State looks at ‘investing’ in 2 utilities

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PG&E files lawsuit against rate limits

Sacramento Bee

Seeking to eliminate the back-breaking debt California’s two major utilities have accumulated, state officials Thursday began crafting a plan to gradually bail them out, perhaps in exchange for stock in the teetering companies.

The plan emerged on another day of conflicting signals in California’s ongoing power crunch: Wall Street expressed confidence in the state’s efforts to negotiate long-term power contracts, but the Pacific Gas and Electric Co. filed a lawsuit demanding it be allowed to charge higher rates to cover future costs.

As legislative leaders and Gov. Gray Davis worked into Thursday night in an effort to agree on a broad plan, talk of the state buying utility companies’ hydroelectric plants was pronounced dead by the governor’s office.

Davis, in an interview on CNN, suggested that state political leaders are leaning instead toward exchanging a state effort to help utilities recover some of their debt for stock options or another “financial instrument” that “lets ratepayers know they will gain as the utilities gain.”

“We’ll get something of value for the consumers – some sort of financial instrument that allows them to participate in the upside if the stock recovers and (the utilities) are back on their feet in two years,” he said.

Under such a scenario, the state would use its credit to issue revenue bonds to pay off some yet-to-be-negotiated portion of the utilities’ debt.

While utilities have estimated their debt at $12 billion, about 40 percent of that figure reflects the cost of power the utilities produced at plants they own – not payments they owe other power generators or marketers. Davis has said he does not believe utilities are entitled to recover all that money.

In exchange for the revenue bonds, the state would receive warrants – a form of stock options – presumably at lower-than-market prices. As the utilities’ credit improved and their stock prices rose, the state could redeem those options and use the money to pay down the revenue bonds or forestall future rate increases.

Whether a rate increase would also be necessary is under discussion.

Consumer advocates immediately blasted the stock concept.

“California consumers should not become involuntary investors in the same energy companies that have mercilessly participated in this energy debacle,” said Michael Shames of the Utility Consumer Action Network in San Diego.

Shames also said the state would be engaged in a “profound conflict of interest” if it held a financial interest in companies it’s supposed to regulate.

Doug Heller of the Foundation for Taxpayer and Consumer Rights said he doubts that consumers would get a fair deal.

“I’m afraid the way these stock warrants are going to work out is for every dollar in bailout, they give us 10 cents worth of company,” Heller said.

His group said any stock options should go directly to ratepayers, not to the state.

Legislative leaders have also discussed a potential state purchase of the utilities’ transmission lines, a deal that would provide utilities with cash for debt repayment and the state with control over California’s electricity delivery system.

A third option – state ownership of the utilities’ hydroelectric plants – failed to gain traction at the Capitol. Central Valley lawmakers, in particular, feared that such a move would interfere with managing water flow for agricultural needs, and Davis is not interested in that option, his aides said Thursday.

Reaction from utilities to the stock idea also was less than enthusiastic.

A director of Edison International, the parent of Southern California Edison, said the utility shouldn’t have to give the state any financial assets in order to extinguish a debt that was forced upon Edison by state officials in the first place.

The massive debt wouldn’t exist if the state would let Edison recover its wholesale costs from ratepayers – something Edison believes is guaranteed by federal law, said attorney Ronald Olson, a company director.

Having that debt erased “is not something we should pay extra for,” Olson said.

Davis said he continues to believe state leaders can settle on an overall plan within two weeks – before federal orders requiring out-of-state suppliers to sell electricity and natural gas to California expire Feb. 7.

One legislative committee toiled for more than two hours on a bill that would give the state Department of Water Resources the authority to enter into long-term contracts to purchase energy but left several key issues unresolved.

It’s not clear, for instance, whether power purchased by the state will be sold directly to consumers or through the money-strapped utilities.

The measure also leaves open the price that the state would pay for energy under the long-term contracts. In its original form, the bill required the state to purchase power from wholesalers at no more than 5.5 cents a kilowatt-hour.

Meanwhile, there were few details available on negotiations over contracts with the big wholesale electricity providers that submitted bids for the state’s long-term power needs at an unusual auction this week. State officials say 39 generators produced bids for long-term contracts with a “weighted average” of 6.9 cents a kilowatt-hour.

“It’s like a blackout basically on information at this point,” said spokesman Jeff Cohen of the Department of Water Resources, which is negotiating the deals. “They’re behind closed doors; they’ve got a guard on the door.”

While Davis said he was encouraged by the results of the auction, some experts said it is still far from certain that the state could obtain sufficient low-priced power to keep the lights on and prevent a rate increase.

“We haven’t heard from the auction about how much power was bid,” said Severin Borenstein, director of the Energy Institute at the University of California, Berkeley. “I don’t think this is going to be a magic bullet that’s going to bring reasonable prices just because we had an Internet auction.”

Wall Street, at least, gave the auction an unquestioned thumbs-up. After weeks of battering, PG&E shares jumped 31 percent, closing at $13, while Edison International shares increased 35 percent to $12.688.

The prices shot up after Merrill Lynch analyst Steven Fleishman raised his recommendation on both companies’ stocks, saying: “We believe the chances of constructive legislation passing to stabilize the power market and help the utilities have gone up significantly, and the risk of bankruptcy (while still real) has dropped significantly. … We sense the tide is turning.”

The state’s 10-day string of Stage 3 power emergencies was expected to come to a close today, according to the California Independent System Operator. The grid outlook improved because suppliers have committed to selling more electricity in advance, and demand is generally lower on Fridays than other weekdays, said ISO spokeswoman Stephanie McCorkle.

She said the ISO was expected to have enough electricity in reserve to drop to a Stage One emergency, which still includes a public plea for conservation.

“If people stop conserving at the rate they’re conserving, we will be right back into a Stage 3,” she warned.

In other developments, PG&E has asked the state Public Utilities Commission for permission to pay its natural-gas suppliers before it pays its wholesale-electricity bills. Some gas companies had cut off PG&E because the beleaguered utility wouldn’t pay cash up front for deliveries. Deliveries resumed after federal officials intervened with their order to the companies to keep PG&E supplied.

And a San Francisco judge issued a temporary order blocking the California Power Exchange – a clearinghouse for wholesale electricity purchases – from selling off long-term electricity contracts owned by PG&E.

Edison won a similar temporary order against the Power Exchange a day earlier.

PG&E, in a move that mimics Edison, sued the PUC in U.S. District Court for immediate permission to raise rates. The lawsuit said the PUC is violating the U.S. Constitution by not allowing PG&E to charge high enough rates to cover its wholesale purchase costs.

PG&E is both captive to and victim of California’s deregulated electricity market, a market described by government officials in terms ranging from ‘disastrous’ to ‘apocalyptic,’ ” PG&E said in its court papers.

Consumer Watchdog
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