|
|
Enron Mail |
---------------------- Forwarded by Richard Shapiro/NA/Enron on 04/20/2001
11:39 AM --------------------------- "SCIENTECH IssueAlert" <IssueAlert@scientech.com< on 04/20/2001 05:35:54 AM To: cc: Subject: Deal for SCE's Transmission Assets Appears Dead on Arrival Today's IssueAlert Sponsors: [IMAGE] The CIS Conferencec provides utility management personnel unequaled insight and current information on Customer Relationship Management (CRM), E-Commerce, Technologies and Marketing. Fifty-four sessions conducted by utility industry representatives will focus on issues facing the industry. Over 100 companies will exhibit the latest technologies and services. Former President George Bush is our Honored Keynote Speaker www.cisconference.org e-ProCom Europe for Utilities and Energy e-Business Conference & Exhibition - May 22-23, 2001, Amsterdam, The Netherlands e-Commerce/e-Business/Integrating the Digital Utility/ Pan-European attendance from the major utilities and energy players can be found at the e-ProCom Europe: for Utilities & Energy e-Business. Call 31-346-590901 or email jhh@synergy-events.com or visit our web site at: www.e-procomseries.com. [IMAGE] In an exclusive SCIENTECH PowerHitters interview, Jeff Sterba, CEO of Public Utility of New Mexico (PNM), shares some keys that have helped the small company find success in the wholesale power market. He also looks at issues affecting deregulation both in New Mexico and across the country. Read the questions Sterba was asked at: www.scientech.com [IMAGE] [IMAGE] April 20, 2001 Deal for SCE's Transmission Assets Appears Dead on Arrival by Will McNamara Director, Electric Industry Analysis [News item from Reuters] California Gov. Gray Davis' billion dollar plan to save utility Southern California Edison (SCE) from bankruptcy is in deep trouble and could be rejected by legislators. Legislative sources said the governor was having so much trouble gathering support for his plan that he could not find anyone to sponsor a bill. One Assembly official called the SCE bailout plan "the most unpopular piece of legislation in years." Analysis: Even when this deal was announced as an "agreement in principle" some 50 days ago, it seemed too far-fetched to be possible. The only party that clearly seems to benefit from the agreement forged between Gov. Davis and SCE is the cash-strapped utility. California energy customers appear to get the short end of an expensive stick, while the state seemingly gains nothing of value beyond what could amount to a whole new set of administrative problems. Thus, despite the hype with which Gov. Davis announced this rescue plan for SCE, California legislators-both Republicans and Democrats-are saying "not so fast" and appear to be collectively opposed to the plan as it currently stands. As it becomes apparent that the California Legislature will not approve this plan, the general consensus is that Gov. Davis' offer to SCE is simply a financial bailout for the utility that provides no benefit to California residents. For background on the details of Gov. Davis' rescue plan for SCE, please reference my IssueAlert from 4/11/01. In a nutshell, the state of California agreed to buy SCE's 12,000-mile transmission grid, which covers much of the southern half of the state, for $2.76 billion, 2.3 times the system's book value. SCE would be allowed to use the proceeds to pay off its existing debt, restoring it to financial stability. Both the California Legislature and the CPUC need to approve this deal by Aug. 15 or else the agreement is terminated. In the highly politicized climate under which the California energy crisis has unfolded, it is imperative to understand the agendas that each stakeholder possesses. For instance, keep in mind that Gov. Davis' political career has been severely damaged by the state's energy crisis, and the fact that Pacific Gas & Electric Co., California's largest utility company, declared bankruptcy has only further tainted the governor's standing. Perhaps more than any other goal, Davis wants to keep SCE from also filing for Chapter 11 protection. In addition, Davis believes he will be better able to solve the crisis if he assumes control over the state's transmission grid (much like the state has assumed the role of a power purchasing agent). Normally, a measure supported by the Democratic governor could be easily approved by California's Democrat-controlled legislature. However, the energy issue has divided support for Davis even within his own party. Consequently, the governor needs the support of both Republicans and Democrats in order to see his rescue plan for SCE pass. For its part, there was very little reason why SCE should not have agreed to the governor's terms. From multiple standpoints, the utility gains enormously from the governor's offer, while at the same time it avoids lengthy and costly bankruptcy proceedings. Under the agreement, SCE gains a method for pulling itself out of debt, via rate increases that probably would be implemented over the next 15 years. Further, its parent company Edison International gets to hold on to a reported $4.8 billion that SCE has provided to the corporate operation since 1997. (The exception to this is a $400 million tax refund that Edison International would give back to SCE). While Davis referred to his plan as a "good, balanced deal," some consumer groups have charged that SCE "has taken the governor to the cleaners." Meanwhile, California customers clearly lose in the deal because they would be forced to ultimately pay for the $2.76 billion that the state needs to buy the transmission assets. The state would purchase the lines with bonds that would be paid off by transmission fees charged to SCE customers. It is presently not clear whether or not those fees, which are already part of monthly bills, would be sufficient; therefore, it is likely that rates would be increased to support the purchase. In addition, the subtext of the deal is that customers would ultimately pay to drive down SCE's debt, which was accumulated as a result of unrestricted wholesale power costs charged by generators. Consequently, California customers would bear the responsibility for prices that FERC has at times deemed "unjust and unreasonable." Ultimately, however, it is the California Legislature and CPUC that will have the authority to approve the agreement between Gov. Davis and SCE. These two agencies must ultimately decide if the plan is good or bad, and weigh the impact for various stakeholders. Presently, the legislature in particular is finding that there are many questionable aspects about the plan. For instance, what value would there be in the California government owning only one portion of the state's interconnected transmission system? PGOCorp. has walked away from the negotiating table and has expressed little interest in selling its transmission lines to the state. No agreement with Sempra Energy (parent of San Diego Gas & Electric) has been reached either. Thus, if the Gov. Davis / SCE agreement is approved, the state of California would gain ownership rights to only a portion of the overall transmission system in the state. Many legislators challenge the value of this, especially when it is considered that most of the congestion that leads to higher prices within the state is concentrated along PG&E's portion of the grid. The counter-argument to this point is that, now that its utility is in bankruptcy proceedings, PGOmay not have the choice of whether or not to sell its transmission assets to the state. The bankruptcy judge would make this decision. Thus, some argue, the state may have a better chance of obtaining PG&E's transmission assets if it can first complete a deal with SCE. The second fundamental problem is that causing California legislators to turn their back on the governor's plan is what some have referred to as an "obscene bailout" for SCE and its parent company. Some reportedly believe that Gov. Davis rushed into an overly generous offer for SCE out of anxiety caused by the breakdown in his communications with PG&E. As noted, the $2.76 billion offer for SCE's assets is about 2.3 times their book value, so many legislators are having difficulty reconciling what appears to be an inappropriate price tag (and, once again, a cost that taxpayers and ratepayers would ultimately have to absorb). Currently, SCE customers pay a FERC-approved transmission rate based upon a cost-plus formula. If the state pays 2.3 times book value, it would equate to ratepayers paying two times over for those same transmission lines. In addition, some legislators, including former Democratic allies of Gov. Davis, have suggested that SCE should be forced to enter bankruptcy as Pacific Gas & Electric Co. has done. Naturally, legislators will approach the issue with their constituents in mind, knowing that they will be accountable for how they vote on this plan. Looking at the issue from a customer perspective, one could argue that SCE declaring bankruptcy would create less financial hardship for California customers than bailing out the utility and increasing rates. This will be a major political challenge for California legislators to resolve if the governor's plan becomes sponsored as a bill. If I pull out my crystal ball and be so bold as to make projections in this case, I would predict that there is little chance that Gov. Davis' rescue plan for SCE will pass in its current form. The energy crisis in California has become so politicized that legislators will be very reticent to approve any measure that resembles a financial bailout for one of the utilities, especially without obtaining something of value for the state in return. It is Gov. Davis' personal agenda to obtain control over the state's transmission assets, but I don't see this as being a priority for other California lawmakers. Thus, the deal will be a tough sell unless some new development occurs that puts owning SCE's transmission assets in the state's best interest. Considering the many headaches associated with this business, and the fact that the state has no expertise in this area, I don't see this occurring. Consequently, the game is by no means over for SCE and its potential for bankruptcy does not appear to have decreased to any large extent. One large California utility is already in bankruptcy court. We could be only days or weeks away from seeing SCE head in that direction as well. An archive list of previous IssueAlerts is available at www.scientech.com Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
|