In California, Winter of Discontent Turns to Spring -- and More Discontent
By Christopher Edmonds
Special to TheStreet.com
3/20/01 10:22 AM ET
Spring begins Tuesday.
Spring, not summer, begins Tuesday. That's spring with cool breezes, April showers and May flowers. Not summer, with hot, sultry temperatures, humming air conditioners and the California power grid pushed to the max with wires popping, lights flickering and stores closing as a result of blackouts rolling across California like a quake through the ground.
Yet, on Monday that is exactly what happened. For the first time since January, rolling blackouts crisscrossed the Golden State, including -- for the very first time since the crisis began -- blackouts in the San Diego area, territory served by Sempra's (SRE:NYSE - news - boards) San Diego Gas & Electric subsidiary.
The blackouts were ordered by the California Independent System Operator, or Cal-ISO, when power supply outstripped demand shortly before noon PST. "Operating reserve started out low [Monday] morning when 11,500 megawatts worth of power plants reported they couldn't produce electricity due to planned maintenance or malfunctioning equipment," said Patrick Dorinson, director of communications at the Cal-ISO. "By midmorning another 1,000 megawatts became unavailable when two units at a desert facility tripped off-line."
The blackouts affected nearly 200,000 customers across the state, with the Cal-ISO considering a reduction of up to 2,000 megawatts of supply, enough power to potentially impact 2 million homes. Late Monday evening the blackouts had directly hit 105,000 PG&E (PCG:NYSE - news - boards) customers, more than 40,000 Edison (EIX:NYSE - news - boards) customers and about 20,000 in the San Diego area, including single-family homes and major office and retail complexes.
If that isn't bad enough, we detailed another burgeoning problem in California on Friday: the shrinking amount of power provided by the state's "qualifying facilities," or QFs. The ISO estimates that half of the state's QFs are not operating because of "reported financial concerns" (read: not getting paid by the utilities or the state's power purchasing pool), "low wind or an inability to purchase natural gas to run the plants" (read: don't have money to buy gas to generate power for which nobody apparently intends to pay them).
QFs are generally small independent companies that generate power from renewable sources and natural gas. Collectively, the QFs produce up to 30% of California's power. According to the California Public Utilities Commission, or CPUC, PG&E, the parent of Pacific Gas & Electric, and Edison International's Southern California Gas & Electric utility subsidiary collectively owe more than $1.5 billion to the QFs for power received since late last year, and that is just through March 8.
On a final powerless note: There may have been just a little justice in those searching for power amid the blackouts. Folks in the CPUC's San Francisco headquarters found themselves coping with no power, many reportedly working with battery-powered lanterns.
The Other "B" Word
While blackouts were on the minds of many California consumers Monday, a much more damaging concept -- bankruptcy -- was front and center for creditors of PG&E and Edison. The two utilities have amassed more than $12 billion in debt over the past several months from buying wholesale power at skyrocketing prices while being forced to sell it to retail customers at rates frozen at 1996 levels.
And a PUC filing last week, which ordered a reopening of the audits of the two utilities in question, shows the growing and dire nature of the company's defaults. Including commercial paper, payments for power to the QFs, the Cal-ISO and charges from the California Power Exchange, the now-bankrupt state-sponsored power market, PG&E's default amount totals nearly $3.3 billion and Southern California Edison has $1.7 billion of payments in default.
While a number of major creditors -- power generators like Duke (DUK:NYSE - news - boards), Dynegy (DYN:NYSE - news - boards), Mirant (MIR:NYSE - news - boards) and Reliant (REI:NYSE - news - boards) -- have remained patient for months while possible solutions floated in the political halls of Sacramento, their patience is beginning to wear thin. Both formal and informal creditors' committees have been established to consider options, including forcing the utilities into bankruptcy.
Generators' hands may be forced if the QFs have their way. Last week, Coram Energy, a small, private wind generator that is owed $350,000 by the utilities, circulated a petition among other QFs looking for two others to hop aboard an involuntary bankruptcy petition. If successful, the utilities named in the petition would have to show cause as to why bankruptcy shouldn't be considered. Given the debts described above, that case will be hard to make.
Given the stakes, many analysts think Coram will have little trouble convincing others to join in the battle. "The small QFs have less financial flexibility than the larger generators and banks and therefore are in a more precarious financial position as a result of the payment default by Edison," Deutsche Banc Alex. Brown utility analyst Jay Dobson wrote in a report to clients on Monday.
However, in a situation where protecting your credit interests is paramount, action by the most skittish of creditors can become the action of the masses. That means if a bankruptcy petition is submitted, it won't be long before the creditor filing party begins. "If the QFs go, we all will most likely have to go," says a source close to the negotiations involving the creditors. Generators have been considering options and discussing them with many of the QFs, looking for common ground. "Everyone still would like to avoid bankruptcy," said the source. "However, we are quickly running out of both options and patience." An ad hoc group of creditors reportedly met for hours Monday afternoon to peruse a group of options none like to consider.
Credit Suisse First Boston analyst Paul Patterson said Coram's bankruptcy petition could be filed as early as Thursday. And, Patterson thinks such a filing may hinge on progress in negotiations between California Gov. Gray Davis and the utilities in a plan to provide long-term financing for the utilities debt.
Patterson's optimism is waning. "Although both companies emphasized on Friday that transmission asset negotiations with Gov. Davis are progressing, we sense that discussions may have lost some momentum in recent days," he told clients on Monday. "In addition, legislative action on much needed restructuring of QF contracts has also apparently stalled. Without a solution, the risk of involuntary bankruptcy only increases."
EDIT. Knowing CA politics, the issues in question will not be resolved soon.
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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. |
