of weeks, it would be sheer lunacy,” Democrat Rod Wright, chairman of the assembly’s special committee on energy, told the San Francisco Chronicle.
Blood in the water
PG&E representatives are praying that similar measures will keep California’s investor-owned utilities afloat, but their debts continue to mount and such actions only flake small chips off the iceberg. On that same infamous Wednesday, they announced default on $76 million to holders of PG&E’s commercial paper. And other payments were looming at press time: a $583 million chunk on February 1, a $431 million bill on the February 15 and another $1.2 billion fee at the start of March.
And the creditors continue to close in.
While a few of the lenders behind PG&E and Southern California Edison are hoping to prevent bankruptcy, lead PG&E lender Bank of America has stated that it doesn’t want to give the utility a formal grace period, preferring instead to see what other options develop.
Houston-based supplier Dynegy is being much more blatant in its demands. It has stated unequivocally that it will take both Southern California Edison and PG&E to bankruptcy court if they don’t pay their debts within the week.
Dynegy bought three of Southern California Edison’s power plants earlier in the state’s deregulation process. The company would not give an exact amount on the debt owed.
And the California Public Utility Commission (CPUC) has denied one attempt by Southern California Edison to save itself from bankruptcy. The company had wanted to sell its stake in the 1,580 MW Mohave Generating Station in Laughlin, Nev., but the CPUC blocked that move in a mid-January vote.
Bush denies caps to desperate governor
And it looks like President Bush will be doing little to assist in those sleepless nights that both Davis and the utilities have been tossing and turning through as of late.
He rejected Davis’ price cap request, calling the solution “short-term,” and labeling the state’s attempt at restructuring “flawed.”
Informing the Associated Press that he is “against price controls,” the president did add that the federal government might be able to help the growing crisis through easing those environmental restrictions that prevent some plants from running at optimum capacity.
Bush’s energy secretary, Spencer Abraham, faced a confirmation hearing filled to the brim with the California crisis. Senators from the Northwest lamented the golden state’s drain on their resources, and California Democrat Dianne Feinstein got little sympathy in her appeal for wholesale price caps, even from the secretary-designate, who said he had no direct comment on Feinstein’s proposal.
Other committee members, however, were not so silent.
“I think my state is being set up to be an energy farm for California,” said Gordon Smith, a Republican representative for Oregon.
Overall, however, Abraham did say that he and the Bush team think national restructuring could be in the cards, an option Alaska representative Frank Murkowski cautions against.
“I would encourage you to recognize that before there are going to be meaningful corrections, the California consumer has to feel the hit, and that hasn’t occurred yet,” he said.
“I would encourage you to keep the pressure on those responsible for it and not necessarily encourage Uncle Sam to step forward and bail out a situation that’s going to take internal correction,” he added.
With PPL Montana LLC and Reliant Energy Services Inc. already petitioning DOE to reconsider their requests for payment from the state’s utilities, having the federal government intercede may be the last hope for not just Southern California Edison and PG&E, but for the California consumer as well.