Christopher Edmonds
After nearly a week of negotiations aimed at saving California utilities from financial ruin, the utilities, regulators and politicians are still trying to find a solution and avoid blackouts and utility bankruptcies.
The intense and sometimes contentious discussions between California Gov. Gray Davis, members of the Clinton administration and the chief executives of the beleaguered utilities and companies that generate power in the Golden State, are generating mixed reviews. "We made progress, but the governor has the ability -- and apparently the willingness -- to make a solution difficult," said one source close to the talks. Davis remained firmly opposed to any increase in electric rates for consumers. The California Public Utility Commission recently approved a 90-day surcharge to help PG&E's (PCG Quote - Cramer on PCG - Stock Picks) Pacific Gas & Electric and Edison International (EIX Quote - Cramer on EIX - Stock Picks), parent of Southern California Edison, recover the high costs of wholesale power. Under the California deregulation scheme, wholesale power prices were unleashed while retail rates were frozen at 1996 levels. And, as the price the utilities are forced to pay to purchase electricity on the spot market has soared, PG&E and Edison have amassed over $12 billion in debt, pushing them to the brink of bankruptcy. "The Governor is apparently not willing to budge on rates nor is he willing to make any guarantees about debt repayments of the utilities," said the source. Power generators such as Calpine (CPN Quote - Cramer on CPN - Stock Picks), Dynegy (DYN Quote - Cramer on DYN - Stock Picks) and Reliant Energy (REI Quote - Cramer on REI - Stock Picks) are owed millions by the utilities, and are seeking assurances that the state will assist the utilities in climbing out. The generators have indicated they are willing to defer receipt of payments as part of a comprehensive solution that could include increasing electric rates for California consumers. Davis, however, proposes that generators sell future power directly to the state at significantly lower prices and the state will guarantee future payments to the generators. PG&E and Edison say they cannot afford to make payments and may run out of cash as soon as Tuesday. "If a solution is not reached, or at least looks certain by Tuesday, there is concern PG&E and Edison may file [for bankruptcy protection]," said the source. Meetings of working groups preparing documents for consideration by the Federal Energy Regulatory Commission, or FERC, continued Sunday and the principals are expected to continue meeting later Sunday or Monday. Can an agreement be reached? Even though Davis opposes increasing consumer rates and will not commit the state to a role in securing financing for the utilities' debt, he continues to work closely with PG&E and Edison as well as credit rating agencies to keep the utilities from insolvency. That, say sources close to the talks, provides hope that he is willing to compromise. The stakes for a solution over the three-day weekend are enormous. The Clinton administration is winding down, and with utility loan payments looming, a lack of positive news from the negotiations before the market opens on Tuesday would likely spell trouble for the California utilities' shares. "Time is of the essence," says Jeff Dietert, power analyst at Simmons & Company, a Houston energy boutique. "The results of negotiations this weekend are very important to both utilities."Power Insight From TSC Readers
Our coverage of the California power crisis has generated an unprecedented response from readers. Here are some of your thoughts on the subject. As always, we welcome your feedback and will update your responses as they roll in. Drop me an email and let me know what you think.For 10 years the people of California have crushed any attempt to build power plants and instead have opted to siphon off power from adjacent states. Now the cost of obtaining that power has risen and they have all but bankrupted two major utilities. Additionally, the utilities have been asked to subsidize retail customers so that they can avoid facing economic reality since about 1996. Then the 1996 law has another quirky feature that prevents a utility from entering into long-term contracts so as to smooth out their cost structure. This provision and the rate cap seem designed to sabotage the deregulation effort and have succeeded admirably well. Until they have enough courage to work towards adding more capacity, allowing long-term contracts and getting customers to pay the cost of services, they appear stuck in a situation of their own making all in the name of perpetuating the myth that there is somehow a free lunch. -- Edward M. Dunlevy, Jr., Texas
This country wants clean, safe and affordable electricity, and at this point in time natural gas fits that bill. Until some other source of energy can take the place of natural gas, this country needs to wake up to the growth of consumption of energy. Californians need to pay at least their share for the energy necessary to fuel the products produced in their state and sold to the rest of the country. -- Edward E. Willis, Louisiana
We had a Stage Three alert today [meaning rolling blackouts were imminent] and my city is not immune, despite owning its own utility and having long-term contracts. PG&E is out of money; it's that simple. And SoCal Edison is not far behind. There is no guarantee that service won't be significantly disrupted for the next couple of years. Regardless of how many new plants are approved and brought on-line, they'll need fuel, which likely will be natural gas. Gas is expensive. I see no price or rate relief even if supply were abundant and a non-issue. Remember, California assumed in the early '90s -- during a regional recession -- that their excess energy supplies would continue and, thus, an open market would bring down prices. No one counted on the entire West growing like a wild weed and creating demand for natural gas resources far beyond any projections. Conservation is California's latest motto. -- R.S. Love, California
If [Energy Secretary] Bill Richardson can force neighboring states' utilities to continue selling to California companies about to go bankrupt, then the Fed can also step in and mediate a solution. Doesn't seem like California is capable of resolving their problem. -- Christy Sheffield Sanford, State Unknown
PG&E and Southern California Edison management had a strong voice at the deregulation table. Their lobbyists wrote much of AB 1890, the deregulation bill. The fundamental deal in that bill was that in exchange for moving towards a deregulated market four years in the future, the utilities would get "high" power prices for the first four years so that they could recover their stranded costs. In the derivatives market, this is known as a mismatch of assets and liabilities. They were using fixed priced assets -- the bills paid by the ratepayers -- to cover a floating rate liability -- the price of power on the open market. At the time, the utility managements thought the pricing delta was sufficient to compensate them for their expensive nuclear and alternative energy projects. They took a calculated risk and they blew it. Fundamentally, this is a finance 101 judgment error, and the price should be paid by the utilities' management and investors. If it's time for deregulation to end, so be it. But these people do not deserve compensation for their own past failures in exercising basic business judgment effectively. -- Jason Chroman, California
I didn't expect Davis to stoop to that level of demagoguery in his State of the State address. I could understand a windfall profits tax (with distribution to the poor worst hit by power costs), but talk of public power authority and eminent domain is just ridiculous. Instead of letting prices curb demand and stimulate more efficient use, he wants to bribe consumers to buy more efficient equipment. And, of course he doesn't admit that the real problem is that California politicians botched deregulation through bad design. -- Steve Meyers, California
Am I missing something here or is the Governor of California threatening to seize the property of the utilities via the use of condemnation? Is this deregulation California style? Talk about the left coast! This type of thinking may explain how California got into this situation in the first place. -- Jim Plummer, Michigan
Thanks for your article on the California energy crisis. Many homeowners in California pay less than $100 a month for their electric bill. In the Washington, DC, area household electric bills have averaged over $200 a month for years. Is this great difference true? If so, the California crisis should not generate too much sympathy in the halls of national government. -- Samuel McClure, Virginia
Gray Davis will never ever be included in any profiles of courage group. He is the quintessential political panderer. His party engineered the goofy deregulation in the first place. His party has all the "eco-freaks" and all the other activists that have continually opposed the construction of new generating plants in California. Now that the chickens have come home to roost he is saying "new rules baby." If I were a director of either utility, I would push for hiring [attorney] David Boies and declare bankruptcy. Then Governor Davis would have to deal with the Federal Courts and they won't buy his act. -- James Heald, Massachusetts
As a participant in the energy market, I was afraid of this kind of political backlash. The government is now using the marketplace as the scapegoat for the problem that has been created not by dissimulating energy companies, but by the physical reality that there are not enough molecules of natural gas. It is terrifying and reprehensible that the most important capitalist state in the world is willing to abrogate the principals of free markets to advance an obvious political agenda and to cover up for poor decision-making in the past. California's problems would be better met by release of price caps (which would help margins) and/or support of utilities until demand adapts to the new physical supply reality. This would include development of new power facilities, drilling of new gas supplies and a sufficient slowdown of economic activity to allow supply to meet demand. No amount of government grandstanding is going to change the cold, harsh reality that energy has been undercapitalized for an entire generation. And we are now only paying the price. -- Name Withheld by Request, Canada
I live in Oregon and we are getting very little rain, which is very unusual for this time of year. At best, stream flows are below 74% of normal and falling. That may mean even less cheap surplus power for California. The northern border of Oregon is the Columbia River, which contains the hydroelectric plants that supply most of our power. As an aside, if the lifeblood of your economy was electricity, would you worry that a power company might be charging too much? Wouldn't you just say, "Thank you, we very much appreciate working with you," and be done with it, because the alternative is darkness? -- Henry Carstens, Oregon
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