Near bankruptcy: Legislature proposes law to buy power on utilities’ behalf
MOUNTAIN VIEW, Calif. – California lawmakers began rushing an emergency bill through the legislature assembly last night aimed at keeping the lights on in the largest state in the United States.
The proposed law, which needs Senate approval, calls for the government to buy electricity in the long-term market and sell it to utilities, the largest of which no longer has financial credibility with energy suppliers.
California’s two biggest utilities are teetering near bankruptcy after the industry’s failed attempt at deregulation, which has led Pacific Gas & Electric Co. and Southern California Edison to rack up US$12-billion in debt in less than one year.
Yesterday, the state’s second-largest utility suspended at least US$596-million of payments to creditors. Southern California Edison, a subsidiary of Edison International, defaulted on a US$200-million bond note and said it would not pay a US$215-million power bill.
‘Time has simply run out,’ the utility said. Moody’s Investors Service responded by cutting Edison‘s debt worthiness to junk bond status, betting the firm will be forced to file for bankruptcy protection.
Meanwhile, Standard & Poor’s reduced the credit rating of California’s largest utility, PG&E and its parent PG&E Corp., to junk bond status, citing ‘the heightened probability of the utility’s imminent insolvency.’
The nervousness of the generating companies is being felt across California. The operator of the state’s power grid declared its highest electricity alert for the second time in less than a week, briefly readying the entire state for deliberate rolling blackouts as reserves fell to less than 1.5%.
The deepening crisis is beginning to reverberate through parts of the broader economy.
In a conference call with analysts yesterday, James Hance Jr., Bank of America’s chief financial officer, tried to allay fears about any potential fallout and called the situation ‘very fluid.’
He said the bank has about US$5-billion of global exposure to the utility industry, and California makes up a small part of that.
Analysts estimate that, together, Bank of America and J.P. Morgan have lent the utilities about US$400-million of their own funds.
Yesterday’s emergency legislation, which Gray Davis, the Governor, wants in place by Feb.1, is designed to keep generating companies providing electricity to the state. But the bill does not address the utilities’ liquidity crisis.
Some consumer advocates are threatening to go to the public to get any legislation that bails out the utilities overturned.
‘If the deal rescues the utilities, repays the pirates and leaves the public holding the bag, the voters will undo the deal through a ballot initiative or possibly even a referendum,’ said Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica.
Critics are angry that while the state is trying to find ways to alleviate pressure on the utilities, PG&E on Friday persuaded federal regulators to approve a plan that protects the profits of parent PG&E Corp. from its utility’s growing debt. The restructuring could mean that the US$225-million profit that parent PG&E Corp. reported in the third quarter would not go toward paying down the utility’s debt.