PG&E Co. issues statements on the increase in the state’s cost for power

SAN FRANCISCO, Calif., April 18, 2001 — John Nelson, Director of the News Department Pacific Gas and Electric Company, attempted to allay some confusion Wednesday about the effect Pacific Gas and Electric Co.’s bankruptcy filing has had on energy prices.

“There seems to have been some confusion yesterday over the effect Pacific Gas and Electric Company’s bankruptcy filing may have had on energy prices,” he said in a statement. “I thought it might be helpful to provide a few useful facts and figures, to help you pin down the truth behind what may be driving the state’s energy costs higher.

“Yesterday, Governor Davis claimed that the state was paying roughly $20 million more for electricity every day as a direct result of the bankruptcy filing by PG&E. While it’s understandable, even laudable, that the Governor would want to fully explain the downsides of utility bankruptcy, this claim is simply not accurate. The Governor should know better.

“Consider the facts:

* On January 19, the credit ratings of California’s two largest investor-owned utilities — PG&E and SCE — were downgraded to below investment grade by every major rating agency. Generators immediately raised concerns about continuing to sell power to such non-creditworthy entities.

* The state reacted by passing AB7x, which authorized the state Department of Water Resources to make $400 million in power purchases. Less than two weeks later, on February 1, the Governor signed AB1x, which authorized DWR to buy power on an ongoing basis at least through 2002, until the utilities could be restored to creditworthiness. The clear understanding in the legislative debate was that the DWR would purchase the full “net open position”, which is the amount of additional generation needed, beyond what the utilities themselves own or have under contract, to meet customer demand.

However, a few weeks later, in spite of the clear intent of state law, it was revealed that DWR was not buying the full net open position, and had no intention of doing so. It was only buying power that it considered “reasonably priced” and was leaving the ISO to buy whatever was necessary to keep the lights on — an amount that most estimates place at 10- to 20-percent of the state’s daily electricity need.

* The ISO, in turn, revealed its intention to attempt to pass along the costs of these last-minute, high-cost, spot-market purchases to the state’s non-creditworthy utilities (despite existing FERC tariffs which precluded the ISO from doing so). PG&E has estimated that its share of these costs was roughly $10 million a day; SCE has a similar estimate. (We don’t know for sure, because we haven’t seen the bill. The DWR won’t say how much power it’s buying, and at what cost, and neither will the ISO.)

* On February 14, the Federal Energy Regulatory Commission informed the Independent System Operator that it could not force generators to sell to non-creditworthy entities (namely, both PG&E and SCE). This order appeared to force the DWR to purchase the full net open after all. The ISO responded the next day with its own interpretation of the FERC order, saying the order was limited to “emergency” power only. The ISO also sought and obtained in federal court a temporary restraining order (issued by Judge Damrell), forcing generators to continue selling to it.

* On February 22, five power generators filed a complaint with FERC seeking to clarify that the ISO’s interpretation of the February 14 order was contrary to FERC’s intent.

* On April 5, the Ninth U.S. Court of Appeals reversed Judge Damrell’s lower court order affecting one of the generators, Reliant, saying the generator was no longer required to sell electricity to the ISO without assurances of payment. Presumably this order would apply to other generators, if they sought such assurances.

* On April 6, PG&E noted in the announcement of its Chapter 11 filing that one of the reasons for the decision was the “financial exposure to unreimbursed wholesale energy procurement costs” caused by the state’s failure to assume the full procurement responsibility.

* On April 6, unrelated to PG&E’s bankruptcy filing, FERC issued an order responding to the generators’ Feb. 22 complaint against the ISO. In this new order, FERC reaffirmed its February 14 order that the ISO could only buy power on behalf of creditworthy entities, meaning neither PG&E nor SCE.

* On April 9 in remarks reported in the press, the Governor’s office acknowledged the State’s “bill for energy purchases will increase by upward of $8 million a day after a ruling last week by the Federal Energy Regulatory Commission,” once DWR started buying the full net open position, rather than force the ISO to try to bill the utilities. It seems likely that the $8 million was an estimate based on only one of the utilities’ costs, not the combination of both.

* On April 11, the ISO discontinued its daily practice of publishing the total amount it spent on energy the day before.

* Despite the history, the state continues to try to avoid buying the full net open position. On April 13, in response to the FERC order — NOT the PG&E bankruptcy filing — the ISO sent a “murky” notice to generators promising that “any bid accepted by the ISO will be deemed to have the financial support of another Qualified Party or DWR as specified in this notice.” Generators were reportedly underwhelmed by the assurances contained in the letter.

* Yesterday, in response to the Governor’s claim that bankruptcy was driving up the state’s costs, Gary Ackerman, spokesman for the Western Power Trading Forum, said “I don’t believe, nor have I ever heard, of a bankruptcy surcharge being added to the cost of power…. If anything, I think that generators and marketers would take solace in the fact that bankruptcy brings order to an otherwise volatile situation.”

“What does it all mean? Clearly, the increase in the state’s costs have come as a result of the DWR finally covering the state’s energy needs, as promised in AB1x. This change in DWR’s buying habits has come as a direct result of the February 14 and April 6 FERC orders that the ISO only sell to creditworthy entities. These orders were issued independent of PG&E’s bankruptcy filing and apply equally to PG&E and SCE.

“Neither PG&E nor SCE have been creditworthy since mid-January, when their credit ratings were reduced to below investment grade, and the DWR, ISO and Governor’s office have been aware of the effect of the FERC order since mid-February.

“Some generators have suggested that California has been paying a credit penalty since December, when the utilities’ deteriorating financial situation gave rise to payment concerns. There appears to be far more evidence that the state’s coy approach to AB1x implementation has created far more uncertainty in the marketplace than has PG&E’s Chapter 11 filing. “