Bloomberg article frames the debate well for the upcoming Cali power legislation. Lots of wishful thinking on the part of Davis and the legislature, IMO:
quote.bloomberg.com
01/14 16:22
California Lawmakers Moving to Let State Buy Power (Update3)
By Daniel Taub
Los Angeles, Jan. 14 (Bloomberg) -- California lawmakers plan to introduce legislation this week that would allow the state to buy electricity on behalf of its two biggest utilities, saving them from bankruptcy, Governor Gray Davis said.
Details of the plan will be worked out today and tomorrow, Davis said last night, after taking part in a seven-hour teleconference linking government and power-industry officials in Washington, D.C. and Los Angeles.
A bill will be introduced Tuesday, Assembly Speaker Robert Hertzberg said. Davis said the state could buy electricity for far less than the utilities, and sell it to them at a cost well below the rates they collect from customers. The utilities would use the difference to help pay off billions of dollars in power-buying debt, he said.
``There will be no rate increase,'' Davis said.``Obviously, the utilities are not going to cover all of their costs.''
Generators say they're studying the proposal, with Duke Energy Corp. spokeswoman Cathy Roche calling it ``definitely promising.'' To make it work, though, power producers must be able to lock in lower prices for the natural gas they use to fuel many of their plants, she said.
Consumer advocates were wary.
``The questions remains: Will the ratepayers be picking up the tab for the failures of deregulation?'' asked Douglas Heller, of the Foundation for Taxpayer and Consumer Rights, based in Santa Monica. ``We should be thinking about protecting the ratepayers moving forward, not the utilities looking backward.''
Contracts
Davis has asked generators to sell power to PG&E Corp.'s Pacific Gas & Electric and to Southern California Edison, owned by Edison International, under three-year contracts for $50 to $55 a megawatt-hour.
``The price doesn't seem high enough,'' said Ray Niles, an analyst at Salomon Smith Barney. ``You can't ask a business to sell below its cost of production.''
About $70 to $80 a megawatt-hour sounds more reasonable, said Michael Worms, senior vice president at Gerard Klauer Mattison. ``I don't see gas prices coming down a lot this year,'' he said.
Natural gas prices have almost quadrupled on the New York Mercantile Exchange in the past year as supply has lagged demand. Power producers say California's stringent air-emission standards also drive up costs and prevent construction of new plants.
Eventually, the utilities' customers will have to shoulder some of the burden, said Barry Abramson, senior utilities analyst at UBS Warburg. Davis's attempt to shield consumers from rate increases is ``just not realistic,'' he said.
``You cannot expect to pay the prices that were in effect from a few years ago,'' Abramson said.
``I was surprised to see the vehemence'' in Davis's insistence that rates won't rise, said Steven Fetter, a managing director at credit-rating company Fitch Inc. ``(An) agreement is going to have to provide some give and take on all sides.''
Lower Costs
Davis is betting that gas prices will fall and long-term contracts can keep power costs in check. California's power prices have soared in part because the state's three investor-owned utilities weren't allowed to enter such contracts under the state's 1996 deregulation law.
Instead, PG&E, Edison and Sempra Energy, owner of San Diego Gas & Electric, must buy most of their electricity through the state-run California Power Exchange, bidding against each other when demand surges.
A shortage of supply has made things worse. California hasn't added a major power plant in about a decade, while demand has climbed as the state's economy grew. This winter, poor weather both boosted demand and reduced imports from hydroelectric dams in the Northwest. The state narrowly avoided blackouts last week after plant outages caused a statewide emergency.
Electricity prices on the California Power Exchange averaged almost $130 a megawatt-hour during the past year, more than twice what Davis is asking generators to accept. The previous year, prices averaged about $48. A megawatt-hour of power is enough to light 1,000 U.S. homes for an hour.
If generators don't agree to Davis's terms, he has other options. State Treasurer Philip Angelides has proposed creation of a power authority to buy and run the state's transmission system and build power plants. State Senator John Burton, the majority leader, has been working on a related bill, aides say.
Debt Ratings
The governor is a Democrat, and his party controls both houses of the Legislature. He didn't say whether the bill being drafted would create a power authority or authorize the state's Department of Water Resources to buy electricity.
The water department already has purchased some power for the cash-strapped utilities, which say they have almost $12 billion in debt from power costs. Davis said the debt is closer to half that amount, because the utilities can pay off much of it with profits from their own power plants.
Power sellers aren't the only ones to balk at selling to the utilities, which have trouble borrowing money because of their poor credit ratings. Davis has asked President Clinton to use emergency powers and require that out-of state natural-gas suppliers keep selling fuel to Pacific Gas & Electric. The utility has 3.8 million gas customers.
J. Aron & Co., an energy-trading unit of Goldman, Sachs and Co., has stopped deliveries and Western Resources Inc. and Duke will do so in a week because of credit concerns, PG&E said Friday.
Fitch has downgraded the utilities' debt to ``junk'' levels, and Moody's Investors Service and Standard & Poor's Corp. lowered their ratings to one notch above that. Trading in the utilities' bonds has all but halted.
A 90-day, 10 percent increase in electricity rates that regulators granted the utilities this month won't even cover their current costs, much less pay off past debt, ratings companies said.
Shares of both San Francisco-based PG&E and Edison, based in Rosemead, California, have fallen more than 55 percent since November. Both companies have cut their dividends and fired workers.
PG&E shares fell 75 cents to $11.56 Friday. Edison fell 31 cents to $10.19.
Consumers
PG&E Chairman Robert Glynn and Edison Chairman John Bryson declined to comment on Davis's proposal, as did Southern Energy Inc. spokesman Chuck Griffin. ``We're studying the thing,'' Reliant Energy Inc. spokesman Richard Wheatley said.
Participants in yesterday's video teleconference included Gene Sperling, President Bill Clinton's top economic adviser; U.S. Treasury Secretary Lawrence Summers; and the heads of some of the biggest U.S. energy companies, including Enron Corp. Chairman Ken Lay and Williams Cos. Chairman Keith Bailey.
Among those not present were representatives of consumer groups. Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights, said advocates were told there wasn't room, the Los Angeles Times reported.
``You always will have a problem when politicians and corporations meet in private,'' the foundation's Heller said. ``The public hasn't had a chance to scrutinize this deal.''
During the teleconference, participants discussed ways to meld ideas that emerged from meetings last week in Washington into a unified plan, Edison's Bryson said.
Davis and legislative leaders from both parties were in Los Angeles, along with PG&E's Glynn, Edison's Bryson and Sempra Chairman Stephen Baum.
Joining them were leaders of some of the state's largest power producers: Lay, Bailey, Dynegy Inc. President Steve Bergstrom and Calpine Corp. Chairman Peter Cartwright.
In Washington, participants included Sperling, Summers, Federal Energy Regulatory Commission Chairman James Hoecker, and executives from Duke, Reliant and Southern Energy Inc. |
