Bottom Line Energy Issues - October 2001 - California Muck Gets Deeper, and Deeper, and Deeper

Recall that Gov. Gray Davis assigned purchase of long term power contracts to the state Dept.of Water Resources that resulted in about $43 billion dollars of commitments to electric providers over some 15 years. Then he got the legislature to establish a new state department of energy. Meantime, Southern CA Edison was threatened with bankruptcy following PG&E. SCE sued the state in federal court claiming its dilemma was caused by state rules that limited its ability to recover spiking wholesale prices forced upon it through deregulation. Just as he was about to call a special session to devise a plan to save SCE after it failed in regular session, Gov. Davis negotiated a settlement between the PUC and SCE, allowing it to recover some $3.3 billion in debt through controlled rates. The deal was immediately challenged in court from several quarters, including key creditors and consumer groups. The suit was concluded Oct. 5 when U.S. District Court Judge Ronald S.W. Lew ratified the terms as finalized. However, opponents said they are still "considering their options."

Gov. Davis also has had problems gaining PUC approval to sell $12.5 billion in general revenue bonds to finance state debts for purchased power. He sought legislative approval to restrict authority of the PUC to review prices the state might invoke that would effectively socialize the state power business, and then he also obtained PUC termination of all consumer choice in selecting a power provider, effectively repealing deregulation completely. However, the PUC voted 4-1 Oct. 3 to reject his fiscal framework for issuing the badly needed bonds to keep the state from facing a fiscal deficit by 2002-03. This proposal saw utilities and consumer groups allied against the state plan because neither group wants the PUC to set aside its authority to determine whether power charges are reasonable, although the state legislature has told the PUC it has no authority over DWR purchases.

Average of prices negotiated last spring by the state was $69 a megawatt hour, compared with current spot market prices of about $25. PUC Chair Loretta Lynch said honoring the purchase contracts would saddle CA users with unfairly high electricity prices for years to come. Suppliers claim, however, that their prices helped stabilize a run-away market where prices ran up to $500 a megawatt hour. PUC commissioners who opposed the state bond plan said the rate agreement would threaten the fiscal integrity of the state by tying it to long term contracts that the majority think are too expensive. The state cannot sell bonds without the PUC approval so there is no schedule for bond issuance and no plan to repay the state's general fund. David Hitchcock, a director of Standard & Poor's, said the delay in bond sales was not good news for the state's credit rating, which has been downgraded and remains in a negative trend.