Progress, warning in state energy fight

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Sacramento Bee

Gov. Gray Davis and other officials laid out details Wednesday of their efforts to rein in the state’s electricity crisis, even as Pacific Gas and Electric Co. said it was confronting a new emergency – it soon may be unable to purchase natural gas for its customers.

Davis said a meeting Tuesday in Washington, D.C., with power generators, utilities and federal officials resulted in progress on a proposal to stabilize electricity prices using long-term contracts with power generators.

The generators have been reluctant to make such agreements because the utilities – PG&E, Southern California Edison and San Diego Gas & Electric – have accumulated massive debt by purchasing expensive power. The utilities, who were under a rate freeze that prevented them from passing on their costs to consumers, say they face bankruptcy.

The state could solve that problem by either guaranteeing payment on the long-term contracts or buying the power itself and reselling it to the utilities, Davis and legislative leaders said Wednesday. In the meantime, the generators would agree to hold off on demanding payments from the utilities for a certain period, still to be worked out.

“I think there’s a distinct possibility that we could contract on a long-term basis for power that is reliable and priced at a very attractive rate,” Davis said. “I believe we can do it at a price that’s well within the existing rate structure, and so it will not require any rate increases.”

Davis said he learned at Tuesday’s meeting that utilities are paying a credit penalty on electricity because of their shaky finances – a premium that could be eliminated with credit backing from the state.

The governor also said he declined to make any commitments about using state-backed bonds to pay off the utilities’ debt. “They asked me six, seven times. I said no. I’m not making any commitments on that,” he said.

Two technical groups kept working out details in Washington.

In the meantime, PG&E reported Wednesday that its precarious finances have touched off a different kind of trouble.

In a letter to Davis and a filing with the Securities and Exchange Commission, PG&E warned that it may soon run out of cash to buy natural gas for its customers.

That could bring the crisis home for the first time with Sacramentans, who get their natural gas from PG&E. Until now, Sacramentans have been insulated from the dilemma because their electricity provider, the Sacramento Municipal Utility District, hasn’t had to buy much wholesale power at inflated prices.

PG&E‘s “deteriorating credit situation is causing many of its gas suppliers to decline to sell the utility any more gas, even under existing gas contracts, in the absence of accelerated payments,” the company told the SEC. “The utility believes that a gas supply emergency exists.”

PG&E, in a move sure to rattle shareholders, also said it will skip its regular fourth-quarter dividend in order to conserve cash, and that it is delaying release of fourth-quarter financial results. The utility said it has $2.21 billion worth of wholesale power bills due in the next two months, or more than four times its cash reserves.

If enough suppliers break their contracts, PG&E would run out of gas by the second week of February, the company said.

In its letter to the governor, PG&E asked him to use emergency powers to help it, such as buying gas or providing credit.

“Without the gas supplies currently under contract, gas available to serve high-priority customers will be depleted within several weeks, and possibly sooner if temperatures fall below normal,” wrote Gordon Smith, president and chief executive. “At that point, home gas furnaces, stoves and water heaters would go off.”

Davis, who said PG&E never mentioned the natural gas problem in their Tuesday meeting, said he was seeking to verify the claim with the state Public Utilities Commission. A PG&E spokesman said the utility was “at a loss” to explain the governor’s comment because officials had contacted the governor’s staff twice this week to discuss the situation.

Davis said a move by the electricity generators to hold off demanding payments from the utilities also might reassure the gas suppliers.

“The forbearance that the generators are offering the utilities may well solve it,” he said.

Unlike electricity rates, which are the subject of fierce court and regulatory battles, natural gas rates already cover all of PG&E‘s wholesale gas costs. But gas sellers say they are worried about their payments getting caught up in a possible bankruptcy.

On Tuesday, J. Aron & Co., a natural gas trading firm owned by Wall Street’s Goldman Sachs Inc., told PG&E it wouldn’t sell it any more gas unless the utility paid cash, utility spokesman John Nelson said. PG&E normally pays for gas 20 to 55 days after it takes delivery. Aron is PG&E‘s single largest gas supplier.

On Wednesday, PG&E met with representatives of 30 other suppliers in person or by conference call, insisting that the utility would be able to pay for the supplies because it can pass gas costs on to consumers.

The meeting ended with “an encouraging sense that no one in the room wanted to precipitate a crisis when one didn’t have to happen,” Nelson said. But the representatives gave no firm commitments, saying “they need to go back to their folks and analyze their risk,” he said.

The developments came as grid operators declared the second Stage 2 power alert of 2001 on Wednesday and called on consumers to take extra steps to conserve electricity this morning, when supplies will again be short because of power plant breakdowns and other problems.

Reaction to the Washington talks among utilities and the new owners of California’s power plants were cautiously optimistic, but consumer groups were wary, stressing that the wrong moves now could boost electric bills for years to come.

Consumers could be badly hurt if the price of long-term power contracts is set too high, they said, and taxpayers could lose if any state deal to purchase power on utilities’ behalf turns into a full or partial bailout.

At a minimum, the state would give up investment income on any money it devotes to buying power, and if the utilities take months to repay California, that forfeited revenue could be in the multi-millions, said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights.

Two bigger risks, he and other consumer advocates said, is that long-term contracts could lock in unfair prices for years to come, and that utilities could lobby in secret for new concessions from ratepayers or the state.

“The utilities’ best shot is in the closed rooms. They don’t have a lot of sympathy in the Legislature,” said Michael Shames, head of the San Diego-based Utility Consumers Action Network.

Shames said power markets are so distorted that it’s almost impossible to name a reasonable long-term price.

Both PG&E and Edison said they were pleased that the talks had begun, and they remained hopeful that something solid could emerge, possibly by the weekend.

“Some notable progress was made during (Tuesday’s) session, including agreement on a set of core principles relative to fixed-price, long-term electric power contracting and financial issues. However, much more work remains to develop concrete solutions,” Edison said in a statement.

Wall Street gave the Washington talks a tentative thumbs-up, as PG&E shares rose 6.3 cents while Edison International, parent of Southern California Edison, rose 12.5 cents to $11.25.

And credit analysts said they were encouraged.

“It’s a great start,” said Susan Abbott, director of corporate finance at Moody’s Investors Service in New York. “We’re feeling a little bit more comfortable today.”

But she said Wall Street will soon begin insisting on details. Abbott said analysts are encouraged that the wholesalers have agreed in principle to delay payments from PG&E and Edison.

One question left unanswered is how the utilities would cover the $11 billion to $12 billion in electricity costs they have been unable to recover in electricity rates.

Assembly GOP leader Bill Campbell of Orange, who attended the Washington meeting, said that if the utilities combine their own generating capacity with what they get from long-term contracts, they could save enough money to pay off the old debt.

Meanwhile, one of the federal officials who attended the Washington meeting, James J. Hoecker, announced he will step down Jan. 18 as chairman of the Federal Energy Regulatory Commission. Hoecker, who was the top federal official overseeing the state’s deregulation, rejected Davis’ recent calls for FERC to reinstitute some power price caps.

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