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Tally shows S.F. poised to operate its own water, power agency
Mercury News November 8, 2001 PG&E to attack public power in court Utility prepares all-out offensive if final vote backs S.F. initiative SF Gate News November 8, 2001 US Power, Gas Companies Restrict Dealings With Enron Dow Jones Interactive November 8, 2001 Study details problems with utility deregulation Dow Jones Interactive November 7, 2001 Tally shows S.F. poised to operate its own water, power agency With spring's blackouts and rate increases beginning to fade from memory, San Francisco was on the verge of becoming a public power city Wednesday amid promises of lower prices, stable supplies and an end to PG&E's monopoly. San Francisco is set to join Los Angeles, Sacramento, Palo Alto and other California cities with publicly owned utilities and hopes to offer comparably low electricity rates once its new municipal water and power agency is in place. But if anything is certain the day after the election, it is that nothing is certain about the future of public power in San Francisco. With 19,000 ballots uncounted, Measure F led by about 2,000 votes. Then there are enormous political and legal hurdles to creating a public utility. Among the most daunting: Coping with likely legal opposition from Pacific Gas & Electric, which has vowed to fight any takeover of its assets. Electing a board of directors from seven San Francisco districts and agreeing on how to proceed. Patching together a power supply from the city's Hetch Hetchy system, new solar energy sources and electricity purchases on the open market. The complex electricity market, the uncertainty of San Francisco's budding solar initiatives and the potential legal delays mean the city's ratepayers will not see any changes soon, said Severin Borenstein, director of the University of California's Energy Institute. ``There's a chance that, despite the vote, San Francisco won't wind up with a municipal utility,'' he said. ``I think this is a shot across the bow, but it's going to unfold over the course of years, not weeks or months. If people think suddenly we're going to see a huge change in the industry, I think they're misreading.'' PG&E officials on Wednesday refused to speculate about the future of the bankrupt utility's operations in San Francisco. But the company pointed out that a second ballot initiative -- Measure I -- to create a municipal utility district for San Francisco and neighboring Brisbane had apparently failed, and that Measure F's lead was still razor-thin. With the apparent failure of the municipal utility district, a very close vote on Proposition F, and a very low voter turnout, ``there is no strong sentiment in favor of municipalization in San Francisco,'' said an official statement. Public power advocates painted a more optimistic picture, saying the obstacles to getting a city power agency running were not insurmountable, and that the failure of the more legally troubled Measure I means municipal power will flow sooner than if both measures had passed. ``We lost a big battle, but we won the war for public power,'' said Ross Mirkarimi, director of the Yes on I and F campaign. ``San Francisco can begin its conversion to a water and power authority.'' The mechanics of establishing the new agency are sketched out in the ballot language. Later this month, the San Francisco Board of Supervisors will carve out seven electoral districts, and candidates for the board of directors will be required to declare for office in December. The election is scheduled for the first week in March and, if necessary, a runoff will be held in April. The new board will be seated in May, and its first action is expected to be commissioning a study showing how best to bring public power to San Francisco. There are a number of possibilities, said Ed Smeloff, assistant general manager for power policy at the San Francisco Public Utilities Commission. The city's PUC, which operates the Hetch Hetchy Water and Power System, would be absorbed by the new power agency. Options include building the city's own electricity delivery system; leasing PG&E's lines to deliver power to the city; or buying PG&E's power plants and distribution system outright, at a cost PG&E estimates at $800 million to $1 billion. The city-run utility would be able to take advantage of tax breaks and low-interest loans to acquire the system, and repay the debt much like a mortgage. The agency would be authorized to purchase PG&E's assets through eminent domain. ``You have to look at the data to decide if you can lower rates by buying out the PG&E system,'' Smeloff said. ``That's the purpose of the study. It's possible it could be less costly to use PG&E's lines and pay them for the delivery of power.'' Even Measure F's most active supporters on Wednesday were beginning to talk about a municipal utility that stops short of a full takeover of the PG&E system. ``In this economic climate you might be able to buy power more cheaply without taking over the infrastructure of PG&E,'' Mirkarimi said. ``With an energy glut coming on the market, they may be able to obtain power other ways. The point is, we have options.'' PG&E to attack public power in court Utility prepares all-out offensive if final vote backs S.F. initiative Pacific Gas and Electric Co., faced with the prospect of losing its right to sell power in its hometown after Tuesday's vote, is preparing an all- out legal battle to block seizure of the utility's power lines, senior executives said yesterday. Officially, PG&E's message following Tuesday's vote is that support for public power is only marginal at best. "There is no strong sentiment in favor of municipalization in San Francisco," the utility said in a brief statement. Privately, PG&E executives said the utility would do anything it takes to stop public power from becoming a reality in San Francisco. A final ballot count will not be available until today at the earliest. But it appeared yesterday that Proposition F was headed toward victory. The measure would allow an elected board to declare eminent domain and purchase PG&E's San Francisco power lines. The fate of a related public-power measure, Proposition I, remained uncertain. PG&E executives said utility officials from throughout the Bay Area had been summoned to the company's San Francisco headquarters yesterday for a high- level war council on the election outcome. Although a long-term strategy for fighting the public-power initiative remained elusive, the meeting's participants agreed that PG&E's attorneys must go on the attack, the executives said, requesting anonymity. The company reportedly spent more than $1 million in an attempt to defeat the measures, and if either passes, the utility is ready to shell out millions more to tie things up in court. "If you look at past history, we've always been aggressive about protecting our property," one executive said. "Bring it on," countered Ross Mirkarimi, campaign manager for the public- power measures. "The absolute arrogance of a bankrupt corporation threatening to dismiss the intent of voters will be met in court and successfully beaten back," he said. Any legal defense of propositions F and I would be made by the city attorney's office. A spokesperson for outgoing City Attorney Louise Renne declined to comment on the matter yesterday. But a well-placed source in Renne's office scoffed at the suggestion that PG&E, even with its deep pockets, would be able to bully San Francisco in court. "This is a 200-lawyer office, which is larger than most law firms in the city," the source said. "If PG&E chooses to, they can try and paper us to death. But that will not affect the outcome." The source said it appeared most likely that PG&E would attempt to challenge the public-power initiatives on constitutional grounds in federal court. Such a challenge could last at least two years, the source said. "PG&E will not handle this with in-house lawyers," the source at the city attorney's office added. "They'll hire an outside firm and pay up to $400 an hour for legal help. Meanwhile, the city will use salaried deputy city attorneys. This will be much cheaper for us." PG&E, which filed for bankruptcy protection in April after running up more than $9 billion in debt under a rate freeze, stressed in its statement late yesterday that numerous hurdles still must be be overcome before a public utility could be created in San Francisco. "It is important to recognize that there are still many other steps the city government and San Francisco voters must approve before any municipalization outcome could occur," the company said. "An agency has to be formed, commissioners elected and a feasibility study conducted to determine if the city can run the system and justify a takeover." John Nelson, a spokesman for the utility, declined to comment further. PG&E has been fighting off public-power initiatives in San Francisco since the 1960s. One utility official said that unlike similar battles elsewhere, there was a "pride factor" involved for what is seen as the company's home turf. "This is where our headquarters is, and our employees take a lot of pride in what they do," the official said. In fact, no major California city has succeeded in establishing a public utility for nearly 50 years, since Sacramento took charge of its local power system. Only about a quarter of all Californians receive electricity from a public entity. And if PG&E has its way, that number will not grow. The utility amassed a war chest of $120,000 last year to crush a grassroots effort seeking a public utility in Davis. PG&E hired a small army of lobbyists and consultants, and ultimately prevailed by killing off the ballot measure. "This kind of thing comes up every couple of years somewhere in our service area," a utility executive said. "In all cases, we've fought fairly aggressively." US Power, Gas Companies Restrict Dealings With Enron NEW YORK -(Dow Jones)- Trading companies in Enron Corp.'s (ENE) key North American power and gas markets are restricting their dealings with the ailing Houston-based giant, people at those companies said Wednesday. Concerns have mounted because Enron, which accounts for about a quarter of the trade in the country's power and gas markets and which makes a market for those commodities on its Internet-based system EnronOnline, has seen its share price fall by about 75% and its credit ratings downgraded since mid-October due to uncertainties about its extremely complex financial structure. "We've restricted our business with them," said Mike Smith, chief financial officer for Mirant Corp. (MIR) unit Mirant Americas Group, a Top 10 trader of power and gas in the U.S. Smith wouldn't be more specific, but his comments echoed those of others in the business. "Our exposure to Enron is insignificant compared with the previous exposure," said Al Butkus, spokesman for Aquila Inc. (ILA), a Top 5 U.S. power and gas trader. Tractebel Energy Marketing, the North American subsidiary of the Belgian company Tractebel S.A., has limited the term of transactions with Enron to three years or less, a person at the company said. And a power broker said some medium sized western utilities have stopped trading with Enron even for near-term delivery. Enron didn't return calls seeking comment. The Wall Street Journal reported Wednesday that Enron was in talks for a capital infusion and possible acquisition by competitor Dynegy Inc. (DYN). Also, Enron said Thursday it was restating its financial statements from 1997 through the second quarter of 2001, saying its financial and audit reports are unreliable for all those periods. The company fired its treasurer and general counsel. Key Markets Enron's ability to transact in its core markets - North American wholesale gas and power - is essential if the company maintain the earnings and cash flow needed to emerge from its current credit crisis, Wall Street analysts and ratings agencies have said. Standard & Poor's and Moody's Investors Service downgraded Enron's credit to within two steps of junk-bond status last week and have it on watch for further downgrade. Enron still has its supporters. Exelon Corp. (EXC) is monitoring its own risk management, but hasn't changed its relationship with Enron, said Chief Financial Officer Ruth Ann M. Gillis. "We haven't changed our relationship," Gillis said. Enron is a very important factor in the vitality of the wholesale energy markets, she said. They're still the "largest, best" of the companies out there, she said. Likewise, a trading floor manager at one energy company said Enron called earlier in the week and asked that the company increase its trading on EnronOnline. The company's EOL volumes had fallen, but it honored Enron's request out of respect for Enron's still market-making power. PPL Corp. (PPL) moved to mitigate its exposure to Enron following the downgrades, a person in the marketing organization at PPL EnergyPlus said. "Enron would not be a first choice to do long-term transactions," the person said. "For shorter terms, deals, they wouldn't be considered equally with everyone else. There's just too much risk there." Since Enron's troubles began several weeks ago, energy trading partners had stood by the company in ways that stock and bond traders hadn't. Until this week, "business as usual" was an almost constant refrain. Energy companies' immediate exposure to Enron was limited to a maximum of seven weeks of receivables, and Enron was paying its bills. But for some of those companies, business as usual also meant not changing value-at-risk formulas, even though the formulas were generating ever lower allowable volumes of business with Enron as the company's credit quality deteriorated, one risk manager said Wednesday. Lower value-at-risk limits got most trading companies to flatten their portfolios by taking positions to offset currently profitable long-term positions with Enron. PPL, for example, is still following its credit policy and as a result has limited its dealings with Enron, which has seen its credit quality fall, the person at PPL EnergyPlus said. "We've taken a look at our book," the person said. "Based on the events of this and last week, we've taken some action to mitigate the risk based on their ratings downgrade." Trading companies constantly evaluate their counterparties' credit and adjust their dealings accordingly, but rarely have been required to address problems on the scale of Enron's recent difficulties. "It certainly ranks just behind California ," the person at PPL said. Enron Claims Trading Normal An Enron spokesman, reached later, said the company continues to see a normal range of transactions, including long-term deals. "We've not seen closing out of positions," spokesman Eric Thode said. Susan Abbott, a managing director in corporate finance at Moody's, said the ratings agency wasn't aware of significant changes in trading companies' dealings with Enron. The agency continues to watch for new restrictions, in particular margin calls, which could quickly strain Enron's liquidity. A drop in new business with Enron isn't as much of a concern, she said. "If you're restricting new business with the company, what you're doing is moving the company out of the market in an orderly way," Abbott said. PPL is shying away from doing deals with Enron and is limiting the dollar amount and terms of the deals it will do with the company, but hasn't yet imposed margin calls or required additional collateral, the person in the marketing organization said. "Neither the credit thresholds nor our exposure threshold have been breached," the person said. PPL said it's limiting exposure to Enron for shorter-term deals too, the person said. "Their liquidity just isn't there anymore," the person said. No large company can afford to pull the plug on Enron, given the company's centrality to the power and gas markets. "Enron is such a large player and they're so important in terms of maintaining the liquidity of the markets," said Sandy Fruhman, spokeswoman for Reliant Energy Inc. (REI). "We see this as a situation that has potential downsides for the entire industry." Enron's North American wholesale trading unit brought in $1.9 billion in income before interest and taxes in the first nine months of the year, up from $1.1 billion in the same period last year. Reliant continues to do business, but Fruhman wouldn't say specifically whether it had restricted its dealings. "We're monitoring the situation carefully and making sure we follow prudent business practices," she said. "But we're trying to work with them, because it's in the best interest of the entire industry to overcome their current problems." Study details problems with utility deregulation Whether or not Oklahoma embraces power deregulation, electricity prices probably will rise. The question is how much. That was one conclusion in a report presented to the Oklahoma Corporation Commission Tuesday. The commission ordered the study, conducted by the Oak Ridge National Laboratory of Tennessee, to examine the state's deregulation issues. The study raises the key question of whether price increases can be minimized with fair treatment for both consumers and power-generating companies. It also notes that the Oklahoma and regional power grids are inadequate to handle new power plants coming on line . "It's sort of like walking a tightrope," said Stanton W. Hadley, an Oak Ridge researcher who presented the study before the commissioners. "Once you do it wrong, it's hard to go back." The commission took no action Tuesday. Commission Chairman Denise Bode called the meeting "a brainstorming session." The commission wants to sidestep the nightmare of electricity deregulation in California . The Oklahoma Legislature postponed a decision this spring on deregulation. The study, which is Phase II of Oak Ridge research on Oklahoma deregulation issues, lays out four possible scenarios for Oklahoma's electric future between now and 2010. The scenarios include continued utility regulation along with three types of free-market deregulation. Under total deregulation, the study said, existing coal and hydroelectric plants would profit handsomely. Consumer prices would probably fall, at least for awhile. However, the numerous gas-fired "merchant power plants" being planned or built in Oklahoma probably would lose money. Some would fail. Under a semi-deregulation scenario - in which power producers would be allowed to charge more to help pay for their plants - all power plants would make money, the study reports. But coal and hydroelectric plant profits would skyrocket even further, and average prices to customers could be 5 percent to 25 percent higher than under regulated rates. For that reason, Hadley endorsed a fourth scenario in which coal and hydroelectric plants would continue under some form of regulation, allowing the different types of power plants to profit more equitably. Under that scenario, prices of electricity generated at coal plants could be set through long-term contracts or continued regulation. They would sell at their cost plus a markup that was set by regulators. Such an approach, he said, would likely lead to a "win-win" situation, with power plants thriving and consumers seeing only modest price increases. The study also reported that power supply in Oklahoma will far outstrip demand during the 2001-2010 period. The state's power capacity of 13,300 megawatts will zoom to 25,700 by 2010, with at least 3,500 megawatts of reserve power. The problem: That much power would overwhelm Oklahoma's power grid. Power lines were built to serve local customers, not to export huge quantities of electricity . "Right now those lines can carry some of the proposed capacity, but not all," Hadley said. Bode said the report's scenarios are based on today's power transmission capacity. The critical question, she said, is how much transmission capacity to build, and how to make it possible for new power plants to hook into that grid. "You've got to build your infrastructure first," Bode said. "We could have a real serious mess in 2010 if we don't get more transmission built." About 20 gas-fired power plants are either planned or are being built in gas-rich Oklahoma. Power merchants need to be able to ship electricity - a value-added product of the state's natural gas supply - out of state, Bode said. By the same token, she said, the state needs to be able to retain enough reserve electric power to attract industry, fuel economic growth and keep power prices reasonable. Douglas Burton of Oklahoma City-based Acarus Group, representing major Oklahoma industrial power consumers, urged Bode and Commissioner Bob Anthony to consider a regional power grid concept, sharing the cost of transmission expansion with surrounding states. Burton called for "no transmission welfare." She insisted that if Oklahoma tried to build a regional grid by itself, it wouldn't lead to a competitive market. Hadley advised a go-slow approach to the wealth of issues and unknowns surrounding deregulation. "Better to take more time," he said, "and do it right."
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