DAVIS’ BID TO STABILIZE MARKET COMES UNDER FIRE FROM BOTH SIDES. COMPANIES SAY PROPOSED PAYMENT IS TOO LOW; CONSUMER GROUPS DECRY THE BLUEPRINT AS A BAILOUT.
Los Angeles Times
Despite Gov. Gray Davis‘ show of public optimism, the key players in California’s electricity saga remain poles apart over the two most fundamental facets of a newly conceived rescue plan, with energy producers crying foul and consumer groups claiming bailout.
The marathon bicoastal negotiations that have been underway for days are mired in a dispute over a couple of pennies and a few years–both of which translate into billions of dollars for the state’s utilities and their wholesale suppliers.
Under a plan announced during the weekend by Davis, the state would use its good credit standing to buy power from the wholesalers at a rate of 5.5 cents per kilowatt-hour for three years. One kilowatt-hour, which currently costs 30 cents on California’s open market, is enough to power a computer and monitor for seven hours.
But the electricity suppliers, who wield enormous clout in the state’s deregulated market, contend that the governor’s numbers are simply not good enough.
“I don’t think suppliers, given all the money on the table, are going to bend very much on the contract terms and price,” said Gary Ackerman of the Western Power Trading Forum, an association of electricity marketers and generators.
Electricity sellers say their costs dictate at least 8.5 cents per kilowatt-hour under the proposed three-year contracts. The only way they might accept the lower amount is if those contracts are extended well beyond three years, a period in which production costs could drop, allowing profits to rise.
According to Cathy Roche, a spokeswoman for Duke Energy in Charlotte, N.C. the governor’s proposal “is actually below the cost of producing power in many instances. . . . In order to make it work, we’re going to have to be very creative in structuring the deal.”
“The devil,” Roche said Sunday, “will be in the details.”
Currently, electricity is bought and sold in California’s daily market, where prices can fluctuate by the hour. Long-term contracts, like those proposed by Davis, would lock in lower prices but with a risk: the negotiated price could actually end up higher than its sale price in the years ahead.
Sacramento officials said they believe their terms are fair under the deal in which California would buy about one-third of the state’s electricity, about 8,000 megawatts. One official close to Davis said the governor told energy producers during negotiations that California already had received unsolicited offers from companies to sell at the state’s proposed price of 5.5 cents.
Steve Maviglio, a spokesman for the governor, acknowledged that although the framework for an agreement has been hammered out, the details remain under negotiation. “It depends on what you define as a deal,” he said.
Both for the state’s future–and perhaps Davis’ own–he is banking on such a deal. On Saturday, after emerging from a 7-hour negotiating session, he made a promise that will certainly be among the most remembered of his tenure: no new rate hikes.
The governor’s proposal, however, probably would make permanent a rate hike of about 9% that the PUC authorized this month as a 90-day stopgap measure.
Legislative aides Sunday began drafting a bill that could be introduced in the Assembly as early as Tuesday, which would authorize the state to buy power. That bill is expected to be a skeletal framework that will be fleshed out over the next few weeks, including the cost. On Sunday night, Davis talked with democratic and republican leaders
More negotiations are scheduled for Tuesday, the day big debts begin coming due for Southern California Edison and Pacific Gas & Electric, which have said they collectively owe $ 12 billion in debt they have been unable to pass to customers under the state’s 1996 deregulation law.
State Senate leader John Burton (D-San Francisco) said Sunday he believes the state government will act swiftly enough to ensure the utilities’ solvency. “This bill, as long as it’s signed by the governor by February 1, it’ll be fine,” said Burton.
In a hopeful sign for the utilities, there were indications Sunday that some power companies may give them extra time to pay their debts, despite their prior insistence that the state guarantee the companies’ credit first.
“Some forbearance of payments might be forthcoming,” said one industry expert familiar with negotiations, “even without the state stepping up.”
Those debts, according to SCE and PG&E, could plunge them into bankruptcy, a move that could ripple through economy and throw the future of the electricity market into even greater uncertainty.
Consumers advocates say, however, Davis’ proposal potentially could leave taxpayers on the hook because the state will be selling electricity to companies on the brink of solvency.
Harry Snyder, west coast representative of Consumers Union, said the state “will be bailing them out, make no mistake about it . . . How do we know that Edison and PG&E are going to pay us back? Is this financially sound? Is this going to be a business deal or is this going to be welfare?”
Snyder and other consumer advocates say that taxpayers essentially will be subsidizing the utilities. The state’s price is less than the amount the utilities charge their customers. The difference pocketed by the utilities would be enough to help them pay down their multibillion debts.
“It’ll be a hidden charge that the politicians hope they can squeeze into our utility bill without us noticing it,” said Harvey Rosenfield, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.
Legislators said they were confident they could allay consumers’ concerns. State Sen. Burton, for example, said that the package may include a suggestion by advocates that ensures homeowners and small businesses discounts.
Under that plan, power that utility companies generate themselves from their own stations would go to homeowners, renters and small businesses. They would be required to provide this energy at cheaper rates than the energy they buy from the state, which would be directed to larger users such as heavy industry.
“They aren’t going to be making something that amounts to a ratepayer bailout,” Burton said. In fact, he added, the utilities may have to write off some of their debt as uncollectable, something the companies have resisted because of the implications for their stock prices.
Legislators Sunday said they were also looking at ways to protect against the cash-strapped utilities failing to pay the state for its power–possibly by making the companies put up plants or property as collateral.
“At least the Speaker Assemblyman Bob Hertzberg and I are concerned that that transaction be structured in such a way that the people of California are protected in the event of default,” Assembly minority leader Bill Campbell, (R-Villa Park) said.
Despite those tough-sounding provisions, utilities gave the plan a cautious thumbs-up.
“This framework is positive and can work,” Edison Chief Executive Officer John Bryson said late Saturday night as he left the Reagan State Building where negotiations were held.
Representatives of Edison and PG&E Sunday said they had no comment. A spokesman for San Diego Gas & Electric, which would also be able to buy from the state under Davis’ proposal, was optimistic. “This type of solution will help reduce the future obligations of our customers,” Doug Kline said.
Sunday brought more meetings, but these were in Washington D.C., where Energy Department officials considered an emergency request by Davis for a federal government order requiring out-of-state power suppliers to provide excess natural gas, as well as electricity, to California. No decision was reached, however.
Energy Secretary Bill Richardson has signed four short-term orders since late December to get power suppliers to sell excess electricity to the state. Davis wrote Richardson on Saturday asking that natural gas be made available as well because of the mounting crisis.
But Matt Nerzig, an Energy Department spokesman, said that unlike electricity, a presidential directive is needed for natural gas.
Nerzig said senior energy officials were cautiously optimistic that Davis’ ambitious proposal to have the state enter the power market. “We think they’re on the right track . . . But it depends what they put in legislation . We’re waiting to see what it looks like, and see what the reaction is from the financial community and creditors.”
Ackerman, the director of the power industry group, said that despite his criticism of the governor’s numbers he believed Wall Street would look kindly on the effort.
“The people who created the problem are now fixing the problem and that’s what the bankers want to see. They don’t want to hear fairy tale economics driving the solution.”
But Robert Michaels, an economist at Cal State Fullerton, questioned whether the economics of the deal would work.
Michaels, who has worked as a consultant to generators, said he too doubted the firms would accept a deal at 5.5 cents when they could sell for more elsewhere in the west.
And he also warned that a painless solution is unrealistic, given the depth of California’s energy crisis. The state either must let the utilities go bankrupt or foot the bill for their debts. And, in Davis’ plan, they are doing the latter, he said.
“This basically makes everybody in the state an involuntary partner in whatever risks there are in these contracts,” Michaels said.
Snyder, of Consumers Union, said he was worried about those risks. He questioned whether bureaucrats and politicians are a match in negotiations for some of the sharpest energy companies around.
“It’s kind of like our amateurs up against the professional traders,” he said. “The experts know how to do this, we’re just shooting in the dark.”