california power 2 / 8 please contact kristin walsh ( x 39510 ) or robert johnston ( x 39934 ) for further clarification .
executive summary :
utility bankruptcy appears increasingly likely next week unless the state can clear three hurdles - agreement on payback for the bailout , rate increases , and further short - term funding for dwr purchases of power .
disagreement persists between gov . davis and democrats in the legislature on how the state should be paid back for its bailout of the utilities . the split is over a stock warrant plan versus state ownership of utility transmission assets .
the economics of the long - term contracts appear to show that rate hikes are unavoidable because of the need to amortize the undercollected rates of the utilities during the recent rate freeze period .
air quality management district regulations are under review , but offer limited scope for providing additional generation capacity .
legislature democrats are feeling intense pressure from the left - wing consumer groups and are being forced to at least slow , if not stop , davis ' s bailout and rate hike plans . senator burton ' s eminent domain threats against generators , which reflect this pressure , are of little significance .
1 . bankruptcy outlook rising once again
a deal to finalize a debt workout continues to be just beyond the reach of the state , the utilities , and their creditors , with time running out on the debt forbearance arrangement set to expire on tuesday .
socal edison and pg & e are not paying any of their bills except for payroll . they are working very hard to keep cash on - hand , and have indicated that they feel that they are very close to an involuntary bankruptcy filing . once this filing occurs , they will have 50 days until either the bankruptcy court accepts the filing or the utilities file a voluntary bankruptcy .
opinion within the assembly is divided with respect to the outlook for bankruptcy . assemblyman keeley told our source that a filing is likely , but that everything will be resolved during that 50 - day period . senator john burton " is in no hurry " to reach a deal with the utilities , as he believes that the state of california is in a good position to " strong - arm " the utilities . burton currently does not intend to cede to the utilities so that they can avoid bankruptcy . the senator stated , " bankruptcy would be bad , but not the worst thing possible . " he intends to stick to his position . senator burton also dismissed governor davis ' end - of - week deadline for striking a deal with the utilities .
still , bankruptcy can be avoided if a last - minute deal can be struck monday on :
what the state receives in return for the bailout
the scope of rate hikes ( a federal court is expected to rule on the pg & e / socal v . cpuc rate undercollection case monday )
additional financing is made available to the dwr to buy more power until the revenue bonds can be issued in may .
there is a possibility that significant progress on these issues could lead to a further extension of creditor forbearance . however , the negative tone taken by standard & poors and others concerning delays in the legislature suggest that further forbearance will difficult to achieve . the previous forbearance period was only achieved via a high - level washington summit which does not appear likely to happen this weekend .
additional financing for dwr will not be automatically approved by the legislature . the non - energy expenditures of the california government are now at risk , as there is not yet a rate structure in place to recover the costs being expended on power from the general fund .
2 . state to take 2 / 3 of utility debt
while the state seems to have succeeded in forcing the utility parents to eat close to one third of the $ 12 billion debt , a final deal has been held up on two fronts . first , it is still unclear what the state will get in return for the utility debt . it is possible that there will be a mix of stock warrants and / or transmission assets . a takeover of the transmission assets seems more likely than a takeover of the hydro assets . the value of these assets still has not been settled . second , while the state will be on the hook for $ 9 billion , it is not clear what mixture of rate hikes and revenue bonds will be used to recover the cost of the bailout . finally , expect davis and other california politicians to work to minimize rate hikes ( although the edison / pg & e v . cpuc case on monday is likely to force their hand here ) and to do everything possible to avoid the appearance of a bailout . the tangible transmission assets are more politically attractive than the nebulous stock warrants .
no price has been set at which the state would purchase the utilities ' transmission assets , which are currently valued at approximately $ 7 - $ 8 billion . all of the proceeds though cannot be used to pay off the utilities ' debts , as some of the money would go to existing bondholders . however , ipp sources advise that there is already a bid on the table for these transmission assets that is higher than what the state would offer .
3 . long - term contracts
as noted by the governor in his announcement tuesday , only 500 mw of the 5 , 000 mw of power contracted for can come on - line immediately . much of the remainder reportedly was contracted in long - term purchases from suppliers who are building power plants . some of this will come on - line in approximately two years .
assemblyman keeley expressed frustration that he has received a " tablet from on high " from governor davis that there must not be a rate increase . this means that the state must acquire power , not from internal sources or from the market , but through long - term contracts at 7 . 39 cents / kwh . this allows 1 . 213 cents to amortize socal edison ' s undercollection from the recent rate freeze period . ( the number is slightly different for pg & e . ) this assumption is based on a natural gas price of $ 7 . 90 in 2001 and $ 5 . 15 in 2005 , and an efficiency heating rate of 10 , 000 - 12 , 000 in 2001 and 7 , 200 in 2005 .
these numbers were quoted to industry sources , who felt they were unrealistic . these sources quoted the 2001 price of natural gas as $ 9 . 00 - $ 9 . 50 . the sources agreed with keeley ' s number for the 2001 efficiency heating rate , but they felt that 7 , 200 in 2005 was very optimistic unless an enormous amount of new generation capacity comes on line .
according to keeley ' s numbers and assuming the filed rate case is settled at $ 7 billion rather than $ 12 billion , it would take 5 to 6 years to amortize all of the utility undercollection . a settlement to this case will need to be reached so that the state can figure out how much to charge for power in order to amortize the undercollection . however , since assemblyman keeley ' s numbers are unrealistic , a rate increase will be necessary .
4 . air quality district exemptions
there have been a few bills introduced to provide exemptions from aqmd ( air quality management district ) regulations - - ab 20 x , ab 28 x , ab 31 x . also , republicans have been asking the governor to lift the environmental regulations and immediately site the facility in san jose that was denied by the local government .
currently there is no contemplation of loosening the aqmd compliance restrictions . the legislature will not allow " dirtier " plants to
come on - line . however , there might be a change in the means of implementation in southern california by moving away from the
use of credits ( this apparently drives up the cost of gas - fired power ) .
5 . democratic moderates pressured by consumer advocates
the moderate left ( sen . burton , the puc , consumer activists ) is afraid of harvey rosenfield and his consumers movement . this is not just because of his initiative . more important from their perspective , his initiative puts him and the far left in a position to challenge and defeat the moderates in the next election . thus , democrats in the legislature will feel pressured to distance themselves from davis and slow down any further rate increases or bailout .
6 . eminent domain would have a limited effect
the threats by burton to seize generation assets to insure continued power supply are limited . they only apply to california suppliers . a
federal order would be needed to seize assets from out - of - state suppliers . there are also canadian suppliers ( such as bc hydro ) who are essentially untouchable .
7 . smaller ipps feeling the squeeze
many of the smaller ipps , which account for approximately 2500 mw of production , appear to be within a few days of running out of cash .
ab lx may be amended , possibly sometime this week , to give the smaller producers credit support .
california power 2 / 8
please contact kristin walsh ( x 39510 ) or robert johnston ( x 39934 ) for further clarification .
executive summary :
utility bankruptcy appears increasingly likely next week unless the state can clear three hurdles - agreement on payback for the bailout , rate increases , and further short - term funding for dwr purchases of power .
disagreement persists between gov . davis and democrats in the legislature on how the state should be paid back for its bailout of the utilities . the split is over a stock warrant plan versus state ownership of utility transmission assets .
the economics of the long - term contracts appear to show that rate hikes are unavoidable because of the need to amortize the undercollected rates of the utilities during the recent rate freeze period .
air quality management district regulations are under review , but offer limited scope for providing additional generation capacity .
legislature democrats are feeling intense pressure from the left - wing consumer groups and are being forced to at least slow , if not stop , davis ' s bailout and rate hike plans . senator burton ' s eminent domain threats against generators , which reflect this pressure , are of little significance .
1 . bankruptcy outlook rising once again
a deal to finalize a debt workout continues to be just beyond the reach of the state , the utilities , and their creditors , with time running out on the debt forbearance arrangement set to expire on tuesday .
socal edison and pg & e are not paying any of their bills except for payroll . they are working very hard to keep cash on - hand , and have indicated that they feel that they are very close to an involuntary bankruptcy filing . once this filing occurs , they will have 50 days until either the bankruptcy court accepts the filing or the utilities file a voluntary bankruptcy .
opinion within the assembly is divided with respect to the outlook for bankruptcy . assemblyman keeley told our source that a filing is likely , but that everything will be resolved during that 50 - day period . senator john burton " is in no hurry " to reach a deal with the utilities , as he believes that the state of california is in a good position to " strong - arm " the utilities . burton currently does not intend to cede to the utilities so that they can avoid bankruptcy . the senator stated , " bankruptcy would be bad , but not the worst thing possible . " he intends to stick to his position . senator burton also dismissed governor davis ' end - of - week deadline for striking a deal with the utilities .
still , bankruptcy can be avoided if a last - minute deal can be struck monday on :
what the state receives in return for the bailout
the scope of rate hikes ( a federal court is expected to rule on the pg & e / socal v . cpuc rate undercollection case monday )
additional financing is made available to the dwr to buy more power until the revenue bonds can be issued in may .
there is a possibility that significant progress on these issues could lead to a further extension of creditor forbearance . however , the negative tone taken by standard & poors and others concerning delays in the legislature suggest that further forbearance will difficult to achieve . the previous forbearance period was only achieved via a high - level washington summit which does not appear likely to happen this weekend .
additional financing for dwr will not be automatically approved by the legislature . the non - energy expenditures of the california government are now at risk , as there is not yet a rate structure in place to recover the costs being expended on power from the general fund .
2 . state to take 2 / 3 of utility debt
while the state seems to have succeeded in forcing the utility parents to eat close to one third of the $ 12 billion debt , a final deal has been held up on two fronts . first , it is still unclear what the state will get in return for the utility debt . it is possible that there will be a mix of stock warrants and / or transmission assets . a takeover of the transmission assets seems more likely than a takeover of the hydro assets . the value of these assets still has not been settled . second , while the state will be on the hook for $ 9 billion , it is not clear what mixture of rate hikes and revenue bonds will be used to recover the cost of the bailout . finally , expect davis and other california politicians to work to minimize rate hikes ( although the edison / pg & e v . cpuc case on monday is likely to force their hand here ) and to do everything possible to avoid the appearance of a bailout . the tangible transmission assets are more politically attractive than the nebulous stock warrants .
no price has been set at which the state would purchase the utilities ' transmission assets , which are currently valued at approximately $ 7 - $ 8 billion . all of the proceeds though cannot be used to pay off the utilities ' debts , as some of the money would go to existing bondholders . however , ipp sources advise that there is already a bid on the table for these transmission assets that is higher than what the state would offer .
3 . long - term contracts
as noted by the governor in his announcement tuesday , only 500 mw of the 5 , 000 mw of power contracted for can come on - line immediately . much of the remainder reportedly was contracted in long - term purchases from suppliers who are building power plants . some of this will come on - line in approximately two years .
assemblyman keeley expressed frustration that he has received a " tablet from on high " from governor davis that there must not be a rate increase . this means that the state must acquire power , not from internal sources or from the market , but through long - term contracts at 7 . 39 cents / kwh . this allows 1 . 213 cents to amortize socal edison ' s undercollection from the recent rate freeze period . ( the number is slightly different for pg & e . ) this assumption is based on a natural gas price of $ 7 . 90 in 2001 and $ 5 . 15 in 2005 , and an efficiency heating rate of 10 , 000 - 12 , 000 in 2001 and 7 , 200 in 2005 .
these numbers were quoted to industry sources , who felt they were unrealistic . these sources quoted the 2001 price of natural gas as $ 9 . 00 - $ 9 . 50 . the sources agreed with keeley ' s number for the 2001 efficiency heating rate , but they felt that 7 , 200 in 2005 was very optimistic unless an enormous amount of new generation capacity comes on line .
according to keeley ' s numbers and assuming the filed rate case is settled at $ 7 billion rather than $ 12 billion , it would take 5 to 6 years to amortize all of the utility undercollection . a settlement to this case will need to be reached so that the state can figure out how much to charge for power in order to amortize the undercollection . however , since assemblyman keeley ' s numbers are unrealistic , a rate increase will be necessary .
4 . air quality district exemptions
there have been a few bills introduced to provide exemptions from aqmd ( air quality management district ) regulations - - ab 20 x , ab 28 x , ab 31 x . also , republicans have been asking the governor to lift the environmental regulations and immediately site the facility in san jose that was denied by the local government .
currently there is no contemplation of loosening the aqmd compliance restrictions . the legislature will not allow " dirtier " plants to
come on - line . however , there might be a change in the means of implementation in southern california by moving away from the
use of credits ( this apparently drives up the cost of gas - fired power ) .
5 . democratic moderates pressured by consumer advocates
the moderate left ( sen . burton , the puc , consumer activists ) is afraid of harvey rosenfield and his consumers movement . this is not just because of his initiative . more important from their perspective , his initiative puts him and the far left in a position to challenge and defeat the moderates in the next election . thus , democrats in the legislature will feel pressured to distance themselves from davis and slow down any further rate increases or bailout .
6 . eminent domain would have a limited effect
the threats by burton to seize generation assets to insure continued power supply are limited . they only apply to california suppliers . a
federal order would be needed to seize assets from out - of - state suppliers . there are also canadian suppliers ( such as bc hydro ) who are essentially untouchable .
7 . smaller ipps feeling the squeeze
many of the smaller ipps , which account for approximately 2500 mw of production , appear to be within a few days of running out of cash .
ab lx may be amended , possibly sometime this week , to give the smaller producers credit support .