california update 3 / 26 / 01 executive summary :
- cpuc likely to pass rate hikes tomorrow , politicians bowing to the inevitable
- many questions still unanswered , most notably size / structure of rate increase and past utility debts
- past undercollect major sticking point , with little help available from transmission deal or long - term contracts
- reliant seeking relief in circuit court from emergency orders ; large generators increasingly angry with davis ' " blame game "
- qfs waiting for details of rate hike ; new price formula crucial to socal ' s ability to make payments
- bankruptcy outlook increasingly complex , but debt rescheduling remains subject to failure
in our late friday report , we wrote " davis could order rate hikes as a last ditch effort , but this action would not address the undercollection issue . there is still a high chance of bankruptcy by either the larger generators , commercial paper holders , and ( less now but still very possible ) the qfs as time is running out . " events are unfolding exactly along these lines .
1 . why rate hikes now ?
cpuc president lorretta lynch came out this weekend in favor of rate hikes . davis and many legislators recognize that rate hikes are the quickest solution , but that there is a potentially painful political price attached . davis will probably come out in support of a structured rate system , passing on most of the hikes to business and industrial users .
other california politicians are starting to face reality of rate hikes . the calenergy ruling massively reduced their leverage over the creditors , who are now able to sell outside the state , if they can get similar relief from the courts . and it ' s not just the qfs - - the giant reliant energy is appealing to the ninth circuit court in san francisco against federal judge frank damrell ' s series of rulings forcing large generators to continue to sell to california .
2 . what impact will the rate hikes have ?
rate rises will stabilize the situation going forward , but there will be a messy scramble to assign blame and liability for past debts . some form of rescheduling is a possibility , but there are any number of accidents that could happen and yet result in bankruptcy for the utilities - - if they don ' t seek protection from creditors themselves .
3 . undercollection / net short still unaddressed
all of these developments fail to address the past undercollection or the bond revenue plan . still , the passage of rate hikes could speed up the legislature on these fronts as well . the bulk of the rate hikes will go first to repay the dwr , then to the commercial creditors . absent the transmission line deal , the bond revenue plan would have to be restructured to repay the past undercollect . long - term power contracts are still relatively meaningless until 2003 , when the majority of the contracts kick in .
4 . large power suppliers losing patience
relations are also deteriorating between davis and the large power suppliers . davis for the most part has been very careful to cultivate them during the drawn out negotiations , talking to several of the main ceos almost daily . but state legislators and officials are rapidly trying to initiate investigations of alleged market manipulation and overcharging to deflect the growing political heat from themselves . this is only agitating the larger generators more as every day passes . if reliant loses their case , it may also tempt some of the larger generators to force the issue to bankruptcy . what ' s more , financial creditors are also waiting with growing impatience , and the utilities themselves are contemplating voluntary bankruptcy . pg and ( 2 ) many of them have to move in court quickly or lose any possible standing for future court action . it is in the interests of a number of creditors to wait and hope that a negotiated settlement can be reached , but others have a large incentive to game the situation and threaten to force bankruptcy .
other bullish news : pg & e gets extended forbearance until april 13 th from its banks , and socal announces that it will pay some qfs . the actual amount of payments to the qfs is still subject to the cpuc approving a revised pricing formula that is satisfactory to the qfs . that decision should come tomorrow .
6 . outlook
last week we wrote that " the qfs felt there was no point in filing today because they want to see what they can get from the legislature this week and in all likelihood , what they can get from the cpuc hearing next week . " the next 48 hours will be crucial . only massive rate hikes ( 40 % or higher roughly ) would address the undercollect issue and davis is unlikely to authorize those .
as one source told us , " the age of denial is ( mostly ) coming to an end , and that is the main source of hope that california can begin to move forward from this . " but the situation is so complex , and there are so many players and angles involved , that a negotiated solution to the past debt problem will still be complicated and vulnerable to failure .