‘TIME HAS SIMPLY RUN OUT,’ COMPANY SAYS AS IT ANNOUNCES IT WON’T MAKE $600 MILLION IN PAYMENTS. DETAILS OF STATE PURCHASE CONTRACTS REMAIN UNCERTAIN.
Los Angeles Times
Southern California Edison edged closer to insolvency Tuesday by declaring that it would not make nearly $ 600 million in electricity and bond payments, the legacy of months in which it has paid far more for energy than it was allowed to collect from customers.
“Time has simply run out,” Edison said as it defaulted on some of its loans, even as the state Legislature scrambled to find a solution to the crisis. The state’s largest utility, Pacific Gas & Electric, managed to meet its debt payments Tuesday but has said it cannot do so much longer.
In Sacramento, the Assembly approved stopgap legislation to make the state a massive purchaser of electricity at fixed, long-term prices. The move, which still needs Senate approval and which amounted to a dramatic admission that California’s attempt at deregulation had failed, would let the state Department of Water Resources enter into long-term contracts with power generators and sell the electricity directly to consumers.
Businesses and homeowners served by Edison, PG&E and San Diego Gas & Electric would continue to receive bills from them. But the utilities would essentially be acting as bookkeepers for the state. The state would sell the electricity at cost, and in five years legislators would review the state’s role.
There was no indication Tuesday that Davis and power producers were any closer to agreement on the price of the electricity the state would buy, or the duration of the contracts it would sign with the producers.
The legislation met with a lukewarm reception from Gov. Gray Davis, who first raised the idea of the state’s becoming a power purchaser last weekend, but apparently was not satisfied with the way his plan had been drafted.
The utility’s action–or lack thereof–induced the two largest Wall Street bond-rating firms, Standard & Poor’s and Moody’s Investors Service, to downgrade it to the high-risk world of junk bonds. The default means that some lenders now have the right to demand full payment, which Edison could not begin to meet.
Some creditors complained that Edison is playing a high-stakes game of chicken with California politicians and regulators, pointing out that the utility has enough cash to pay its bills. Edison said that cash on hand as of Monday totaled $ 1.2 billion, but that those funds would be exhausted Feb. 2.
Edison did win a last-minute, two-day reprieve on $ 215 million it was supposed to pay to electricity suppliers Tuesday. The Federal Energy Regulatory Commission issued an order shortly after 5 p.m. Tuesday, giving the utility until Thursday to pay those debts, which were for the company’s electricity costs in December.
But Edison missed its deadline for paying $ 230 million in bond principal and interest payments that were due Tuesday, as well as $ 151 million owed primarily to suppliers of renewable power.
The actions appear to put Edison in default on most of its bonds and bank debt, giving creditors the right to begin demanding payment. Edison reportedly is negotiating with its bankers for a 30-day grace period while politicians and regulators hash out a way to repair California’s electricity mess.
Stocks Continue Long, Slow Decline
“Edison is trying to hedge its bets,” said Susan D. Abbott, managing director of corporate finance for Moody’s Investors Service. “Any company that is seriously facing bankruptcy tries to maintain as much liquidity as possible.”
The stocks of the two utilities continued their long, slow decline on the New York Stock Exchange. Shares of Edison International fell 63 cents, or 6.13%, to close at $ 9.56 per share. PG&E also dropped 63 cents, or 5.41%, to close at $ 10.94 per share.
In a filing with the Securities and Exchange Commission, Edison said it is trying to hold on to its cash “to continue to maintain customer service while a legislative and regulatory solution, which involved state and federal authorities, is finalized.” Edison said it will pay its bills “once a permanent solution to the energy crisis is developed.”
Edison previously announced plans to cut costs by $ 465 million a year through layoffs and reduced service and maintenance. At current electricity prices, those savings are equal to slightly more than two weeks of power purchases for Edison‘s 11 million customers.
Meanwhile, one of Edison‘s major creditors privately expressed doubts about the utility’s stated inability to pay its debts Tuesday, and questioned the utility’s motives.
“We think they’re trying to keep the political pressure on, to get the government to move” on a rescue plan suitable to Edison and PG&E, said a representative for the creditor, who spoke on condition of anonymity.
“This company doesn’t have the cash flow,” he said. “It’s gone.”
Furthermore, he said, the debt-rating agencies usually have the best handle on a company’s cash position–outside of the company and its lenders. So if the agencies downgraded Edison‘s debt to junk status, they must be satisfied that Edison doesn’t have the money, Christopher said.
Questions were also swirling about whether some of Edison‘s lenders might still be willing to make another last-minute loan to Edison to keep it out of bankruptcy, or be willing to provide additional funds after a bankruptcy filing.
Another of Edison‘s senior creditors refused to even discuss such lending, bankruptcy or not. And Christopher said any bank or other creditor would make more cash available to Edison “only if they have clear and definitive guidance . . . from the state” about how it plans to solve the situation.
Under the plan being considered in the Legislature, the state water resources agency would use California’s sterling line of credit to purchase electricity at rates no higher than 5.5 cents per kilowatt-hour. That is far less than the California’s debt-laden utilities are paying, but potentially more than they would pay once natural gas prices, a critical factor in the current energy crisis, begin to level off.
Municipal utilities such as the Los Angeles Department of Water and Power would be able to receive electricity from the state as well, if it became a cheaper alternative. The state would also have the option of selling the power to the utilities instead of using their power lines and facilities to do business directly with customers–whichever is cheaper for consumers.
Drafted during an all-night session of Democrats and Republicans, financial experts and a bankruptcy lawyer, the bill by Assemblyman Fred Keeley (D-Boulder Creek) passed two legislative committees before its 60-5 approval by the full Assembly.
The open-ended nature of the buying arrangement, which has no expiration date, frightened many Republicans. They worried that it could be the first step in a state takeover of the energy business in California.
“It’s starting to walk like a municipal duck, and quack like a municipal duck,” said Assemblyman Bill Leonard (R-San Bernardino), “and eventually, it becomes a municipal power authority.”
Leonard wondered why legislators were proposing that the state buy power instead of using their credit to loan the utilities money. But under the rates utilities are now paying, Keeley said, the state would be unwise to enter into a banking relationship with utilities, saying their debts would “gobble up the entire state surplus by Labor Day.”
Davis Calling for More Work
Davis representatives testified Tuesday in support of the legislation, but made it clear that the measure still needed work to gain the governor’s signature.
Legislators were quick to concede the point. Senate Republican Leader Jim Brulte, who participated in the negotiations, said Assembly action on the Keeley bill was a “show of good faith.” The Rancho Cucamonga legislator said it was meant to demonstrate Davis’ pledge to marketers, federal officials and others that California was serious about solving its energy crisis.
Senate President Pro Tem John Burton (D-San Francisco), as always, was more blunt. His goal, he said, was to get the bill out of the lower house and into the hands of more experienced senators to hammer out the sticking points.
The Legislature’s solution in progress garnered mixed reviews from the utilities and power sellers. They said it would do little to help the utilities overcome their crushing debts, and questioned whether California would find enough takers to steadily supply power at Davis’ target price.
PG&E attorney William V. Manheim told legislators that the utility supported the bill in concept, but that it would not solve its cash crunch.
“It, by itself, is by no means the solution to what is going to keep the lights on in this state,” he said.
In remarks that stunned the room full of lobbyists and legislative aides, Manheim said he doubted whether anyone would sell power to the utility, now that it had been downgraded to junk bond status. He also confirmed that American Express had notified PG&E it could not extend any more credit to the utility–an indication of how low its credit had sunk.
“That’s a pretty good sign they have no credit,” said Assemblyman Roderick Wright (D-Los Angeles), head of the Assembly Committee on Energy Costs and Availability.
Power industry officials acknowledged that California might be able to buy some electricity at 5.5 cents per kilowatt-hour, but predicted very little of the state’s needs could be met at that price. They noted, for example, that power delivered at the peak demand period of 10 a.m. to 6 p.m. costs more than that consumed at night.
“If someone showed up at your doorstep tomorrow and said, ‘I will sell you electricity at 5.6 cents per kilowatt-hour, for your entire load, take it,” Jan Smutny-Jones, executive director of the Independent Energy Producers Assn, told the committee, advocating a more flexible price cap.
Moreover, they said, other contract terms, such as the number of years power sellers would want it to last–might not satisfy the state. Generators will also be extremely interested in guaranteeing payment, perhaps through bonds, in case a future political administration tries to undo a long-term contract.
Keeley’s bill, ABX 1, calls for $ 300 million to $ 400 million in state funding to cover start-up costs of purchasing power until the state begins to receive payment from consumers. It also would allow the Department of Water Resources to borrow money to cover added costs.
Some consumer advocates remained neutral or expressed cautious support of the Keeley bill. But others were sharply critical.
Douglas Heller, consumer advocate at the Santa Monica-based Foundation for Taxpayer and Consumer Rights, testified against the Keeley bill and urged the Legislature to return California electricity to a regulated system.
Legislator Denies Bailout of Utilities
“If we give a temporary respite to the utility companies, in three to five to 10 years–or whatever the terms of the contracts may be–we will find ourselves back in the same boat again,” Heller told the committee.
Burton had expressed outrage over some consumer advocates’ characterization of the plan as a bailout of the utilities. “There is no bailout bill,” he repeatedly, and heatedly, told reporters. “I’m talking about allowing the people of California to have long-term electricity at prices they can afford.”
Concerns persisted that utility customers might get stuck with excessive bills if wholesale power prices drop. “It is a risk worth taking,” said Assembly Speaker Bob Hertzberg (D-Sherman Oaks).
As the Legislature wrestled with its strategy, DWP General Manager S. David Freeman confirmed Tuesday that the department is hiring a law firm to protect its interests in the event of an Edison bankruptcy. (The agency has been in talks with the New York-based bankruptcy specialists, Skadden, Arps, Slate, Meagher & Flom, since the holidays.)
At the same time, Freeman said he still hopes that a bankruptcy can be avoided and that the DWP will continue to sell energy that can be used by the utility.
Deputy Mayor Ben Austin also said the city is determined to obtain assurances that its assistance with the state’s energy crisis will not prove a burden for Los Angeles.
“We are moving in the direction of making sure that we have assurances that we are going to be paid back before we sell any more energy,” Austin said.
Indeed, unless the governor and Legislature can quickly secure a resolution, the state’s energy crisis could produce a conflict between Mayor Richard Riordan and the DWP, one City Hall official said.
“The mayor’s office is very much moving in the direction that if the city does sell any more energy, it gets commitments the money will be paid back,” the official said.
The California Independent System Operator, a marketplace for electricity in the state, declared another Stage 3 emergency Tuesday morning, indicating that the state’s energy reserves were in danger of dropping below 1.5% of the total system needs.
But after an all-day scramble, the ISO once again came up with enough energy to avoid mandatory blackouts.