California "Energy Crisis" Tied to Stock Market

by J.A. Savage

With two of the largest utilities in the nation declaring that they are disturbingly close to filing bankruptcy, repercussions on the businesses themselves and their Wall Street backers would be dire -- although their holding companies would probably do all right. However, the backlash could be devastating to the state and the nation say economists.

California accounts for 14 percent of the nation's economy. Even if it's merely a 30 percent rate hike for electricity (what Southern California Edison and Pacific Gas & Electric are asking), that too, will undoubtedly have severe economic effects. Manufacturers will lay off workers. Consumers will stop buying because utility bills are taking up so much of their income. It will make the dot-com dieout look like small spuds.

"There's nothing magical about bankruptcy. It's the shock waves from it," said Tapan Munroe, president, Munroe Consulting.

For California alone, "the destabilization and uncertainty puts a pall over the state. If I were [a business] outside California or thinking of expanding I would have no confidence in the business economy of the state," Munroe added.

"Businesses do go bankrupt all the time, but not utilities," maintained Gerald Keenan, PricewaterhouseCoopers lead energy strategy partner. "Utility service is cloaked with a different public interest point of view."

The utility points to securities analysts, like Standard & Poors, that lenders will no longer continue to extend that sort of credit without a ratepayer bailout of some sort. Access to commercial paper has run out for PG&E and Southern California Edison, predicted Keenan. Short-term credit, with payback schedules from one day to nine months is the way companies manage cash-flow. But, Keenan said that since about December 15, Edison at least, has found banks unwilling to lend any more money.

California utilities' creditworthiness has become a national economic quandry. On December 26, Governor Gray Davis met with Federal Reserve Bank Chair Alan Greenspan, and Treasury Secretary Lawrence Summers. Davis hinted the meeting was his idea, but some observers believe it was just the opposite, with the feds worried about California's ripple effect on the rest of the economy.

"Me, personally -- I mean Greenspan doesn't tell me what he thinks -- is that if I were him I'd be concerned about high electricity prices in the state, and the ripple effects of bankruptcy on markets in general. It would be a fairly significant psychological impact," said Susan Abbott, Moody's power group managing director.

Still, consumer advocates maintain utilities are crying "wolf" and that they have convinced Wall St. to create undue pressure on regulators -- making the situation look more dire than it is.

Issues high on consumer advocates' list of why utilities should be left to their own devices are:

• The outgoing account, the Transition Revenue Account should be netted against the incoming account, the Transition Cost Balancing Account. Thus utilities' outstanding balance would be reduced from the claimed $8 billion to something far less.

• Once accounts are netted out, then utilities should take that remaining number and apply it to the risk of "headroom," or lack thereof. In other words, consumer groups say utilities signed onto the risk of not making back all their stranded assets when they supported AB 1890, and that gamble did not pay off.

• With consumers financing rate bonds in 1997, utilities got $5.6 billion in cash already. "One can only observe that utilities' holding companies have gone on a buying spree in recent years, purchasing generating assets in other states and countries. Apparently none of the money was set aside for a 'rainy day' when PX prices might not be as favorable," noted Mike Florio, The Utility Reform Network senior attorney.

Moody's Abbott said that the feared domino effect of deregulation's demise in California cutting off the free market other states -- and thus, the investments of utilities' unregulated affiliates in those states -- is highly unlikely. If so, then PG&E and Edison's holding companies, would be walled off from economic problems that might bring them down in the big picture.

"The majority of people who have come to see us, the first words out of their mouths are: 'We're not California.'" She said that this state's supply and demand imbalance is not shared and would be unlikely to stop deregulation in states where it is already underway. "California is an isolated case."

A poor California economy was what restructuring was supposed to remedy in the first place in the early 1990s when rates were 50 percent higher than the rest of the nation and the state of Idaho was trolling to lure away businesses to the potato state with its offering of lower rates.

Regulators only considered the downward effects on prices with a free market, but the market goes both ways, said Munroe. "No one considered that prices would go up. Econ 101 lives."