California power companies on brink of bankruptcy

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San Jose Mercury News

SAN JOSE, Calif._Wednesday’s fast-emerging concern about the financial health of the state’s major utility firms is prompting an alarming possibility: that taxpayers will get stuck paying the companies’ multi-billion-dollar debts.

That speculation took off at a fever pitch after Gov. Gray Davis and U.S. Sen. Dianne Feinstein, D-Calif., said Pacific Gas & Electric Co. and Southern California Edison were near bankruptcy. Some observers said the companies’ estimated debts of $8 billion are so huge that they may need government money to stay afloat.

“It’s clear, either the ratepayers or taxpayers are going to pay,” said Assemblyman Rod Wright, D-Los Angeles, who chairs the Assembly Utilities Committee. “Somebody will have to pay the cost, since no one is prepared to see the state go dark.”

But others suggested the companies might be exaggerating their troubles in hopes of being bailed out after a year in which they paid high prices for power because of ongoing shortages. They said the companies’ financial footing appears reasonably solid so far.

“I think it’s an effort to play the violin” in order to get a financial bailout from consumers or taxpayers, said Doug Heller, of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

Before Wednesday’s announcement by Davis that some energy suppliers weren’t selling power in California for fear of not getting paid by the utilities, the idea that government might have to help buy that juice seemed remote, said Steven Maviglio, Davis’ press secretary.

Now, “anything is possible,” he said. “So far on this electricity dilemma, nothing is beyond the realm of possibility. We have to look at everything.”

Utilities could run out of cash soon Officials at PG&E and Southern California Edison declined to discuss their financial situation in detail Wednesday. But California Public Utilities Commissioner Carl Wood said he also believes bankruptcy could be a likelihood for both companies soon.

“We’re looking at this possibility occurring in the next few weeks _ the utilities running out of cash and credit to purchase electricity, and having to default on their obligations and go into bankruptcy,” he said.

Wood added that having the government provide financial help to those companies “could happen,” but he said such a step would require legislative action, which might take months. Wood said the commission plans to take up the question of PG&E and Southern California Edison‘s finances on Dec. 21, but was unsure what type of action the regulatory agency might take.

Some question just how dire the situation actually is.

Neither PG&E nor Edison International, the parent corporation of Southern California Edison, exhibits the traditional warning signs of a utility near bankruptcy.

So far, neither has failed to pay back any debts, and the major credit agencies generally rate the companies’ ability to repay borrowed money as “strong.” Moreover, they continue to pay hundreds of millions of dollars a year in cash dividends to their stockholders. Edison actually raised its dividend payout in March, and PG&E has kept the same rate since 1996. A utility in serious financial trouble typically cuts its dividend to conserve cash.

“They’re not close to bankruptcy,” said Heller of the Foundation for Taxpayer and Consumer Rights.

Others have pointed out that even though PG&E may be having problems, its parent company, PG&E Corp., is financially well off. Besides, even if PG&E is in financial straits, critics of the utility firms contend that they should have known what they were getting into when they helped design the deregulation law.

As state assemblyman Fred Keeley, D-Santa Cruz, put it, “it’s not the role of the Legislature to bail out people who made a deal they can no longer live with.”

Some people think it would be especially unfair to foist $8 billion of utility-company red ink onto the thousands of Californians who aren’t their customers. Presumably, those consumers would wind up paying twice for power _ once to their own electricity supplier and once more to assist the major utilities.

Utility-company officials blame most of their financial troubles on what they characterize as greedy power suppliers, who have been charging extraordinarily high wholesale electricity prices since last summer. But the problems date back to March 31, 1998, when the sale of electricity was officially opened up to competition under the deregulation law that the Legislature passed two years earlier.

That law encouraged the utilities to sell off most of their own power plants and begin buying electricity from independent generators. Moreover, it froze the retail rates that utility companies could charge their customers. Neither of these changes was a big concern to utility executives at the time, because the frozen rate covered the cost of the power they bought and also gave them a little extra to pay off their old power-plant debts.

Debts incurred to pay for price jump This year, the price of power soared well beyond what the company is able to recoup from consumers under the freeze. Last year, the average price of one megawatt hour, which is enough to power 1,000 homes for an hour, was $31. This week, with electricity in severely short supply, the price jumped well past $1,000.

Southern California Edison claims it has incurred more than $3.5 billion in unanticipated electricity costs this year, while PG&E put its unanticipated costs at $4.6 billion as of Nov. 30. PG&E officials have said that amounts to at least $1 million an hour in bills with which it is stuck.

Although both utilities are seeking permission to pass those bills on to consumers, there has been great reluctance among government officials to let them do that. But if the companies declare bankruptcy and claim they no longer can buy power, state officials say they might face considerable pressure to have the government finance part of all or those electricity costs _ at least until the utilities recover financially.

Consumer Watchdog
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