Here's a quick overview of the problem.
Dimming in the Golden State?
By Christopher Edmonds
Special to TheStreet.com
3/16/01 6:02 PM ET
After spending nearly two months in suspended animation -- an apparently familiar condition -- the California Legislature is getting a wake-up call from a small independent power producer.
Coram Energy Group, which provides wind-generated power to Southern California Edison, the utility subsidiary of Edison International (EIX:NYSE - news - boards), said Thursday it had signed a petition seeking to push Edison into bankruptcy. Coram's owner, Brian O'Sullivan, says Edison hasn't paid in months and owes it $350,000. O'Sullivan "has only $41,000, or one month's worth of cash remaining, which he is using to pay his staff members and other absolutely necessary payments," Credit Suisse First Boston analyst Paul Patterson said in a note to clients Friday. O'Sullivan said he will be forced to shutter Coram unless he is paid.
Coram is a qualifying facility, or QF. The QFs -- typically small, entrepreneurial companies that generate power from nontraditional sources like wind, water and the heat of the earth -- provide California with about 30% of its power. Utilities in the U.S. have been required to purchase power from QFs under a federal law passed in the 1970s.
That's not to say that large utilities aren't also involved in the QF business. FPL Group (FPL:NYSE - news - boards), one of the country's largest wind-power generators, owns a number of qualifying facilities in California. Edison and PG&E's (PCG:NYSE - news - boards) Pacific Gas and Electric subsidiary collectively owe QFs more than $1 billion.
For the court to accept Coram's involuntary bankruptcy petition, two other creditors of Edison must sign it. Rounding them up shouldn't be too difficult. The Independent Energy Producers Association, or IEPA, an association of QFs, said earlier this week that the petition would gain support unless momentum toward a solution to the power crisis picks up in the Legislature.
"We believe that it will be fairly easy for Coram to collect the other two signatures needed to make a petition valid," noted First Boston's Patterson. "We believe that the QFs pose the greatest risk of filing involuntary bankruptcy against the utilities because of their dire financial situation."
Gov. Gray Davis and the Legislature have accomplished very little in several weeks. Davis says he's continuing to negotiate with the utilities about a plan to return Edison and PG&E to financial stability, but news of progress has been eerily absent in recent dispatches from Sacramento. Both the governor's plan for the state to purchase the transmission assets of the utilities for more than $6 billion and a state-supported bond issue to aid the utilities with the balance of their debt appear to have lost steam. While the Bush administration indicated this week it would not block the plan, neither PG&E nor Edison seems to be on board with Davis.
And, even if they are, legislative approval is far from certain. "Although Gov. Davis and the utilities are purportedly still negotiating a comprehensive recovery plan, there is no assurance of cooperation by the state legislature," notes Patterson.
Will They Ever See $20 Again?
Edison and PG&E sink toward single digits
Both Edison and PG&E traded down on the renewed risk of bankruptcy. On Friday, Edison lost $1.35, or 10%, to $12.24; PG&E traded off $1.50, or nearly 12%, to $11.60.
From Crisis to Nuisance
For the larger power generators doing business in California, the lack of action from the Legislature suggests a lack of urgency. "This has gone from being a crisis to a nuisance," says a source from one power generator. "It has gone on long enough."
Not only is that the prevailing attitude among the QF crowd but apparently among the large generators as well. A group of generators is scheduling a meeting next week to discuss possible collection strategies, including the possibility of collecting from bankrupts. "We're to a point where it's about time to say enough is enough," says the source.
It remains unclear whether anyone, including even the QFs, are actually willing to file a petition to push either Edison or PG&E into bankruptcy. Such a filing, while moving the process toward resolution, would also reduce control over the solution.
"So far politicians, regulators and distribution companies have angled to avoid bankruptcy court when necessary and we don't think they will let a couple of small suppliers change that," Morgan Stanley Dean Witter analyst Kit Konolige told clients in a note Friday morning. "The action could act as a catalyst to jump-start stalled legislation."
Still, if there isn't a political solution soon, the QFs might be joined by some powerful allies. Last month, Dynegy's (DYN:NYSE - news - boards) Steve Bergstrom said he is quickly running out of patience. "My interest is getting this resolved and getting Dynegy paid 100 cents on the dollar," he said at the UBS PaineWebber energy conference. "The only threat today is bankruptcy. We don't want to do that, but at the end of the day we have to protect our shareholders."
Therein lies the risk: that a large creditor decides to join the bankruptcy fray and the process snowballs. And, before you know it, both utilities are in bankruptcy. "If it looks like the petition has momentum it could open the floodgates with other suppliers piling on to avoid being left behind," notes Konolige. "Once that happens it could get harder to stop the process and, of course, if a judge rules the utilities are technically bankrupt, there is no turning back."
Which leads to the real concern: Any judge with a calculator would likely reach that conclusion today.
Action: No Gray Areas Here
The growing chance of bankruptcy combines with Energy Secretary Spencer Abraham's suggestion that blackouts in California this summer are inevitable to scream for action from California pols.
That will require leadership and political courage, something that, to date, has been in as short supply as electricity.
It also means higher power bills for consumers. "It is becoming increasingly likely that a rate increase, or some other cash-flow stream, will have to be established sooner rather than later," wrote Konolige. Trying to keep his pledge not to hike electricity rates, Gov. Davis has been suggesting a bond issue that would be repaid by California taxpayers, who are known as ratepayers when they're shelling out for power.
The utilities are out of money and the state is buying power in their place. But the state has already overspent current allocations for power and Davis has all but admitted his hopes for buying juice for about $55 a megawatt-hour is nothing but a dream. "There simply isn't enough money to go around," notes Konolige. "While that has been obvious for the utilities, it is increasingly a problem for the state itself."
California is spending nearly $2 billion a month on power and summer isn't even here. That suggests the state would run through $10 billion in bond money well before the peak summer cooling months.
Without some meaningful action by Davis and the Legislature, the bankruptcy train is about to leave the station. "The minimum required to get the QFs and their suppliers comfortable will be either action on SB47(x) [legislation detailing power contracts and payments for the QFs] or an unambiguous position by the governor that rates would rise soon."
The bulb continues to dim.
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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. |
