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USA: UPDATE 2-SoCal Edison in default, bankruptcy looms.
By Jonathan Stempel 01/16/2001 Reuters English News Service (C) Reuters Limited 2001. NEW YORK, Jan 16 (Reuters) - In a move that escalates the California power crisis, embattled California utility Southern California Edison said on Tuesday it has suspended at least $596 million of payments to creditors, moving it closer to a possible bankruptcy filing. SoCal Edison and No. 1 rival Pacific Gas and Electric Co., a unit of San Francisco-based PG&E Corp., have run up billions of dollars of debt this year because they are subject to a rate freeze and have been unable to pass on their skyrocketing wholesale power costs to consumers. In mirror filings on Tuesday with the Securities and Exchange Commission, the state's No. 2 utility and its parent, Rosemead, Calif.-based Edison International, said that to conserve cash SoCal Edison has "temporarily suspended" three payments due Tuesday. These payments include $230 million of principal and interest on its 5.875 percent notes, $215 million to the California Power Exchange, and $151 million to "qualifying facilities," as well as "certain other obligations." Failure to make the note payment puts SoCal Edison in default on the notes, and on other of SoCal Edison's and Edison International's credit facilities, the filings said. The Power Exchange, which arranges sales of power to the utilities, can foreclose on collateral the utility pledged, they said. SoCal Edison said it had nearly $1.2 billion of cash on hand as of Monday, and will run out of cash on Feb. 2 assuming it makes all payments when due. "It's an extremely negative sign, and telegraphs the company's intention to take this to the mat," said Shawn Burke, head of U.S. investment-grade research at Barclays Capital. "Unless the legislature pulls a bill out of its hat, giving them virtually all of what they want, it's pretty much over." Edison International also said in the filings that it plans to amend the articles of incorporation and by-laws for Edison Mission Energy, a wholly-owned unit, to protect its low investment-grade ratings. Edison International shares traded Tuesday on the New York Stock Exchange at $9-1/8, down $1-1/16, or 10.4 percent. PG&E shares fell $1-9/16, or 13.5 percent, on the Big Board to $10. On Jan. 4, the California Public Utilities Commission recommended giving the utilities a temporary 10 percent rate hike. The utilities, rating agencies and many analysts consider such a hike inadequate. Edison International has suspended its dividend, and SoCal Edison plans to slash up to 1,850 jobs. DOWNGRADES LIKELY The missed payments effectively ensure that credit rating agencies Standard & Poor's and Moody's Investors Service will cut at least some of SoCal Edison's credit and debt ratings to junk status. When a company misses a debt payment, S&P ordinarily does not wait for a grace period, if any, to run before cutting its rating for that debt to "D," or default. A downgrade to below investment-grade status would put SoCal Edison in default of some of its credit lines and bank loans, and ratchet up its liquidity crunch. "It's difficult to lend if there is no short-term solution, much less a long-term one," said Burke. The utility, as well as Pacific G&E, have been shut out of the short-term debt capital markets, and have already drawn on backup credit lines. S&P now rates most of SoCal Edison's senior long-and short-term debt "BBB-minus" and "A-3," its lowest investment grades. Moody's rates the respective debt a roughly equivalent "Baa3" and "Prime-3." The utilities' debt trades like junk. A third rating agency, Fitch, has already cut SoCal Edison's and Edison International's ratings deeply into junk. The bank loans and credit lines contain no default provisions triggered by that downgrade, analysts said. DELAYING REPORTING RESULTS Separately, SoCal Edison and Edison International said they plan to postpone release of their fourth quarter and year-end 2000 fiscal results pending further developments. Analysts said SoCal Edison is acting now to push California legislators and regulators to craft a remedy fast. "This is a rugged step toward moving this process along, and forcing California to do something," said Jerry Bellucci, senior vice president for Applied Economic Research, a New York-based energy consulting firm. Burke said SoCal Edison will wait as long as possible to file for bankruptcy protection. USA: S&P to issue statement on SoCal Edison Tuesday. 01/16/2001 Reuters English News Service (C) Reuters Limited 2001. NEW YORK, Jan. 16 (Reuters) - Credit rating agency Standard & Poor's said on Tuesday it plans to issue a statement by 12 P.M. (1700 GMT) about Southern California Edison's failure to make $596 million of payments to various creditors. The announcement came in a voice-mail message left by Richard Cortright, an S&P analyst following the California power crisis. SoCal Edison, a unit of Rosemead, Calif.-based Edison International , said it temporarily postponed the payments as it seeks to negotiate a resolution for its cash crunch. USA: Calif. declares highest level power alert. 01/16/2001 Reuters English News Service (C) Reuters Limited 2001. SAN FRANCISCO, Jan 16 (Reuters) - California, in the grips of its worst-ever power crisis, on Tuesday declared a Stage Three power emergency, the highest-level alert, citing a severe shortage of power and natural gas needed to generate electricity. A spokesman for the California Independent Operator System (ISO), the agency that oversees the operation of most of the state's power grid, said it did not appear likely they would have to trigger rolling blackouts to relieve the heavy load on the system, although the possibility exists whenever a Stage Three alert is called. The ISO spokesman said 10,700 megawatts of generation were off line in California for repairs or maintenance. Schools and offices reopened after the Martin Luther King Day U.S. holiday on Monday, pushing up demand. One megawatt powers about 1,000 homes. The spokesman said there was also a shortage of natural gas available in southern California, forcing power plants there to switch to oil to run their generators. About one-third of all California power is produced at gas-fired plants. California has declared a statewide Stage Three alert only twice before, but each time narrowly averted rolling blackouts as emergency supplies were made available from neighboring states. . Only 54% of Californians Feel That There Is an Energy Crisis 01/16/2001 PR Newswire (Copyright © 2001, PR Newswire) Knowledge Networks Unique Poll Finds Majority Expect Even More Increases From the CPUC. MENLO PARK, Calif., Jan. 16 /PRNewswire/ -- The energy crisis, which is dominating media coverage, paralyzing state government, and prompting industry to consider moving operations elsewhere, is causing less concern among average California citizens. Results from a recent survey conducted by Knowledge Networks using its unique population projectable Web-enabled panel, show that just 54% think the current situation is a crisis -- 21% don't believe that there is a crisis and 25% don't know. However, California citizens are losing confidence in the system that controls electric power in the state. -- 80% believe the CPUC will extend the recent temporary rate increase given to PG&E and Southern California Edison beyond the 90 day limit -- 75% expect an additional rate increase once the 90 day period is over -- 14% are positive about electricity deregulation -- 61% support reconsidering deregulation In addition to attitudes about changing deregulation, Californians were surveyed about an extensive range of proposals for dealing with the energy situation. People were asked the questions in the same manner as the various proposals have been summarized in the media reports. This may account for the high support received on a couple of the proposals. For example 90% of the respondents approved the Governor's suggestion to, "add new power generation plants within California and make existing plants more efficient." The proposal as worded doesn't distinguish between adding new plants or making existing plants more efficient or some combination thereof. Critics note that in the past Californians have been hesitant about power plants being built in their own communities. Among the other proposals, Californians are most supportive of: -- 76% Federal limits on the amount that electricity suppliers can charge for wholesale energy sold to California utilities -- 59% Incentives for reducing electricity usage by 8% -- 57% Creating a state power authority to take over existing plants and speed up the building of new power plants Attitudes towards the two largest investor owned utilities, PG&E and Southern California Edison are noticeably split. 41% find the explanations about the crisis given by the utilities to be believable, while an equal percentage (42%) don't believe them. With regards to the possibility of going bankrupt, 46% think that it is somewhat likely that the two utilities will be forced to declare bankruptcy if they don't receive outside help. 70% think that the state and or Federal government should help prevent bankruptcy. While just over half think that the electricity situation is a crisis, there are clear signs that people take the situation seriously. When asked about actions they have taken to reduce their electricity usage a majority report taking basic steps like shutting off lights, reducing the temperature, and cutting back on holiday lighting. Looking forward, Californians will be replacing less efficient lighting and taking other steps to make their homes more efficient. 11% state that they will likely switch to another electricity supplier. A full release including data tables is available at: www.knowledgenetworks.com/press. The survey was completed by 529 California head of household members of the Knowledge Networks panel, between Tuesday January 9 and Thursday January 11, 2001. The margin of error for results based on the total sample is plus or minus 4.4 percentage points. About Knowledge Networks Knowledge Networks' revolutionary single-source marketing information system provides continuing insights about consumers' opinions, attitudes, activities and behavior. Knowledge Networks is the first to combine traditional statistically valid probability sampling with Web technologies to create a panel that is representative of the U.S. population. The company equips all panel households with interactive TV and Internet access enabling it to collect a wealth of information with unusual speed. Knowledge Networks, a privately held company, was founded in 1998 by two Stanford Political Science Professors, Norman Nie and Douglas Rivers. Knowledge Networks serves clients nationally from seven offices: Boston, Chicago, Cincinnati, New York, Fairfield CT, Washington DC, and its headquarters in Menlo Park, California. For information on Knowledge Networks, please visit its Website, www.knowledgenetworks.com. Southern Calif Edison Projects Will Be Out Of Cash Feb 2 01/16/2001 Dow Jones News Service (Copyright © 2001, Dow Jones & Company, Inc.) WASHINGTON -(Dow Jones)- Southern California Edison, a subsidiary of Edison International (EIX), said it will be out of cash on Feb. 2 based on its current cash flow forecast, according to a Form 8-K filed Tuesday with the Securities and Exchange Commission. , Southern California Edison had cash reserves of about $1.2 billion, according to the filing. 08:49 AM Southern California Edison said it estimates it has a $215 million payment due to the California Power Exchange Tuesday, $259 million in payments to qualifying facilities due through Jan. 31, a scheduled interest payment of $230 million on maturing 5.875% notes due Tuesday and $255 million pyaments for commercial paper due through Jan. 31. The company also has total expenses for energy delivered as of Monday, but not yet paid for, of $1.54 billion. However, Southern California Edison states that due to a "significant lag time" between the delivery of energy and the final billing, the actual expenses through Monday can't be determined at this time. Southern California Edison said that in an attempt to conserve cash it has "temporarily suspended" payment of $230 million of principal and interest on its 5.875% notes due Jan. 16, $215 million due to the California Power Exchange due Jan. 16, $151 million due to certain qualifying facilities as well as certain other unnamed obligations. As reported, a company representative told Dow Jones Newswires Monday that the company might not be able to make the payment to bondholders. According to the company, failure to pay the notes when due constitutes a default, allowing the noteholders to exercise remedies available to them. Failure to make the payment on the notes also constitutes a default under Southern California Edison's credit facilities, entitling the lenders to exercise certain remedies. If the company doesn't cure or waive the defaults within a specified time period, the defaults may trigger defaults on all outstanding series of the company's senior unsecured notes and subordinated debentures. Failure to make the payment to the California Power Exchange constitutes a default under the agreement, allowing the exchange to foreclose on collateral pledged by the company. According to the filing, Southern California Edison is attempting to avoid bankruptcy and intends to pay all of its obligations once a solution to the current liquidity crisis has been reached. However, the company warns that it's possible that it could be forced into bankruptcy. Based on the ongoing "uncertainties," Southern California Edison and Edison International intend to postpone releasing their financial results for the fourth quarter and year-end 2000 "pending further developments in federal and state regulatory proceedings, judicial proceedings, legislative enactments and other efforts to resolve the current energy crisis," notes the filing. Southern California Edison said in the filing that as of Dec. 31, the difference between the cost of supplying electricity to customers and the amounts received from customers reached $4.5 billion and "is continuing to increase." As reported, because of liquidity and other problems, the company has no unused borrowing capacity under its existing credit facilities, and it's been unable to arrange any additional facilities. In addition, the company is unable to issue commercial paper or access the capital markets on "reasonable terms." On Jan. 4, the California Public Utilities Commission authorized a surcharge for 90 days in an attempt to help Southern California Edison as well as PG&E Corp. (PCG), which is also undergoing severe liquidity problems. Southern California Edison said the rate increase provides "no real relief" and will increase revenue by about $65 million a month during the three months the surcharge is in effect. Edison International is an energy holding company. Southern California Edison provides electricity to people in California. -Todd Goren; Fed Filings/Dow Jones; 202-628-9782 Calif Gov Could Stymie Solution To Crisis -FERC's Hebert 01/16/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) (This article was originally published Monday) By Bryan Lee Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- High-level talks over the weekend on a plan to rescue California's troubled two largest utilities and keep power flowing to customers have brought participants no closer to a solution, sources involved in the discussions said Monday. And as events Tuesday are expected to push the state's financially ailing electric utilities closer to bankruptcy, responsibility for the potential meltdown rests squarely with California Gov. Gray Davis, a key federal energy regulator said Monday. "You've got a governor who cares more about being on a nighttime news show than he does about fixing the problem in California," said Curtis Hebert, a Republican on the U.S. Federal Energy Regulatory Commission. Hebert criticized Davis, a Democrat, for his refusal to swallow the bitter financial medicine needed to rescue the state's flawed power market restructuring initiative. Hebert's comments echo those voiced privately by industry officials and Clinton Administration officials involved in unprecedented discussions brokered by the White House since Tuesday. The talks are designed to reach agreement on a plan that will allow the state's utilities to continue purchasing power for their retail customers, despite a liquidity crunch brought about by the state's power market restructuring effort. Broadly, the proposed deal involves having California's Department of Water Resources enter into long-term power sales contracts on behalf of the utilities. This would end the utilities' reliance on volatile spot markets for power purchases. In return, power generators are to grant some form of "forbearance" for the money they are owed while the forward contracts are ironed out. But throughout seven days of negotiations, Davis has refused to consider raising state-protected retail rates and has resisted calls for the state to issue credit guarantees for the utilities. In the meantime, Davis has insisted that power suppliers agree to sell the state power under long-term contracts at rates generators say is below their cost of production. Unless Davis backs down, no rescue package can be struck, some people close to the negotiations say. "Everybody's still trying to talk, (but) now it's spinning out of control," said a person involved in the discussions. A person representing power marketers and familiar with the status of the talks: "I don't see any great cause for optimism - particularly when I hear some of the things that Davis's office says." Governor's Office Rejects Talk Of No Progress A spokesman for the governor rejected the characterization that the talks were stymied. "People are working and moving forward," said Steve Maviglio, the governor's spokesman. "If they weren't closer (to an agreement), they wouldn't still be talking. To send a message to the markets that there's not progress here is irresponsible." Draft legislation to be unveiled Tuesday at the state Legislature will hold up the governor's end of the deal, Maviglio said. The legislation will give the state the authority to purchase power on behalf of the utilities, and the structure of the long-term contracts will give the utilities the ability to pay down the billions in uncollected power costs they have accumulated to date, he said. The utilities - Edison International's (EIX) Southern California Edison Co. and PG&E Corp.'s (PCG) Pacific Gas & Electric Co. - say they have no cash on hand and have been squeezed out of capital markets after hemorrhaging some $12 billion buying high-cost wholesale electricity and selling it for a considerable loss under state-mandated frozen retail rates. Southern California Edison has a multimillion-dollar bill due Tuesday for power purchases made in November and no cash on hand. Pacific Gas & Electric says it can squeak by until early February, but obtained approval from federal regulators on Friday for a corporate restructuring that will help shelter its successful unregulated business units should the utility unit files for bankruptcy. Developments could come fast and furious if financial markets open Tuesday with no deal struck. Wall Street credit ratings agencies have warned they will downgrade the utilities' debt to speculative, or junk-bond, status if a solution isn't reached soon. And various entities are expected to file emergency petitions with the Federal Energy Regulatory Commission to ensure that power keeps flowing to the state despite the utilities' inability to purchase power for their retail customers. According to sources familiar with the discussions, one filing would allow the Department of Water Resources to purchase wholesale power on behalf of the utilities, while another would give Southern California Edison more time to make good on amounts owed power suppliers. Whether the regulatory filings buy the utilities time to avoid bankruptcy remains to be seen. "They've got to make some real decisions here," FERC's Hebert said of the stymied negotiations with Davis. "If (Davis is) not willing to make those decisions, then certainly I think he's to blame." -By Bryan Lee, Dow Jones Newswires, 202-862-6647, bryan.lee@dowjones.com Houston power supplier threatens to bankrupt California utilities 01/16/2001 Associated Press Newswires Copyright 2001. The Associated Press. All Rights Reserved. SACRAMENTO, California (AP) - In the midst of California's struggle to obtain more regional power, a major electricity supplier is threatening to take the state's two largest utility companies to bankruptcy court. If Southern California Edison and Pacific Gas & Electric do not make payments due this week, officials from Houston-based Dynegy Inc. said Monday they will have no choice but to take them to court. "If we can't get this bill through in the next two days, this will start to unravel," Stephen W. Bergstrom, president of Dynegy, told the Los Angeles Times. "When and if they (Edison) default on Thursday, it puts us in a position where we have to take them into bankruptcy, and I'm sure others will be right beside us." Bergstrom refused to say how much money Dynegy is owed but said if any three creditors jointly petitioned the court, it would be enough to start involuntary bankruptcy proceedings. State and federal lawmakers are trying to craft a temporary solution to California's power crisis. Officials met this past weekend with electricity wholesalers to negotiate a plan by California Gov. Gray Davis for the state to buy electricity and sell it to utilities. That plan was to be introduced Tuesday in the Legislature. The state believes it can negotiate better prices than the utilities, which have seen their credit ratings plummet in recent months. PG&E and SoCal Edison say they have lost more than dlrs 9 billion because of wholesale price increases and the state's 1996 deregulation law that froze rate hikes. Electricity sellers have been increasingly reluctant to supply California because of the utilities' dwindling finances. Edison owes a major payment Tuesday to the Power Exchange, which manages the wholesale buying and selling of electricity. Power industry sources estimate the bill to be more than dlrs 150 million but believe the company has the resources to make the payment. Technically, SoCal Edison will not be in default on the payment until Thursday. Company officials refused to comment on their obligations to the Power Exchange. They said they would disclose details Tuesday in a filing with the federal Securities and Exchange Commission. PG&E officials said Monday that they would pay their dlrs 40 million bill due this week. The utility has approximately dlrs 500 million in cash, a spokesman said, with a bill for about dlrs 580 million due Feb. 1. On Monday, the state's power reserves shrank to nearly 5 percent even though many businesses were closed for the holiday. Dynegy purchased three Southern California power plants when SoCal Edison, PG&E and San Diego Gas & Electric auctioned off assets as part of deregulation. The company's plants can generate enough electricity to supply 2.8 million homes. California Utility's Power Supply Could Be Cut By John R. Emshwiller and Mitchel Benson Staff Reporters of The Wall Street Journal 01/16/2001 The Wall Street Journal A4 (Copyright © 2001, Dow Jones & Company, Inc.) Today could prove to be a critical day in California's electricity crisis as one of the state's biggest utilities, Southern California Edison Co., faces a possible cutoff from power supplies. Edison, a unit of Edison International Inc., is considering not paying a big wholesale electric-power bill, believed to be in the hundreds of millions of dollars, that comes due today from the California Power Exchange, a person familiar with the matter said. Edison is suffering from a cash shortage brought on by the skyrocketing cost of wholesale power. An Edison spokesman declined to comment yesterday. A spokesman for the Power Exchange said Edison could face immediate cutoff from further purchases via the exchange if it doesn't pay its bill. However, the exchange was talking with various parties in an effort to avoid such a suspension. "We are still in negotiations. We don't know what we have yet," the spokesman said. The Power Exchange, created as part of California's utility-deregulation effort, serves as a crucial middleman between utilities and power generators. Under deregulation, Edison obtains much of its daily electricity through the exchange. An inability to buy through that venue could leave Edison and its 4.2 million customers in Southern California facing power shortages and possible blackouts. Adding to the financial uncertainty surrounding Edison, Dow Jones Newswires, citing a senior Edison executive, reported late yesterday that the company has a $200 million bond payment due today that it also might be unable to pay. Meanwhile, state officials met through the Martin Luther King Jr. holiday in Sacramento in a frantic effort to resolve the power crisis. Within the next 24 to 48 hours, Wall Street and the energy producers "need a precondition, a signal that we're serious and heading in a direction they're comfortable with," said one lawmaker involved in the talks. One idea proposed by Gov. Gray Davis and others is to have the state use its financial resources to purchase power from electricity producers for resale to the financially beleaguered utilities. "We don't have to go into business tomorrow as the purchaser," the lawmaker said. "We simply have to make a strong enough and substantive enough statement coming out of the state capitol so that the creditors and [energy] producers will exercise forbearance." Such forbearance would give utilities more time to pay billions of dollars of wholesale power costs that they have accrued but haven't been able to collect from customers through rates. Several people involved in yesterday's talks said they were optimistic that some plan would be ready to present to a legislative committee today for public hearings and, potentially, a vote in the Assembly. They acknowledged that as of late yesterday that no agreements had been reached with electricity producers on such crucial issues as the price to be charged for the electricity and the length of the supply contracts. California's Legislature has been called into special session by Gov. Davis to consider a series of bills aimed both at improving the state's electricity supply and at curtailing demand. Edison's move on its Power Exchange bill could compress the timeframe for action. Many observers believed the utilities had sufficient cash to see them through early February, when another round of big wholesale electric bills comes due. Last weekend, the Pacific Gas & Electric utility unit of PG&E Corp. reiterated its belief that it has sufficient cash to pay its expenses until early February. In recent weeks, Edison and PG&E have said they are being pushed to the brink of insolvency and bankruptcy-law filings because of skyrocketing wholesale electricity costs. Some observers speculate that if Edison doesn't pay its Power Exchange bill, it could be a signal that the utility is moving closer to a bankruptcy-law filing. Richard Cortright Jr., a Standard & Poor's director, said an analysis by the credit-ratings concern indicates that Edison has enough cash to pay the Power Exchange. Preserving cash by not paying bills "is often a tactic a company uses before bankruptcy," Mr. Cortright said. S&P and other ratings concerns have been closely following the California electricity crisis, because of the impact it could have on billions of dollars of utility bonds outstanding. The ratings concerns have severely downgraded both Edison and PG&E bonds. The agencies generally haven't dropped those bonds into "junk- bond" status, which is below investment grade. Such a downgrade would put the utilities into various financial defaults that could exacerbate their acute cash problems. While the California situation is "incredibly fluid," any failure by Edison to pay its power bills "paints a very, very dire picture," Mr. Cortright said. To better understand the current picture, state legislative leaders have recruited several legal and financial advisers. Among them is David Wiggs, managing director of Lido Capital in Newport Beach, Calif., a financial adviser to the utility and telecommunications industries. Mr. Wiggs, who has been hired to advise the newly created Assembly Committee on Energy Costs and Availability, is a retired chairman of the utility El Paso Electric Co. Mr. Wiggs, in turn, has hired to assist him Robert D. Albergotti and Stacey Cowand Jernigan, members of the Dallas law firm of Haynes & Boone. Two investment advisers from New York investment bank Credit Suisse First Boston Corp. are advising legislators on a pro bono basis. As regulators, politicians and executives struggled to come up with fixes, California itself struggled through another day of tight power supplies. Metro Desk Power Firm Demands Utilities Pay Bills Now Electricity: Supplier says it will haul Edison and PG&E into bankruptcy court if money isn't forthcoming. Lawmakers scramble for a solution. NANCY VOGEL; MIGUEL BUSTILLO TIMES STAFF WRITERS 01/16/2001 Los Angeles Times Home Edition A-1 Copyright 2001 / The Times Mirror Company SACRAMENTO -- Increasing the pressure on state lawmakers to craft at least a temporary solution to California's power crisis, a major power supplier threatened Monday to force Southern California Edison and Pacific Gas & Electric into bankruptcy court unless the utilities pay their bills due this week. The move by Dynegy Inc. of Houston upped the ante on a day when legislators huddled with financial experts and lawyers but reached no agreement on a mechanism for the state to buy electricity for Edison and PG&E at rates far lower than they pay now--allowing the beleaguered utilities breathing room to restructure their massive debts. "If we can't get this bill through in the next two days, this will start to unravel," said Stephen W. Bergstrom, president of Dynegy. "When and if they [Edison] default on Thursday, it puts us in a position where we have to take them into bankruptcy, and I'm sure others will be right beside us." Bergstrom refused to say how much money Dynegy is owed, but said if any three creditors jointly petitioned the court, it would be enough to start involuntary bankruptcy proceedings. Under a plan outlined this weekend by Gov. Gray Davis after marathon bicoastal negotiations, the state would use its excellent credit rating to purchase electricity and then resell it to debt-hobbled utilities. The state Department of Water Resources has stepped in on an emergency basis to buy power to prevent blackouts, but Davis' plan would, overnight, make California the biggest single buyer of electricity in its own market. Legislators generally backed the need for the state to buy power, but there has been no agreement on two key issues: the price and the duration of the contracts. The price needs to be low enough so that utilities, with the rates currently in place, can save enough to restructure their debts--but high enough so that the power producers will go along with the plan. With attention focused on how Wall Street will view the tenuous agreement when markets reopen after the weekend, legislators were fighting multiple deadlines in trying to make good on the weekend promise to pass a bill by today. Edison owes a major payment today to the Power Exchange, the market created in 1998 under deregulation. Power industry sources say they believe Edison has the cash to make the payment, estimated at more than $150 million, but that the firm could play high-stakes political poker by delaying payment to increase pressure on lawmakers. Technically, Edison will not be in default on the payment until Thursday. Edison officials refused to comment on the negotiations with state leaders or the firm's obligations to the Power Exchange. They said they would disclose details today in a filing with the federal Securities and Exchange Commission. PG&E officials said Monday that they would pay their $40-million bill due this week. The utility has approximately $500 million in cash, a spokesman said, with a bill for about $580 million due Feb. 1. Electricity sellers have been increasingly reluctant to supply California because of the deteriorating financial condition of the utilities. The volume of electricity traded in the Power Exchange has dropped by roughly 75% in the last month. Grid operators have struggled daily to buy enough power to balance flow on high-voltage wires and prevent blackouts. On Monday, a holiday during which many offices and businesses were closed, the state's power reserves shrank to nearly 5%. Legislators, convened in an emergency session on the state's energy crisis, quickly seized on Davis' idea. "We're working here around the clock, doing everything we can," said Assembly Speaker Bob Hertzberg (D-Sherman Oaks) during an afternoon break in talks among a half-dozen Republican and Democratic lawmakers. Also involved were the state's finance director, a bankruptcy lawyer, and two utility experts from Credit Suisse First Boston. Their purpose was to craft a skeleton of the legislation that California will need to implement Davis' proposal and have it passed by at least one house of the Legislature today. Senate leader John Burton (D-San Francisco) has said that while the Legislature works, power generators should be willing to give utilities leeway on bills coming due. But that's unlikely unless the Legislature acts quickly, said Bergstrom of Dynegy. His company purchased three Southern California power plants when Edison, PG&E and San Diego Gas & Electric auctioned off assets as part of deregulation. Dynegy's plants can generate enough electricity to supply 2.8 million homes. "We're just not going to do that," Bergstrom said, "because the stakes are too high." He met with Davis and California lawmakers in Washington, D.C., last Tuesday evening and spoke to them again through a bicoastal video conference Saturday. The governor has been lobbying power plant owners to sign long-term contracts with the utilities at roughly 5.5 cents per kilowatt-hour--well below the recent market rate of 30 cents. Power plant owners call that price unrealistic unless the contract lasts at least six or seven years, allowing them to recoup money later, when the cost of natural gas is expected to fall and make electricity cheaper to generate. Contract details do not matter, Bergstrom said, so long as the utilities are so debt-ridden as to be unworthy of credit. That's why the state needs to step in to buy power and guarantee payment, he said. But some lawmakers have downplayed the urgency. Burton has said it is more important to get the details of a bill right than to move quickly. To insert the state as a go-between in California's electricity market raises many complex financial and political issues. Even lawmakers who support helping the utilities insist that consumers get something in return. Stock options, ownership of utility transmission lines or takeover of hydroelectric power plants--a cheap source of power that affects the environmental health of many Sierra Nevada rivers--are among the assets the state should consider, Burton said. Hertzberg spokesman Paul Hefner said lawmakers have included bankruptcy lawyers and financial experts not solely to impress Wall Street, but also because they realize they are entering a realm they know little about. He said politicians clearly want to "send a message to financial markets" that they are working with industry experts when considering the consequences of their legislation. But he said their main goal is to get technical advice from someone who is not a bureaucrat and is not employed by a power firm. Metro Desk Court May Decide if Power Users Pay More Court: Edison calls ruling that it can pass on costs a victory. The PUC says it's just the first of many steps in the battle over setting rates. HENRY WEINSTEIN TIMES LEGAL AFFAIRS WRITER 01/16/2001 Los Angeles Times Home Edition A-15 Copyright 2001 / The Times Mirror Company A federal judge's recent ruling that Southern California Edison Co. has the right to pass on to consumers its costs of acquiring power on the wholesale market does not mean that ratepayers will have to bear any of those costs soon. But the decision nonetheless provided immediate benefits to the beleaguered utility--primarily making the company look more financially secure and credit-worthy because the ruling could pave the way for a recovery of more than $2 billion for Edison. Consequently, attorneys and spokesmen for Edison trumpeted the ruling of U.S. District Judge Ronald S.W. Lew as a significant victory. Attorneys for the California Public Utilities Commission played down the decision's consequences, saying it was merely the first skirmish in a long process. Regardless of how significant Lew's ruling was, the legal battle clearly has important ramifications, and they go beyond Edison's financial health. Ultimately, the case, titled Southern California Edison vs. Loretta M. Lynch (president of the PUC), may determine whether Edison's customers have to pay more for electricity. Moreover, the case--and a virtually identical one filed by Pacific Gas & Electric Co. in Oakland federal court--may clarify whether there will be any change in the traditional demarcation of regulatory authority over utilities as a result of deregulation. Historically, the federal government has regulated wholesale power rates and state governments have regulated retail rates, those charged to consumers. One of the key issues in the Edison and PG&E cases is the utilities' contention that a PUC-imposed rate freeze violated the traditional demarcation by indirectly interfering with federal regulatory authority. Both companies say that they have been prevented from recovering their wholesale purchase costs because of the rate freeze imposed by the PUC as part of the massive utility deregulation law enacted in 1996, known as AB 1890. Unless the issues are resolved by legislative action on the state energy crisis, it seems likely that the two suits will wind up in the U.S. 9th Circuit Court of Appeals and perhaps ultimately the U.S. Supreme Court. The California Public Utilities Commission and the Utility Reform Network, a consumer advocacy group, are opposing the companies in court. The 1996 deregulation law provides that the California rate freeze lasts until March 31, 2002, or until what are known as a utility's "stranded costs" (in essence, certain assets such as nuclear power plants that were overvalued in 1996) are recovered. The PUC determined last year that San Diego Gas & Electric, the state's other major privately owned utility, had recovered its "stranded costs," enabling that company to impose rate hikes. But the agency has said that Edison and PG&E are not entitled to take such action yet. On Jan. 8, Judge Lew agreed in principle with Edison's contention that the Federal Power Act trumps California's 1996 energy deregulation law. Lew rejected the PUC's argument that he should dismiss the case because retail rates are exclusively a matter of state regulation. The judge also rejected the agency's alternative request that he defer a decision for at least 120 days while the PUC gathered more facts. The judge said the gravity of the situation required immediate action. PUC actions "are having devastating effects on [Edison's] current ability to obtain financing to enable it to continue to procure wholesale power at current prices," Lew said. In essence, Lew agreed with Edison's lawyers, Ronald L. Olson and John W. Spiegel, that the company is caught in "a vise that threatens to squeeze it out of existence." "On the one side, SCE has been forced to pay astronomically high prices to buy wholesale electricity," the lawyers said in a brief filed in Lew's court. The 1996 statute requires SCE "to procure all of the electricity needed to serve its 4.3 million retail customers from two wholesale market institutions, whose pricing practices are exclusively within the Federal Regulatory Commission's jurisdiction. Since last June, the cost of procuring electricity through these market institutions has increased nearly four-fold," the attorneys said. "On the other side, SCE has been unable to recover these expenses through retail rates, which are currently frozen under California law." In addition, Edison's lawyers maintain that the PUC has interpreted California law "to prohibit SCE from recovering these costs, either now or in the future." Consequently, Edison has had to buy high and sell low, leaving it with a shortfall in excess of $2.6 billion, the company says. The PUC counters that a substantial portion of Edison's costs are paid to itself from power the company buys from its own plants and that Edison has reaped additional billions in the last two years from the sale of certain assets. The agency contends that those funds should be available to offset the financial problems the company is complaining about. The PUC also contends that Edison failed to take other steps that could have lowered its costs in acquiring power. In addition to the dispute over the facts, there has been a clash over Edison 's contention that California's rate freeze interferes with federal regulation of the wholesale energy market. The PUC and the Utility Reform Network counter that the freeze is an essential component of the Federal Regulatory Commission's approval of wholesale sales. The regulatory commission has taken no formal position on the pending litigation. However, Douglas W. Smith, the agency's general counsel, sent a letter to Edison attorney Spiegel saying that the "filed rate doctrine" applies in a situation such as this. The doctrine, according to a 1986 U.S. Supreme Court decision, holds that interstate power rates filed with the Federal Regulatory Commission or set by it must be given binding effect by state utility commissions determining intrastate rates. However, Michael Strumwasser, attorney for the consumers group, said the 1986 Supreme Court decision arose in an entirely different context. He said the specific question now at issue--whether the "filed rate doctrine" applies when wholesale rates have been set by market forces rather than a regulatory proceeding--has never been ruled on by an appellate court. Lew made no explicit rulings on the PUC allegations that Edison should have offset wholesale payment costs through other revenues. However, Lew said the PUC is entitled to present evidence about the prudence of Edison's wholesale electricity purchases. Further hearings on that issue could determine how much of its costs Edison is entitled to recover. The PUC contends that Edison could have made some purchases at lower prices than it did. But Edison attorneys counter that this is a disingenuous argument, because the PUC has not objected to the prudence of Edison's purchases. Indeed, the Edison lawyers say the next phase of the case should be very brief because the PUC, in effect, consented to Edison's prior actions. Attorneys for the PUC and the consumers group disagree sharply, saying a bevy of issues need to be reviewed in detail. There is no timetable for further proceedings in the Edison case. The next hearing on the PG&E case is scheduled for Jan. 30 in Oakland. NEWS Stealthy Deal Protects Profits of PG&E's Parents Christian Berthelsen Chronicle Staff Writer 01/16/2001 The San Francisco Chronicle FINAL A1 (Copyright 2001) PG&E Corp. has quietly won approval from federal regulators to restructure itself in a way that shields the parent company's profits, and shareholders, from the mounting debts of the utility it owns. The move appears to allow Pacific Gas and Electric Co.'s parent to record substantial profits while maintaining that its subsidiary, which supplies power to 4.5 million customers, is teetering on the edge of bankruptcy and trying to force ratepayers to pick up the tab. The corporate restructuring, approved by the Federal Energy Regulatory Commission on Friday, came as a surprise to consumer advocates and state leaders dealing with the energy crisis -- including Gov. Gray Davis. They have been working feverishly the past seven days to construct a deal that would alleviate debt pressure on PG&E and Southern California Edison by having the state of California buy power and provide it to the utilities at cost. Steve Moviglio, a spokesman for Davis, said the governor was displeased by PG&E's move, although he said it was not likely to derail the state's efforts to intervene in the crisis. He also said Davis was "disappointed that FERC acted in the middle of the night without notice to all parties." Ratepayer advocates and even some state officials have said that any aid to the ailing utilities should be offset by the huge profits that PG&E Corp. has made during the crisis from electricity generation and trading revenues. The money has certainly flowed in the other direction, they argue. In the past, PG&E Corp. has used revenues from the utility to pay down corporate debt, pay stock dividends and buy assets in other states. PG&E Corp.'s action appears to eliminate that possible means of paying off at least part of the $2 billion in debt incurred since November by its utility, Pacific Gas and Electric Co., as it bought power at prices higher than it can legally charge customers. "It's certainly a response to them feeling the threat that the holding company's going to be held responsible for all this," said Bob Finkelstein, an attorney for The Utility Reform Network, an advocacy group. Meanwhile, California's energy crisis continued in full force yesterday, as the California Independent System Operator issued a Stage Two emergency, meaning that demand had reached within 5 percent of the state's electric supply, prompting requests to certain large users to shut down and conserve power. This occurred despite a national holiday, Martin Luther King Day, on which most businesses were closed and demand was forecast to reach about 30,000 megawatts, a fairly modest number. Further, conditions appeared as if they were going to worsen imminently. Edison said it will be unable to pay bills coming due today, and PG&E said it has only about $500 million on hand to cover what it owes. Bankruptcy filings by both utilities appeared more likely. State leaders were still in negotiations yesterday to broker a deal in which California's Department of Water Resources would step in and buy power on behalf of the utilities, who are facing a growing inability to pay for their purchases. The talks were reported to be breaking down, however, because Davis refused to consider raising California rates or backing utility debts with a letter of credit from the state. In San Francisco, state Senate President Pro Tem John Burton said legislation passed last week by the Assembly will probably make its way to the governor's desk by the end of the month. One bill would change the makeup of the boards that oversee the state's power market, and the other would prohibit utilities from selling off their power-generating assets. In the midst of yet another Stage 2 electrical emergency the Democratic leader said, "I want the people of California to have long, stable, available energy throughout the rest of our lives." But in the short term, with the threat of rolling blackouts and urgent requests for power conservation, Burton stated the obvious: "Turn the goddamn lights off," he said. NO CHALLENGES TO RESTRUCTURING The Federal Energy Regulatory Commission approved PG&E's restructuring plan on a 3-to-1 vote on Friday. It was apparently described in a Dec. 28 public notice as a stock transfer, and thus flew under the radar screens of most observers. Details of the plan were first reported in the Wall Street Journal on Monday. Greg Pruett, a spokesman for PG&E Corp., said the intent of the plan was merely to allow another unit of the corporate parent, National Energy Group, to receive its own credit rating that would be weighed independently of the troubled utility. But he acknowledged that all or nearly all of PG&E Corp.'s assets outside the utility are held by National Energy Group and that the move would reduce the liability for the corporation. Although it was unclear whether PG&E informed state leaders of its plans, Pruett said the notice of the meeting was publicly available and had at least been provided to the Public Utilities Commission. In addition to proceeds from the sale of power plants and other revenues that PG&E has forwarded on to its corporate parent, the utility has reaped windfall profits during the crisis from the generation and sale of electricity and has not applied those profits to its own debt. To do so would require an accounting rule change by the California Public Utilities Commission, but company officials have maintained that should not be done. PG&E IN DEBT TO ITSELF Critics say that PG&E is its own biggest debtor, with money flying out of one pocket and into the other and that nearly half of its debt is owed to itself. In the third quarter of 2000, the company reported a 22 percent increase in profits, with a net income of $225 million, while saying it expected California consumers to eventually pick up the tab for its debt. --------------------------------- ON TAP TODAY -- Shortage: Electricity demand is expected to grow as Californians return to work from a three-day weekend, increasing the likelihood of energy emergencies. -- Talks: Energy officials huddle in Washington and Sacramento over Gov. Gray Davis' plan for the state to buy energy for the beleaguered utilities. -- Credit: If Wall Street doesn't like the plan to rescue the state's ailing utilities, it may begin downgrading stock and bond ratings - even to "junk" status. -- Payments: Southern California Edison has a multimillion dollar bill coming due, but the company says it has no money to pay.
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