Calpine’s Troubles Rooted in Power Crisis
Californians are known to love a good, gory accident scene, but for those of us who like our violent smashups to be more metaphorical than real, the 2000-01 electrical power crisis is the gift that keeps on giving.
The latest near-corpse about which the paramedics are hovering is Calpine Corp. At this writing, the San Jose power company is wheezing toward an expected bankruptcy filing in January, possibly followed by extinction.
On Nov. 29 its founder and chief executive, Peter Cartwright, and its chief financial officer, Robert Kelly, were dismissed by the board of directors. Because they were leaders of Calpine’s efforts to stay alive by selling assets, the expectations are that Chapter 11 is looming.
Calpine’s problems are deeply rooted in the power crisis. For years after Cartwright founded the company in 1984, it focused on generating renewable energy, especially at its vast Geysers geothermal facility north of San Francisco. Then, in the late 1990s, California deregulated its energy market in what was viewed as a harbinger of a nationwide trend.
California’s idea was to encourage its utilities to divest their own generating plants and buy power instead from independent operators. The utilities would concentrate on transmission and distribution of electricity, and the independents would build and operate plants. Somehow the purveyors and distributors would all make more money while the customers paid less, a creation of value from sleight of hand worthy of a conjurer’s act.
Calpine became the most aggressive of the new breed of generating company, embarking on a nationwide construction and acquisition spree using billions in borrowed cash. Its portfolio eventually encompassed 93 plants.
But the deregulation scheme proved a disastrous miscalculation. By 2000 the California power system had become a plaything for unscrupulous energy traders like Enron. Pacific Gas & Electric Co. landed in Bankruptcy Court and Southern California Edison came close. Customer bills soared. The market on which Calpine and other generating companies depended blew apart.
But Calpine’s momentum couldn’t be slowed. In 2001, the company brought three new power plants into operation in California alone. It had 27 plants under construction nationwide, including three more in California, and an additional 34 on the drawing board. It floated $18.2 billion in new debt during the year while the three major credit agencies raised their ratings on Calpine. Its stock peaked above $57.
“The capital market was willing to lend money to them on the assumption that the power industry was not cyclical,” says Jonathan Kyle Cartwright (no relation to Calpine’s ex-CEO), director of investment research at the BOSC unit of BOK Financial Corp. in Clearwater, Fla., “and so it was willing to support debt-to-equity ratios approaching 70%.” But the power market was cyclical -- demand did not rise in a straight line -- and in accordance with the new perception, companies like Calpine looked hugely over-leveraged.
In 2002, all three major credit-rating firms dropped Calpine’s rating into the junk category. The company’s financing costs soared, and it was forced to start pledging power plants and other assets as security on its debt.
Questionable creditworthiness has compounded Calpine’s problems. Its customers, primarily utilities, won’t sign contracts for power unless Calpine guarantees the deals by pledging letters of credit or cash collateral; they fear, quite reasonably, that any long-term contracts that provide them power at a decent price would be abrogated in a bankruptcy filing.
As a result, Calpine can’t sell all of its electricity at a profit. In the first nine months of this year its power plants operated at a combined 46% of capacity, a disastrously low level. In that period, the company lost $684 million.
Today there are signs that independent power producers like Calpine are getting squeezed out of the market as utilities move back into generation.
Just this year, Southern California Edison asked for bids to supply it with power in the future -- but barred offers from existing power plants, such as Calpine’s, even if they were operating under capacity, says Jan Smutny-Jones, executive director of the Independent Energy Producers Assn., a California trade group of generators. Meanwhile, SCE has acquired the Mountainview power plant in Redlands, left uncompleted by its previous owners, and is finishing the work. (About half its capacity went online this month). It’s also refitting its San Onofre nuclear plant with new turbines.
SCE says the bid request this year was designed, with California Energy Commission approval, to spur the construction of new power plants in the state so they’ll be ready when increasing demand starts to outstrip the capacity existing today, including Calpine’s underutilized assets. Edison says that Calpine has been eligible to bid on numerous other contracts.
“It is an impartial process,” says Pedro Pizarro, SCE’s senior vice president for power procurement. He acknowledges that the utility requires price or credit concessions from any generator as impaired as Calpine to relieve “the real uncertainty whether our customers will be able to count on the contract.”
Pizarro says SCE has no further plans to acquire power plants. But it’s obvious that Calpine’s relatively new and efficient plants would be very tempting if they were placed on the block in a bankruptcy. Jonathan Cartwright, among others, expects utilities to be “among the more aggressive bidders” in such an event.
Calpine, if it survives, may well end up back where it started, as the operator of a geyser farm in Northern California. The bulk of the electricity sold by SCE and PG&E; may be generated by their own plants.
After years of turmoil, the future of electricity in California may look exactly like its past. And every time another utility bill bloated by the residual costs of this great experiment arrives in the mail, California consumers may well ask, “What was that fuss all about?”
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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and view his weblog at latimes.com/goldenstateblog.
