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Enron Mail |
Executive Summary
Discussions continue today over bill AB1X, focus will be on price and term. New legislation introduced today whereby the state will try to save the utilities from bankruptcy by taking ownership of utilities' hydro assets in exchange for rate increases. Wednesday, state receives bids from auction, rate ranges are expected to be between 5.5 and 8.0 cents per kilowatt hour. Mid week, audit findings will be released; audit expected to show PG&E's utility subsidiary handed over $5B to the holding company. The holding company used $4.4B to pay shareholder dividends and buyback stock. State commissioned study to see who would benefit more in a possible bankruptcy scenario. Bankruptcy still very possible for both companies. Davis concerned about possible ballot issues and how those may effect futue solutions or "bail out". Legislation There will be continued discussion regarding bill AB1X in the Senate today. The discussion will focus on the rate cap of 5.5 cents per kilowatt hour as well as the term. Assemblyman Keeley, the author, indicated that he believed 5.5 cents was "a fantasy" and impossible to obtain. Today, Assembly Speaker Bob Hertzberg, D-Sherman Oaks and Assemblyman Fred Keeley, D-Boulder Creek will introduce legislation whereby the state would temporary or permanently take both PG&E and Edision's hydroelectric facilities or transmission lines (or both) in exchange for keeping the utilities out of bankruptcy. The state would allow PG&E and Edison to impose rate increases, however, the rates would not rise beyond the hikes approved earlier this month by the CPUC as an emergency surcharge. The money collected from consumers would go toward paying off their current debt and the state would then enter into long-term contracts with power generators. Under the bill, the state of California would control 10% of all California's electricity. As you can imagine, this legislation has not received unanimous praise. According to recent corporate filings, PG&E's hydroelectric plants alone would be valued between $3 and $5 billion. This amount just happens to be what Davis estimates to be the final amount of money the state will have to guarantee once the audit of the utility companies is released and the political pressure is escalated on the parent companies to absorb some of the $12 billion in debt. Davis is telling people that he thinks the audit will show the state should help with about $4 billion in debt, while the utilities, of course, say the full $12 billion should be covered. On Wednesday, state officials will see the results of sealed bids from energy suppliers for long term contracts and see how close to reality their effort to keep utility rates unchanged for consumers will come. Davis insists there are already several bids for his 5.5 cents per kilowatt hour ceiling, though few agree with his opinion. A handful of smaller, independent electricity providers with about a 30% share of California power market, indicated Sunday night they would come down to "less than eight cents" or less than half of what they currently charge, in return for the stability of long term contracts. Because consumers pay about 6.5 cents per kilowatt hour for electricity under current PUC rules, any hope California has to "work off" the back debts for these utilities lies in hitting something very close to Davis' price cap, without falling back on higher prices for consumers. The level of bids will be particularly important since bond rating agencies moved to put the state of California on a Credit watch on Friday, worried that there was no obvious long-term repayment plan for the billions of dollars they are on the hook for spending to keep the lights on in the state. Utility's Audit By the middle of this week, California auditors will release their findings about how much money PG&E and SoCal Edison actually owe to institutions outside their own holding company structure. This will define the limits of what the state will guarantee, if they guarantee any of the debt. The truly explosive part of the audit may be its findings that the two companies used billions of dollars from consumers to buy back their own stock in recent years. A source with knowledge of the audits said the audit is expected to show that in the last three years, PG&E's utility subsidiary handed over about $5 billion to the holding company. Of that total, the holding company used $4.4 billion to pay shareholder dividends and buyback shares of its stock. Another finding from the audit shows that state helped caused the current power crisis when regulators, at the time of deregulation (under the direction of Former R-Gov. Pete Wilson), forced the two utilities to sell at least half of their power-generating plants. Auditors are expected to say that if the utilities still owned all these plants, electricity would cost only 7 cents a kilowatt hour, compared with over 30 cents an hour on average in December and January. Bankruptcy The threat of bankruptcy is still very real for both utilities. Senior advisors said that these utilities were on the path often followed by utility companies that ended in bankruptcy. As all the parties involved hunker down for another intensely political week, they all remain determined to avoid bankruptcy, but to push this as close to the brink as possible in the hopes of squeezing out an advantage. Under such conditions, the risks of one or more of the players fumbling and triggering the great unknowable outcome of bankruptcy, is still quite high. California's political leaders order a series of independent analyses to determine who would suffer most in a case of bankruptcy, the state or the two utilities. The short answer was that no one has any idea. Below are the findings of the report and some of the possible scenarios that would face a bankruptcy judge: 1) Would the companies be eligible for Chapter 11 style temporary bankruptcy? Some of the advisors thought that PG&E and Edison's finances were so bad that Chapter 11 style temporary bankruptcy may not even be an option. Advisors said that a bankruptcy judge might take a good look at the corporate debt load and decide that reorganization would do no good and order the companies into full liquidation. This would most certainly be guaranteed chaos. 2) Could the bankruptcy court actually force the PUC to raise the price of electricity to consumers? The legal basis for passing on rate increases to consumers is a lot less solid than originally thought, particularly if there is widespread public outrage directed at the electricity companies. And there is still the question of the unilateral power of a bankruptcy judge. 3) If the bankruptcy judge takes his job of protecting corporate assets seriously and finds that PG&E and Edison cannot afford to buy electricity, he could order them to stop buying it and thus lead to massive power outages. 4) If the utilities go into bankruptcy, the first creditors in line would be the lenders and bondholders with collateral pledges. The state could become almost the last creditor in line as it is just another electricity supplier (one of the reasons why suppliers won't sell electricity on credit to these companies now). 5) If the two companies went bankrupt, it would be the largest bankruptcies in history, straining just about everyone involved in the process. 6) The corporate approval allowing the parent company to segregate assets from the utility by the FERC for PG&E and already in place for Edison may be far less effective than the utilities or the ratings agencies currently think. This is particularly true if this week's audit shows the two corporations transferring billions of dollars in the last few years into stock buybacks and shareholder dividend payments. Davis Opinion polls show that Governor Gray Davis is getting high marks for his job, and the utilities are increasingly viewed as the culprits. One of Davis concern's is, according to a senior official in the Governor's office, that a deal is carved out that triggers a popular ballot initiative which is so anti-utility and anti-business that it cripples future growth in the state. According to a senior official, "No one thought Howard Jarvis and his property tax initiative would succeed in destroying our education system, but he did, with one just ballot line and a lot of popular revulsion. The threat of direct, popular action is at least as large now as then." Consumer advocate Harvey Rosenfield is already threatening to draw up a ballot initiative at the first sign that individual electricity consumers are being asked to help the utility companies repay their debt through higher rate-payer bills. This official goes on to say, "The anger at utility companies is so high here, that almost anything Rosenfield could think of would pass and we couldn't do anything about it." This threat has begun to complicate the one escape route on the debt front that had always appeared wide open to political leaders -- floating a bond issue or a guarantee for the money owed to institutions outside the corporate holding structure, and then letting the companies work that off with profits over the next several years.
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