California Legislators Debate State Involvement in Energy Crisis

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Contra Costa Times

 Four years after the state moved to deregulate the electricity industry, lawmakers are poised today to step back into the state’s power picture when they begin considering whether to buy electricity for millions of Californians.

The proposal, which is being pushed by Gov. Gray Davis, is prompted by the financial distress encountered by the state’s two largest utility companies, Pacific Gas & Electric Co. and Southern California Edison. The high cost of wholesale electricity has driven the two companies to the brink of bankruptcy because they no longer have the cash or the credit to buy that power on their own.

Legislators worked into Monday night crafting a measure that would give the state authority to buy as much as 8,000 megawatts of electricity, about one-fourth used by California this time of year, at a fixed rate through a long-term contract that could run five years.

The legislative proposal follows action taken by PG&E Corp. on Friday to protect its power plant business in New England from the financial problems in California. Consumer advocates reacted angrily Monday when they learned federal regulators granted the protection.

The parent corporation has purchased about 15 power plants in New England in recent years.

“It’s the corporate executives of PG&E spitting in the eyes of California,” said Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights. “The ratepayers of PG&E, who have funded the prosperity of this corporation, should be livid that they would walk away from this crisis with all that money. This is corporate irresponsibility at its worst.”

Meanwhile, state officials and energy producers are still far apart in negotiations for the price of long- term electricity contracts.

Davis has said he expects to pay 5 cents to 5 1/2 cents per kilowatt-hour for electricity, and Saturday said “there will be no rate increase” to pay for those contracts.

Industry officials, however, say the going rate is no less than 8 1/2 cents per kilowatt-hour for a relatively long, five-year power contract.

Davis has been on the phone constantly with representatives of utility companies and power generators trying to reach a deal, said Steve Maviglio, the governor’s press secretary.

The governor “expects to see enabling legislation that would allow the state to purchase power,” Maviglio said. “That will hopefully send a signal to energy providers to give some forbearance to utilities, and that would give utilities some breathing room.”

Companies might be willing to come down slightly on that rate for longer contracts because the price of electricity is expected to fall for two reasons: Natural gas prices are expected to begin to come down, and new power plants will boost the state’s electricity supply in the next couple of years, according to Gary Ackerman, executive director of the Western Power Trading Forum.

One independent expert said the generators appear to have the upper hand.

“Right now, they (electricity generators) have the state over a barrel, and I think they are unlikely to say, ‘OK, we’ll give you back all this money we could earn,”‘ said Severin Borenstein, an energy expert at the UC Berkeley.

“We do have to face a reality that the price of fuel has gone way up, and that has driven up the cost of generating power,” Borenstein said.

“That is something you can’t make go away by being a tough bargainer. It is a reality.”

The long-term contracts and state purchases are two legs of a three-legged plan that industry and government officials are negotiating to stabilize prices. The third leg is a plea from PG&E and Edison for more time to pay billions of dollars of bills that are due in coming weeks.

As negotiations continued over price and duration of long-term contracts, there were ominous signs this week for the utilities. Edison faces an electricity bill today that it might be unable to pay. And PG&E is facing threats from natural gas suppliers to cut off service, according to the governor’s office. Davis has asked President Clinton to intervene.

In recent disclosures to federal regulators, PG&E said it is unable to borrow money and cannot afford to pay more than $ 2 billion in electricity bills that will come due between Feb. 1 and March 2. The company reported having only about $ 500 million in cash on hand.

“We’re trying to find ways to pay for it, but at this point we’re not sure how,” said PG&E spokesman Shawn Cooper.

As a result, energy companies are becoming reluctant to sell to the company. However, one energy company that was listed by the governor’s office as being among those who were threatening to cut off PG&E‘s gas supplies said it was only asking for PG&E to provide a letter of credit by Friday.

“We haven’t said we’re cutting anybody off,” said Duke Energy spokesman Tom Williams. But, he said,, “That’s one of our options.”

In another worrisome sign, PG&E‘s parent company received permission from federal regulators late last week to transfer assets to a new corporate entity, a move that was seen as an attempt to shield those assets from creditors in case the utility files for bankruptcy. The decision to grant the request allows PG&E‘s National Energy Group, which was formed after California began its foray into electricity restructuring, to develop its own credit rating and insulate itself from its corporate sister’s financial problems. PG&E Corp. and its utility, Pacific Gas & Electric Company, have seen their credit rating slashed to a level just above junk-bond status.

Consumer advocates say PG&E should use the wealth it found in California and invest in other states to address the utility’s money problems.

But PG&E says its new business interests should be treated separately.

“Certainly, it does provide some protection for the NEG from any bankruptcy or insolvency that might occur as a result of operations in the utility or PG&E Corp.,” said Greg Pruett, a spokesman for the parent company.

In Sacramento, legislative leaders gathered to discuss how to write provisions of the long-term contracting plan into a bill. The meeting included Assembly Speaker Bob Hertzberg, D-Van Nuys; Senate leader John Burton, D-San Francisco; the GOP leaders of the Assembly and Senate; Tim Gage, the governor’s director of finance; a private bankruptcy lawyer and two private financial analysts.

“I know they have been working on drafts of bills,” said Paul Hefner, Hertzberg’s spokesman. “They draft things about what they know and then fill in the details later.”

Hertzberg, who stepped out of the meeting for five minutes in the afternoon, said he was doing everything he could to produce a bipartisan agreement on legislation that could be introduced and passed today in the Assembly, the Legislature’s lower house.

“We’re very aware of the dire straits the utilities are in and the impact they have on Californians,” Hertzberg said.

Consumer Watchdog
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