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Utility troubles felt far down the line Edison, PG&E bankruptcies would have ripple effect

By Russ Britt, CBS.MarketWatch.com Last Update: 9:42 PM ET Jan 18, 2001 NewsWatch

LOS ANGELES (CBS.MW) - California's two largest electricity suppliers are likely to shock the deepest recesses of the economy if they slip into bankruptcy.

That's the assessment of experts who say creditors, investors and taxpayers will feel the effects from a drastic financial fallout by PG&E Corp. (PCG: news, msgs) and Edison International (EIX: news, msgs).

It doesn't seem to matter what category, the pain is likely to be shared equally by all three groups. The one thing that does raise deep concerns is the fear that few utilities have been in such dire straits.

"We're in uncharted waters," said Wayne Terry, bankruptcy attorney for Mitchell, Silberberg & Knupp in Los Angeles. "We might be sailing into an area where there might be dragons."

All this may be moot, as the state seems determined to play gladiator and fend off any deep problems that might occur. Few companies command the same attention as a utility firm, and virtually none are as vital to the state's economy. Help is expected for both companies from California and, perhaps, the federal government.

"I don't believe that these utilities can be permitted to fail," Terry said. "They've got to come up with some type of bailout."

But if bankruptcy occurs, consumers may lose power and taxpayers will feel the pinch. Until a cavalry arrives, creditors and investors in both firms could slip through the cracks.

"If these utilities go into bankruptcy, that will have a strong ripple effect through the remainder of the California economy, the Western economy, the national economy and, yes, the international economy. It is that big," U.S. Sen. Dianne Feinstein said in a Department of Energy hearing on Thursday.

Edison International and PG&E power the world's sixth-largest economy. If the power is turned off, tech firms, moviemakers and even breweries could be hurt. These all are companies that export goods to other nations, which need these goods to support other businesses.

The influence is being felt already. Miller Brewing Co.'s facility in the City of Industry has been hit with power interruption, forcing the company to cancel several work shifts, said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County.

Kyser said Miller and several other power-guzzling businesses operate under agreements that allow Edison to turn off the power if it's in short supply. Miller is paying workers even though it has sent them home due to power shortages, he said.

"You just can't operate that way," Kyser said.

Miller officials could not be reached for comment.

Similar stories may surface in coming weeks. But blackouts won't be the only part of the equation, Terry said.

The first to feel the impact of a bankruptcy will be creditors for PG&E and Edison International - and they probably won't feel it for long.

Electricity suppliers for the two utilities will cut off credit and demand cash payments for all power sold to Edison and PG&E. That's when the state would step in and bail out those companies, Terry said.

California already is trying to intervene by having its Department of Water Resources buy power at a discount rate and resell it to consumers. A bill permitting such a move is pending before the California Senate. See related story.

So who's next? That would be unsecured creditors such as the office supply vendors or drinking water suppliers. For those who rely heavily on the utilities for their livelihood, it could mean disaster, said Paul Brent, a bankruptcy attorney with the Santa Monica, Calif., firm of Steinberg, Nutter & Brent.

These companies could end up in bankruptcy themselves or have to work with creditors in order to avoid such a move, Brent said.

"I would expect it could have a significant ripple effect," Brent said.

Then there are investors, a group that could be blindsided. Few power suppliers have gone belly up, leading many to consider them one of the safest buys of all, a so-called "widows and orphans" investment.

A number of school districts have plopped down money for shares in both firms. Other public entities such as Orange County, which had its own bankruptcy problems in the mid-1990s, have invested in the troubled firms.

How did California's utilities get in such a mess? Charles Cicchetti, economist and professor of public policy at the University of Southern California, says it was a combination of things.

It all started with electricity deregulation, which took place in California on March 31, 1998. That's when the state set up a mechanism to allow competition in electricity selling, which had been held by a handful of firms operating as monopolies in certain regions until that point.

To encourage new players to enter the electricity game, the state ordered utilities to purchase any extra power it needed on the spot markets. At the time, few suspected that the utilities would need to resort to spot purchases since power supplies were plentiful. The state had 40 percent to 50 percent excess, Cicchetti said.

Allowing utilities to buy long-term power contracts would have bottled up supplies and kept prices higher for prospective rivals, he added. Those rivals never arrived in a meaningful way.

Then a number of factors came into play. States usually follow set weather patterns in the Northwest and Southwest, meaning suppliers can expect to dole out a certain amount of electricity. Those weather patterns usually complement each other on the power consumption front; the North takes more power at a certain time of year and the South at another time.

But weather patterns in 2000 were unusual. The Northwest was dry, while the Southwest was hot. Both regions gobbled more power during the summer to stay cool, Cicchetti said.

There's more. Strong growth added to power consumption in the technology sector. Further, utilities sold off half their generating power.

So what could ultimately happen? Attorney Terry says it's conceivable that California will end up owning the utilities. Often a creditor ends up getting shares instead of cash in a bankruptcy.

That, however, may be a moot point before too long, he added.

"We can't have the Golden State with the lights out," Terry said.

http://cbs.marketwatch.com/archive/20010118/news/current/power_bankruptcyrisks.htx?source=htx/http2_mw

-- Martin Thompson (mthom1927@aol.com), January 18, 2001

Answers

(Approximately 10% of the population of California is Canadian.)

Ottawa Citizen

Canadians in California cheer B.C. utility supplying power to state

DIRK MEISSNER

VICTORIA (CP) - Energy-sapped California is receiving much needed power boosts from British Columbia's provincially-owned electrical utility. B.C. Hydro is selling power to California as the Golden State attempts to avert state-wide blackouts in what has become an energy crisis.

Hydro spokesman Wayne Cousins said Thursday the Crown corporation is monitoring California's energy situation on an hourly basis, and is supplying energy "as best we can, when we can."

California's energy shortages are helping B.C. Hydro reap record profits, reportedly more than $1 billion.

"I heard on the news last night that what saved our ass was imported power from Canada," said Susan Chung, a former Victoria resident now living in Campbell, Calif., in the heart of the state's Silicon Valley.

"It's just wildly bizarre here," she said. "The whole idea of rolling blackouts is wild. All the lights go out, the traffic lights go out, people are trapped in elevators."

Power outages have yet to hit her community, but it's likely only a matter of time, Chung said.

"I can't begin to imagine what rolling blackouts would mean to this economy," she said. "It's in the millions of dollars for minutes of blackouts."

California Gov. Gray Davis signed an emergency proclamation Wednesday permitting California to spend what was labelled as unknown quantities of state money to purchase power from suppliers.

California's privately-operated power utilities are facing financial disaster because they can't pay their bills.

Southern California Edison announced it could not make $596 million US payments due to various creditors. Pacific Gas and Electric Co., California's other major electricity utility, has a $583 million payment due Feb. 1.

The California Independent System Operator, the company that runs much of the state's power grid, declared a supply emergency earlier this week after reserves dropped below 1.5 per cent of demand.

Electricity costs skyrocketed after California deregulated the electricity business, but did not allow the private companies to pass on cost increases to consumers.

Cousins said B.C. Hydro is selling power to California at market prices, but would not say what those prices were.

A spokesman for California's Independent System Operator told the Los Angeles Times on Thursday: "This is the highest price we've paid for energy all day."

Others complained about price gouging, while a public policy think tank released a poll that concluded more than 90 per cent of Californians believed deregulation contributed to their state's energy problem.

Chip Campbell, a former Toronto resident now living in San Francisco, said California is the architect of its energy problems and B.C. Hydro should make as much money as it can.

"I say soak them," he said. "It's very much a free-market economy down here and the flip part of that is if it's planned badly, I think it's fair for suppliers to charge premium prices."

Campbell said it would be different if there was some sort of natural disaster and utilities charged inflated prices.

"But this is absolutely a manufactured situation," he said. "It's absolutely a risk they took. Gouge, gouge away."

B.C. Premier Ujjal Dosanjh said Wednesday he was reconsidering offering an energy rebate to British Columbians in light of the power situation in California.

The private California power utilities owe money to B.C. Hydro and their current inability to pay may affect the timing of the rebate, he said.

Dosanjh, who must call an election by June, was reportedly considering offering all British Columbians rebates and some targeted tax breaks ranging between $125 and $200 as a way to ease soaring natural gas prices in the province.

-- Rachel Gibson (rgibson@hotmail.com), January 19, 2001.

yahoo

Thursday January 18 11:51 PM ET California Power Crisis Forces Further Blackouts

By Andrew Quinn

SAN FRANCISCO (Reuters) - It was another day in the dark for almost two million Californians as homes and businesses were hit by a second wave of rolling blackouts forced by the state's escalating power crisis.

As public anger mounted and officials debated rescue plans, the state's two top utilities edged even closer to outright bankruptcy -- pushed to the brink by supply problems and the disastrous aftermath of market deregulation.

Power regulators said Thursday that the situation might ease slightly on Friday and over the weekend. But few believed that the nation's most populous state was close to solving what has exploded into a major economic and political crisis.

``It's hour to hour, as it always is when you have this tight of a margin,'' said Patrick Dorinson, spokesman for the California Independent Systems Operator (ISO), which oversees power distribution.

The realities of California's power predicament hit home for almost two million customers in northern and central parts of the state Thursday as the ISO knocked them off the grid for up to two hours in an emergency effort to conserve supplies.

As on Wednesday, when California experienced its first rolling statewide blackouts, the effect was immediate.

Traffic lights blinked off. Refrigerators, cash registers, automatic teller machines and computer terminals died. Classrooms and offices were plunged into darkness. Escalators stopped, while elevators shuddered to a halt -- often with passengers inside.

``It was scary,'' one San Francisco woman told reporters after emergency crews worked for almost an hour to free her and her two small children from one stopped elevator.

The problems thus far have centered on northern California, but California's power problems are statewide. And the blackouts are causing increasing concern in Silicon Valley, where high-tech executives are nervously counting up the cost of lost production time.

``Clearly it is already in the tens of millions of dollars,'' said Carl Guardino of the Silicon Valley Manufacturing Group, an industry association formed to address public policy issues. On Thursday, the state's chief energy regulator declared California ``at the mercy'' of power profiteers and the city of San Francisco sued major out-of-state generators, accusing them of making some $1 billion through illegal price manipulation.

Deregulation Debacle

California's power woes are rooted in the state's 1996 experiment with partial market deregulation, a move which freed wholesale power prices but kept tight caps on the prices that utilities can charge customers.

While the arrangement initially delivered profits for the utility companies, the equation tipped wildly out of balance this year as wholesale prices skyrocketed -- forcing PG&E Corp. unit Pacific Gas & Electric and Southern California Edison (news - web sites), a division of Edison International, billions of dollars in debt and leaving them without sufficient credit to buy the power California needs.

Spot market prices now are about 10 times what they were at this point last year.

The utilities' frightening financial situation was underlined Thursday when the California Power Exchange said it was liquidating Southern California Edison's forward contracts because the utility had defaulted on payment -- effectively blocking the company from future power purchases on the state sanctioned power exchange.

Pacific Gas and Electric Co. (news - web sites), meanwhile, said on Thursday its deteriorating credit rating risked costing it 36 percent of its natural gas supplies by Jan. 23.

Officials Scramble To Find Solution

California's political leaders and its consumers were told clearly Thursday that they were on their own when it comes to solving the state's power problem.

In an interview with Reuters, President-elect Bush offered little hope of immediate federal help to California, which he said was paying the price for a ``faulty'' deregulation law.

And while Energy Secretary Bill Richardson, in a speech in Los Angeles, warned electricity and gas producers he would take them to court if they refuse to sell to the state's embattled utilities, he has only one day left to do so -- Richardson is leaving office on Jan. 20 when Bush takes office.

In Sacramento, where late on Wednesday Gov. Gray Davis (news - web sites) declared an official state of emergency in the state, urgent efforts were under way to craft some sort of solution.

Davis on Thursday signed the first of a series of emergency power bills that are part of a plan to reassert state control over the chaotic power market. Further measures, which are expected to pass quickly, include moves to put the state in charge of buying power for the beleaguered utilities -- a move which, with the current sky-high spot power prices, could cost taxpayers hundreds of millions of dollars for just several weeks worth of electricity.

Even as lights blinked off around the state, a new poll by the Field Institute showed that many Californians believe the crisis was created by energy companies seeking higher rates.

And the city of San Francisco filed suit against 13 out-of-state power producers which it accused of manipulating prices and demanding the return of some $1 billion to consumers.

``I think consumers know when they are being conned,'' City Attorney Louise Renne said. ``This is a clear instance of corporations taking advantage of a deregulated market to make a quick buck.'' Spokesmen for the generating companies have strongly denied such charges, saying they are charging a market price.

-- Rachel Gibson (rgibson@hotmail.com), January 19, 2001.