california update 4 / 27 / 01 the following report contains confidential and sensitive information . please
treat with discretion .
executive summary :
? ferc price cap decision reflects bush political and economic objectives .
politically , bush is determined to let the crisis blame fall on davis ; from
an economic perspective , he is unwilling to create disincentives for new
power generation
? davis finds four major flaws with ferc plan , most notably its exclusion of
out - of - state generators
? june lst " kill clause " for ferc order could coincide with new bush regional
plan
? california facing growing fiscal risk following bond downgrade , expected
$ 20 billion power bill this summer - - economic crisis would force deeper
administration involvement
? qf bid for advance payments from pg & e likely to fail in bankruptcy court
? new generation delays probable because of state / qf squabbling
? consumer groups are preparing a constitutional challenge to socal bailout
deal
1 . ferc fallout
the ferc decision is a holding move by the bush administration that looks
like action , but is not . rather , it allows the situation in california to
continue to develop virtually unabated . the political strategy appears to
allow the situation to deteriorate to the point where davis cannot escape
shouldering the blame . once they are politically inoculated , the
administration can begin to look at regional solutions . moreover , the
administration has already made explicit ( and will certainly restate in the
forthcoming cheney commission report ) its opposition to stronger price caps
on the grounds that they are unwilling to create disincentives to the
construction of new generation .
it is interesting and ironic to note that electricity generators were
generally happy with the ferc order and that the only ferc commissioner who
favors price caps actually voted against this plan .
2 . something less than effective price caps
from davis ' s point of view , the ferc plan has four major flaws :
? the order applies only to california , not to the rest of the west .
non - california generators are not required to sell at capped rates to
california .
? as the order is written , it is more of a price floor for emergency power
than a ceiling .
? state officials also believe that energy suppliers will continue to game
the system , because the price mitigation scheme only kicks in after a stage 2
emergency and does not require any collusion .
? even when the price caps kick in , they are based on the cost - plus for the
highest cost producer supplying power to california and do not require
wholesalers to abide by the cap . the generators can also charge above the
cap , provided they can subsequently justify the excess charge to ferc .
3 . proposal " kill clause " adds to the political dilemma for davis
the ferc proposal includes a " kill clause " that says the caps will be
withdrawn unless california ' s iso agrees by june lst to become part of the
regional grid now under ferc control . if davis doesn ' t sign on to the
regional grid by june lst , then he will have to live with june 2 nd headlines
blaming him for letting the " bush price caps plan " collapse .
4 . growing fiscal risk in california
sources speculate that california could therefore pay as much as $ 20 billion
on power this summer - this is more than the combined enterprise value of
pg & e and sce . these sources believe that , because of the severity of the
situation , the ferc and / or the federal government will be forced to take
further action to control prices for power .
the consensus is that the state of california will run out of money in about
90 days . one of the first projects to be cancelled will be state plans to
finance new power plant construction in exchange for long - term power deals .
the bleak fiscal picture is also causing bank creditors to revisit the bridge
loans they are providing to california .
the bush administration and the fed are only now waking up to the seriousness
of the fiscal picture . the country ' s largest and most prosperous state will
have gone from large surpluses to serious debt downgrades and devastating
deficits in a matter of months .
5 . qfs to seek advance payment from pg & e
meanwhile , on the bankruptcy front , the qfs reportedly will ask the
bankruptcy judge today to give them advance payment from pge ' s accounts ,
since their natural gas vendors have likewise demanded advance payment for
gas . it appears very unlikely that the qfs ' request will be granted . if the
qfs do not receive advance payment , it is likely that most of the 4 , 000 mw
of gas - fired qf capacity will remain offline .
6 delays likely in new qf generation
the qf deals made with the state for long - term contracts are being
continually renegotiated , which is likely to mean that the new plants those
contracts are supposed to finance will not be online as early as anticipated .
7 . consumer groups ready to challenge constitutionality of sce bailout plan
harvey rosenfield and his colleagues reportedly have been reviewing an
analysis of the mou for the sce bailout plan . the analysis was done by a
utilities analyst , rather than a lawyer , though it appears to raise a number
of good legal points . for example , one of the elements of the mou is a
" non - bypassable " charge on ratepayers that would require them to pay even
if they disconnect from the grid . this is effectively a tax , since there is
no exchange of value for money , which under the ca constitution cannot be
used to directly benefit a private entity . this makes the bonds that would
be issued are general obligation bonds , rather than revenue bonds . according
to the constitution , the state cannot be put into debt to benefit a private
company . for this and other reasons , even if the republicans would vote for
the sce bailout , which remains unlikely , the bailout probably would not
stand a likely constitutional challenge .
8 . governor hurt by continued failure to disclose long - term power contracts
the issue of the governor ' s failure to disclose the details of the long - term
power contracts continues to distress the other players in the crisis .
even if he were to disclose everything he and his staff have been
negotiating , it is likely that their actions and negotiations will
challenged , creating an even further delay .
california update 4 / 27 / 01
the following report contains confidential and sensitive information . please
treat with discretion .
executive summary :
? ferc price cap decision reflects bush political and economic objectives .
politically , bush is determined to let the crisis blame fall on davis ; from
an economic perspective , he is unwilling to create disincentives for new
power generation
? davis finds four major flaws with ferc plan , most notably its exclusion of
out - of - state generators
? june lst " kill clause " for ferc order could coincide with new bush regional
plan
? california facing growing fiscal risk following bond downgrade , expected
$ 20 billion power bill this summer - - economic crisis would force deeper
administration involvement
? qf bid for advance payments from pg & e likely to fail in bankruptcy court
? new generation delays probable because of state / qf squabbling
? consumer groups are preparing a constitutional challenge to socal bailout
deal
1 . ferc fallout
the ferc decision is a holding move by the bush administration that looks
like action , but is not . rather , it allows the situation in california to
continue to develop virtually unabated . the political strategy appears to
allow the situation to deteriorate to the point where davis cannot escape
shouldering the blame . once they are politically inoculated , the
administration can begin to look at regional solutions . moreover , the
administration has already made explicit ( and will certainly restate in the
forthcoming cheney commission report ) its opposition to stronger price caps
on the grounds that they are unwilling to create disincentives to the
construction of new generation .
it is interesting and ironic to note that electricity generators were
generally happy with the ferc order and that the only ferc commissioner who
favors price caps actually voted against this plan .
2 . something less than effective price caps
from davis ' s point of view , the ferc plan has four major flaws :
? the order applies only to california , not to the rest of the west .
non - california generators are not required to sell at capped rates to
california .
? as the order is written , it is more of a price floor for emergency power
than a ceiling .
? state officials also believe that energy suppliers will continue to game
the system , because the price mitigation scheme only kicks in after a stage 2
emergency and does not require any collusion .
? even when the price caps kick in , they are based on the cost - plus for the
highest cost producer supplying power to california and do not require
wholesalers to abide by the cap . the generators can also charge above the
cap , provided they can subsequently justify the excess charge to ferc .
3 . proposal " kill clause " adds to the political dilemma for davis
the ferc proposal includes a " kill clause " that says the caps will be
withdrawn unless california ' s iso agrees by june lst to become part of the
regional grid now under ferc control . if davis doesn ' t sign on to the
regional grid by june lst , then he will have to live with june 2 nd headlines
blaming him for letting the " bush price caps plan " collapse .
4 . growing fiscal risk in california
sources speculate that california could therefore pay as much as $ 20 billion
on power this summer - this is more than the combined enterprise value of
pg & e and sce . these sources believe that , because of the severity of the
situation , the ferc and / or the federal government will be forced to take
further action to control prices for power .
the consensus is that the state of california will run out of money in about
90 days . one of the first projects to be cancelled will be state plans to
finance new power plant construction in exchange for long - term power deals .
the bleak fiscal picture is also causing bank creditors to revisit the bridge
loans they are providing to california .
the bush administration and the fed are only now waking up to the seriousness
of the fiscal picture . the country ' s largest and most prosperous state will
have gone from large surpluses to serious debt downgrades and devastating
deficits in a matter of months .
5 . qfs to seek advance payment from pg & e
meanwhile , on the bankruptcy front , the qfs reportedly will ask the
bankruptcy judge today to give them advance payment from pge ' s accounts ,
since their natural gas vendors have likewise demanded advance payment for
gas . it appears very unlikely that the qfs ' request will be granted . if the
qfs do not receive advance payment , it is likely that most of the 4 , 000 mw
of gas - fired qf capacity will remain offline .
6 delays likely in new qf generation
the qf deals made with the state for long - term contracts are being
continually renegotiated , which is likely to mean that the new plants those
contracts are supposed to finance will not be online as early as anticipated .
7 . consumer groups ready to challenge constitutionality of sce bailout plan
harvey rosenfield and his colleagues reportedly have been reviewing an
analysis of the mou for the sce bailout plan . the analysis was done by a
utilities analyst , rather than a lawyer , though it appears to raise a number
of good legal points . for example , one of the elements of the mou is a
" non - bypassable " charge on ratepayers that would require them to pay even
if they disconnect from the grid . this is effectively a tax , since there is
no exchange of value for money , which under the ca constitution cannot be
used to directly benefit a private entity . this makes the bonds that would
be issued are general obligation bonds , rather than revenue bonds . according
to the constitution , the state cannot be put into debt to benefit a private
company . for this and other reasons , even if the republicans would vote for
the sce bailout , which remains unlikely , the bailout probably would not
stand a likely constitutional challenge .
8 . governor hurt by continued failure to disclose long - term power contracts
the issue of the governor ' s failure to disclose the details of the long - term
power contracts continues to distress the other players in the crisis .
even if he were to disclose everything he and his staff have been
negotiating , it is likely that their actions and negotiations will
challenged , creating an even further delay .