Pulling Plug on State’s Power Buying

Once compared by Gov. Gray Davis to a stickball team playing the Yankees, the electricity buyers at the Department of Water Resources have reason these days to feel like long-shot victors.

Pitted 19 months ago against such energy industry giants as Enron, Dynegy and Williams, the state’s hastily assembled team initially paid prices comparable to a $15 gallon of gasoline and struggled to avoid blackouts.

Today, the state power buyers snap up bargains. In a July heat wave, they had power to sell. Many of the companies that last year gloated over easy profits in California are today bankrupt or nearly so.

But the state’s pinch-hitting role is nearly finished. DWR’s emergency authority to buy electricity expires at the end of the year.

When desperate lawmakers shoved the water agency into the job of buying electricity for 27 million people, they figured that by Jan. 1, 2003, the crisis would be ended and Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric could resume their old duties.

The smallest of the three utilities, SDG&E;, is financially healthy enough to buy electricity again. But PG&E; is in bankruptcy, and Edison’s debt for past energy purchases tops $1 billion. Utility officials say they nonetheless hope to take the reins from DWR at the turn of the new year.

They don’t have much choice. The Legislature has made no effort to extend the state’s authority to buy electricity. The governor, who could issue an executive order to accomplish the same thing, said he has no intention of doing so.

“The governor made clear that this was a short-term solution,” said Richard Katz, an energy advisor to the governor. “The handwriting’s on the wall. The DWR is getting out of this business at the end of the year.”

In the last week, the Public Utilities Commission and the Legislature have taken steps to prepare for the shift.

The PUC has begun giving the utilities responsibility for dispatching electricity under 35 long-term power contracts signed by DWR in the spring of 2001. DWR will keep the legal title to the contracts, but each utility will get responsibility for scheduling the electricity produced or delivered under contract in its service area.

Last week, the PUC also gave the utilities what amounts to power-buying training wheels. The commission passed an order allowing PG&E; and Edison to sign their own power contracts, lasting up to five years, with DWR co-signing the agreements. That financial backing from DWR would fall away whenever the utilities are financially healthy enough to win a thumbs-up from Wall Street.

The utilities won’t need to sign many more contracts. Existing DWR contracts, negotiated in a rush in the spring of 2001 to help the state avoid exorbitant spot-market prices, supply most of what the utilities will need for their customers over the next several years. At times, the contracts leave DWR with a surplus of power that must be sold at a loss.

“We have some months or hours when we need power,” said Edison Senior Vice President John Fielder, “but we’re not buying a whole lot.”

More important to returning the utilities to the power-buying business is a bill that has cleared the Legislature and is expected to get the governor’s signature.

AB 57, by Assemblyman Rod Wright (D-Los Angeles), would restrict the PUC’s control over electricity rates. It would automatically trigger rate hikes if the utilities sank into debt beyond a certain threshold, which for Edison is roughly $280 million. Conversely, if costs fell, the customers of Edison and PG&E; would get a rate cut.

The PUC has proved to be too fickle for lenders, Wright said. “In the PUC, you have five people who can make decisions about financing,” he said, “and they can almost turn on a dime. Financial markets are afraid of that.”

Fielder said such a law should reassure Wall Street credit-rating agencies that the utilities can be trusted to pay their bills. Getting back into the good graces of investors is critical, they say. Without an investment-grade rating, the utilities must keep millions of dollars sitting around as collateral and pay higher costs to sellers fearful of not getting paid.

The utilities fell billions of dollars into debt during a 13-month reign of high power prices in the market that California created under a deregulation plan. A rate freeze imposed by lawmakers barred the utilities from recovering their costs from customers.

Edison dodged bankruptcy by striking a federal court settlement with the PUC last October. Under that plan, shareholders and utility customers will split responsibility for paying off the utility’s approximately $3.3-billion debt.

PG&E; took a different path and filed for bankruptcy in April 2001. The San Francisco company must clear more hurdles than Edison to reach investment-grade status. In hearings scheduled for November, a federal bankruptcy judge is expected to weigh PG&E;’s plan for paying off creditors against one devised by the PUC and endorsed by those creditors.

PG&E; officials say they believe the Bankruptcy Court could finish its work before the end of the year. The company must be out of bankruptcy and get an investment-grade rating before it can resume buying power, they say.

State officials say that isn’t so. Even in bankruptcy, PG&E; can buy and sell electricity so long as it keeps a pile of cash as collateral with the agency that manages most of California’s transmission grid.

Consider Enron Corp., the once mighty Houston energy trader that filed for bankruptcy in December. To continue selling electricity in California, it posted with the Independent System Operator enough money to cover three days’ worth of electricity for its customers.

“I don’t believe the utilities have to be investment-grade. They have to be creditworthy, which is not the same thing,” said Barry Goode, the governor’s legal advisor.

With four months to go, the utilities are rebuilding their ranks of energy traders. They’ve already lured away three of the dozen power buyers at DWR.

And in a sign of how control of California’s power market has turned topsy-turvy in the past year, energy traders with the once high-flying private companies have shown up at DWR’s power-buying headquarters in suburban Sacramento, looking for work.

DWR spokesman Oscar Hidalgo said a trader with Mirant Corp. in Atlanta showed up two weeks ago, hoping to get DWR experience for his resume, however brief.

“The word is out that things are clicking here,” Hidalgo said.