Producers May Balk at California's Proposed Price for Electricity Purchase

01/16/2001
KRTBN Knight-Ridder Tribune Business News: The Sacramento Bee - California
Copyright (C) 2001 KRTBN Knight Ridder Tribune Business News; Source: World Reporter (TM)

As California officials pulled together a plan to buy electricity on behalf of cash-strapped utilities, the generators of that power indicated Monday they'd be reluctant to sell as cheaply as the state wants.

The state Assembly, taking the first legislative step toward crafting a remedy for California's energy crisis, was expected today to approve using state money to buy large amounts of electricity from wholesale generators. The state would resell it to California's two near-bankrupt utilities, Pacific Gas and Electric Co. and Southern California Edison.

Yet it was far from certain whether many of the wholesalers would sell at Gov. Gray Davis' proposed purchase price: 5.5 cents a kilowatt-hour, a figure far below current spot-market rates.

While some wholesalers said the state could obtain attractive prices via long-term contracts, others weren't so sure.

"In the near-term, it's unlikely (California) can get all the power they need at 5 cents, 5.5 cents," said spokesman Steve Stengel of Dynegy Inc., a Houston power generator that supplies about 5 percent of California's electricity.

As negotiations continued on a long-term solution, the state was reminded again of the immediacy of the problem. Less than a week after California faced a Stage 3 alert and found itself on the brink of blackouts, the state's Independent System Operator declared a less-severe Stage 2 alert. The alert, declared despite the Martin Luther King Day holiday, was in effect from 9:20 a.m. until 10 p.m. The ISO, which runs the power grid, can ask some industrial users to curtail usage under a Stage 2 alert, but that hadn't happened as of Monday evening, said spokesman Patrick Dorinson.

The vague, delicate truce forged in Washington last week between government officials and wholesale generators could face its first major test today, when Edison is due to make payment on a significant debt owed for power purchases. A source said the utility doesn't have enough cash and is hoping for patience, or "forbearance," from the wholesalers. The wholesalers have generally pledged to be patient with Edison and PG&E -- but only to a point.

Edison and PG&E owe as much as $12 billion for wholesale power purchases. The utilities blame that debt for putting them on the brink of bankruptcy and plunging California into an energy crisis without precedent.

Nearly out of cash, and unable to borrow any more money to fund additional purchases of wholesale electricity, the two utilities are banking on the state purchasing plan unveiled by Davis following hours of negotiations late Saturday in Washington and Los Angeles.

Davis wants to use the state's creditworthiness to buy power for a lot less money than the utilities could, on the theory that the state's solid credit rating will enable it to avoid the "credit penalties" the wholesalers have been charging the weakened Edison and PG&E.

Today, the Assembly is expected to pass a general framework for the plan; the Senate will flesh out the details later. And while final passage wouldn't come until early March, the state believes the initial action in the Legislature would send reassuring signals to wholesalers that the state will solve the problem, said Steve Maviglio, spokesman for Davis.

The gist of the plan drew applause from wholesalers. But the proposal could fall apart over price.

"When you factor in the price of natural gas ... a prudent operator can't continue operating a power plant ... at the proposed kinds of rates that are under discussion," said spokesman Richard Wheatley of Reliant Energy Inc., a Houston wholesaler that supplies 6 percent of the state's electricity.

Davis' proposed price is roughly half the true cost of generating electricity -- and about one-sixth the going spot-market rate -- said Robert Michaels, a consultant to power wholesalers and an economist at California State University, Fullerton.

Aides said the governor has been contacting many of the wholesalers individually during the past two days, telling them that a couple of generating firms have made unsolicited bids to sell electricity on Davis' terms.

"It's real," Maviglio said. "He's gotten the calls."

But some analysts were dubious of Davis' claims. If someone were truly willing to meet the governor's price, "the state would advertise that marketer's name in lights," Michaels said.

"You have the governor saying here's a magic fixed-price contract," Michaels said. "He's saying the people on the other side are so stupid that they're going to fall for this. I have news for you."

Still, the wholesalers didn't shut the door on doing business with the state. With the governor proposing three-year contracts, wholesalers noted that electricity can generally be purchased more cheaply under such contracts than on the spot market.

"The longer the term, the lower the price," said spokesman Tom Williams of Duke Energy Corp., another big wholesale generator.

"This weekend was a good first step," he added. "We're optimistic."

PG&E and Edison must rely on purchasing power from wholesalers and independent marketers to supply their customers. The two big utilities control only about 21 percent of the state's generating capacity, having sold many of their power plants to companies such as Reliant and Duke in accordance with state deregulation laws.

Michaels and others said Davis' plan was flawed in one other big way: It doesn't specify how PG&E and Edison will repay the nearly $12 billion they already owe the wholesale generators and marketers for electricity purchases.

The governor has talked about making permanent the emergency 10 percent rate hikes recently granted PG&E and Edison to help them cover the debts.

But most experts believe those hikes are wholly inadequate to cover the utilities' power costs, and Davis has said taxpayers won't swallow the debt.

"Somebody's got to pay for it," said Gary Ackerman of the wholesale generators' trade group, the Western Power Trading Forum.

Michael Shames, director of the Utility Consumers' Action Network in San Diego, said it would be unfair to stick ratepayers with the bill, saying the utilities' shareholders "are definitely going to eat some of that" and that the wholesale generators should have to forgive some debt.

The wholesalers agreed in principle last week to "forbearance," the postponement of debt collection, for as long as three months, Ackerman said. But they have said they won't cancel any debts.

The utilities' cash crunch -- and the pledges of forbearance --could come to a head today. A source said Edison owes an undisclosed sum to the California Power Exchange, the nonprofit entity that acts as middleman for wholesale power purchases, and lacks sufficient cash to make payment.

Without forbearance, "you exacerbate the credit situation," said Jesus Arredondo, spokesman for the Power Exchange. "There's a domino effect on the rest of the players in the market."

Edison also must pay principal and interest on a $200 million bond debt today, according to Bloomberg News.

In a move that could shield many of its assets from creditors, PG&E's parent PG&E Corp. underwent a corporate restructuring that was approved last week by the Federal Energy Regulatory Commission. The move drew immediate fire from the governor.

"Once again, I am disappointed that FERC acted in the middle of the night without notice to all parties," Davis said. "We will study the consequences of this action."

By Dale Kasler and Dan Smith