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Enron Mail |
Eliz -- I need your group to put together a search which captures the
comments of PG&E and Edison officials in trade press, anlyst reports, and speeches which would be inconsistent with the idea that they can now recover their shortfall. In other words, when they were trying to get AB 1890 passed, when they were fighting Proposition 9, when they floated their "rate reduction bonds" and when they talked to analysts and rating agencies I'm sure they assumed that they would live under the rate freeze and take the risk of stranded cost recovery whithin the statutory deadline. ----- Forwarded by Steven J Kean/NA/Enron on 09/27/2000 11:45 AM ----- "Dick S George" <dsgeorge@firstworld.net< 09/27/2000 08:04 AM To: "Dick George" <dsgeorge@firstworld.net< cc: Subject: WSJ: PG&E's Huge losses... CC list suppressed... September 27, 2000 California Utilities' LossesOn Electricity Pose Risk By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL California's two biggest utilities are losing so much money buying electricity in the state's deregulated market that they have run up deficits equivalent to half their net worth in just four months. If the cost of wholesale power continues to exceed the price these utilities are allowed to bill their customers, as currently seems likely, they could become technically insolvent sometime next year. That would put pressure on regulators to orchestrate a multibillion-dollar public bailout, similar to the "too big to fail'' response that in the past pushed governments to rescue banks. Such a scenario is quietly being discussed by bond-rating concerns that recently reduced their credit outlooks for Pacific Gas & Electric Co., a unit of San Francisco-based PG&E Corp., and Southern California Edison, a unit of Edison International of Rosemead, Calif. Bond- rating concerns say they aren't sure how much additional debt can be borne by the two affected utilities before they will have difficulty paying their bills. Probe of California Power Prices Begins, but New Plants Aren't Seen as Solution (Sept. 11) Los Angeles Utility Is Benefitting, Surprisingly, From Deregulation (Sept. 6) California Lawmakers Vote to Limit Electricity Costs (Sept. 1) "If this is just a seasonal aberration, the utilities can get through it," says Lori Woodland, analyst for Fitch IBCA. "If it goes on for six or nine months, it's a very serious situation." Adds A.J. Sabatelle, senior credit officer at Moody's Investors Service Inc.: "At some point, you have a financial crisis." The utilities say they are having no difficulty meeting expenses and don't envision problems in servicing their debts. But they are vigorously lobbying state and federal regulators to change the rules of the game, hoping somehow to raise rates to make up for the shortfall. The California utilities' experience may be a harbinger of what could happen in other states where wholesale power prices have surpassed the amount that utilities are allowed to charge their ratepayers. For now, utilities are making ends meet by going to the financial markets to borrow money. PG&E, a giant utility that serves one out of every 20 Americans, is seeking approval to increase its debt capacity by $1.4 billion. It is borrowing $200 million, while Edison is tapping $250 million from the commercial paper market. "This is going to be a long, tough road," says Jim Scilacci, chief financial officer for Southern California Edison. Today's situation represents a complete turnabout from what was expected when California deregulated its energy market on March 31, 1998, which opened electricity pricing to competition. California tried to give its utilities a competitive edge nationally by deregulating faster than other states and by creating a mechanism to allow investor-owned utilities, such as PG&E and Edison, to quickly pay down debts incurred to serve customers under the old regulatory system. To do this, the state legislature set retail rates at high levels, which, at first, generated fat surpluses for the utilities. As the money piled up, utilities used it to pay down debts for generation facilities that were otherwise unprofitable in the new deregulated world. By the end of this June, PG&E and Edison together had collected more than $12 billion and were on track to finish paying down debts well ahead of the March 31, 2002, deadline set by the legislature. At that point, rate freezes were to end and retail prices were to fluctuate with the market. But all that went out the window in June, when wholesale power prices surged, topping the rates the utilities were allowed to charge retail customers. Average prices at state-sanctioned energy markets were four to five times the prices of a year earlier, and three to four times the level utilities could charge customers. The accumulated shortfall has been so enormous at PG&E, that analysts expect its deficit to exceed $3 billion by Oct. 31, more than half its shareholder equity of $5.7 billion, which is defined as assets minus liabilities. Southern California Edison finished August with a deficit of $2 billion, equivalent to almost two-thirds its net worth of $3.2 billion. The utilities, though they have been accumulating deficits, aren't required to report these as losses on their earnings statements. That leaves utilities in a bind. They want to end the rate freeze to be able to pass on the real cost of electricity to consumers. But should the freeze end before the statutory deadline of 2002, they get clobbered. That is because they will immediately have to book a loss on their power-purchase deficits. What's more, they can't use the proceeds from planned power-plant sales to cover those losses; instead, should the freeze end, they will be obliged to refund some of the proceeds to ratepayers. In PG&E's case, the refunds could total $500 million, while in Edison's case, the amount is $254 million. Publicly at least, utility executives insist a mechanism will be found to let them recoup the money spent on electricity. Consumer advocates are gearing up for the fight. Nettie Hoge, executive director for San Francisco consumer group Utility Reform Network, says ratepayers shouldn't end up footing the bill for a deal cut by utilities that benefited them before prices shot up. Utility executives are now distancing themselves from the legislation that got them into such a mess, which was drafted with their assistance. PG&E Chairman Robert Glynn says it is best not to "overanalyze" the "old deal." Instead, he says, regulators and legislators should sit down with utilities and construct a new agreement, since "it's in the broad interests of the state not to have critical energy infrastructure look like a leper." Mr. Glynn says the current deal offers "mutually assured destruction" to both utilities and ratepayers. Something must be done, he says, or consumers throughout most of the state will experience "a San Diego-style rate shock." The utility serving that city, San Diego Gas & Electric Co., ended its freeze a year ago and began passing wholesale power costs directly through to ratepayers. Legislators intervened this summer, however, and temporarily capped retail rates when monthly power bills nearly tripled. The utility, a unit of Sempra Energy, is also accumulating a deficit as a result. So long as banks and bond markets believe the utilities will be repaid, they will be able to borrow, analysts say. "Until we hear politicians of consequence state otherwise, our position is that we believe the utilities will be made whole," says Richard Cortright, a director at Standard & Poor's corporate ratings group. But that opinion could change if it looks like the utilities will have to swallow a big loss. The result: lower credit ratings that would raise borrowing costs and could trigger a downward spiral. "You're talking about top-rated companies, though," said Ms. Woodland of Fitch IBCA. "To get to insolvency, a lot would have to happen." In the meantime, utilities are doing all they can to control the hemorrhaging. They have gotten authority from regulators to buy more power under long-term contracts at fixed prices, reducing their vulnerability to spot-market volatility. And they have petitioned federal regulators to declare California's market so badly flawed that generators should be denied market pricing and, even, ordered to pay refunds. Nevertheless, several forces are working against them. Although they can sign bilateral contracts, prices remain high for those as well. What's more, they can't buy less power than their customers need. If they don't buy enough, the California Independent System Operator, the organization responsible for reliability, will step in and make purchases for them and send them the bill. Perhaps the biggest problem facing PG&E and Edison, though, is one of timing. The California legislature is out of session until December, and regulators haven't even really started to address the issue formally. In the meantime, the utilities' deficit is growing by tens of millions of dollars daily. Write to Rebecca Smith at rebecca.smith@wsj.com
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