California plans transmission buyout; generators still under order


By Ann de Rouffignac
OGJ Online

HOUSTON, Feb. 19, 2001—As expected, California Gov. Gray Davis reported Friday the state is negotiating with the near bankrupt electric utilities to buy their transmission lines.

The plan is intended to give the utilities a cash infusion so they can pay debtors and buy power to serve customers. The utilities suspended debt payments the first of February and also stopped paying for wholesale power as well. When generators balked at providing power without any guarantees of payment, the California Independent System Operator (ISO) filed suit in a Sacramento federal court to force them to provide power to keep the lights on.

Also, on Friday, a Sacramento federal judge extended a temporary restraining order granted 2 weeks ago for another 5 days forcing the generators to continue providing power, even though Southern California Edison Co. (SCE), a unit of Edison International, and Pacific Gas & Electric Co., a unit of PG&E Corp. have mostly halted payments. A hearing is scheduled Wednesday

The utilities were plunged into insolvency because they were caught between soaring wholesale power costs and frozen retail rates. The state refused to raise rates enough to cover costs, even though many observers agree higher retail rates would have resolved the problems months ago and also sent the proper price signals to encourage conservation. It would also have encouraged new generation.

"Ratepayers did not ask for deregulation. They were promised that the rates would go down," Davis said in a press conference late Friday. "Believe me if I wanted to raise rates that could have solved this problem in 20 minutes."

The transmission purchase is expected to cost $4 billion-$9 billion and would put the state in the electricity business. Operations and maintenance would be contracted to the utilities. The purchase would provide funds to the utilities to pay their debts through rate-financed bonds. The governor and the utilities are still negotiating details.

One version of the financing structure suggested in Southern California Edison's recent 8-K filing with the U.S. Securities and Exchange Commission involves the state issuing revenue bonds to finance the acquisition. Under another mechanism outlined in the filing, the California Public Utilities Commission would create a "dedicated rate component" on customer bills. Then utilities would issue bonds secured by dedicated rate component charges.

In a Friday conference call, SCE creditors wondered when they will see the cash for missed principal and interest payments. SCE officials admitted there could be a delay. If legislators don't approve the plan by a two-thirds majority, the measure won't be effective for 90 days.

"There is a gap between resolution and cash flowing," said Theodore Craver, chief financial officer of SCE. "We will seek additional financing in the interim. That will be coupled with cash on hand to clean up the payment suspension."

Craver explained they would work out terms on a short-term basis among creditors and generators.

Meanwhile, there is considerable disagreement over who is responsible for "net short imbalance energy" provided by the generators after Feb. 1.

The net short is the power needed to serve customer load beyond that provided by the utilities own generation and that purchased by the Department of Water Resources (DWR) on behalf of the state. The utilities stated that the state is responsible for the ISO's purchase of imbalance energy since Feb. 1.

"It is our understanding that the state will pick up the full net short starting Feb. 1," said Craver.

Legislation (AB 1X) became effective on Feb. 1 authorizing the state to buy power on behalf of the cash-strapped utilities. But officials at the ISO said the DWR "was leaving a lot of power on the table."

The DWR does not buy power if negotiators don't like the price, leaving the grid with insufficient resources and the ISO scrambling to procure the power, officials said. Saturday was the 32nd day the ISO operated under its highest emergency level.

Since SCE and Pacific Gas & Electric Co. have virtually halted payments for wholesale power to the ISO, it has no money to pay generators for power. The governor was asked at Friday's press conference if the generators would get paid in full— a bill that is approaching $1 billion for power delivered and unpaid since Feb. 1.

"That's a matter of continuing discussion. That's the only way I can respond to it," said Davis.

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