Kicking Assets

From its inception in 1996, energy deregulation in California had been, above all else, the near-silent transfer of $20 billion from consumers’ pocketbooks to the bank accounts of the state’s three investor-owned utilities. That vast sum flowed to Pacific Gas and Electric, Southern California Edison, and, to a lesser extent, to San Diego Gas and Electric, as silently as the invisible hand of the marketplace would, as the architects of deregulation promised, bring electricity rates down by 20 percent no later than March 2002. That was the deadline for California’s IOUs, as they are aptly named, to be freed of the reins of regulation administered by the Public Utilities Commission.

The placid transition from regulated to unregulated businesses was interrupted just once, in the fall of 1998, when the Ratepayer Revolt, headed by Harvey Rosenfield, mounted a ballot initiative to undo deregulation, losing badly at the polls, outspent by the IOUs $30 million to $1 million.

Then, suddenly, at the end of last year, the silence was pierced by the shrill claims of PG&E and SCE that they were broke. The free market in energy prices had gone wild, forcing the utilities to pay far more for electricity than they could charge their customers under the state Legislature’s mandated rate freeze. By January, it seemed possible that two IOUs — firms thought to be among Wall Street’s safest bets, where pension funds and county financial officers had parked hundreds of millions of dollars because the utilities’ guaranteed rate of return made their stocks appear invulnerable to economic mood swings — were on the verge of collapse. Bankruptcy became the watchword for corporate giants whose combined global revenues in 1999 exceeded $40 billion, and whose portfolios were valued at roughly $67 billion.

This imminent implosion was taken for granted by Sacramento, especially after a wave of rolling blackouts in mid-January drove home the point that the IOUs couldn’t — consumer advocate Rosenfield charged “wouldn’t” — deliver power. Whether it was a sinister strategy of “blackout blackmail” or the more benign “cash flow” crisis Governor Gray Davis spoke of, one thing was certain: The state of California was getting into the power-buying business. It would spend $1.096 billion between January 17 and February 10 (or a little less than half the $2.5 billion that out-of-state power companies spent to buy the in-state generating capacity that provided them with nearly $1.2 billion in windfall profits in 2000). Another $500 million was being sought last week, and the total drain on the state’s general fund could top $4 billion by May. Under intense pressure, the Legislature on January 31 would further authorize $10 billion in bonds in order to assume the power-buying role formerly filled by the investor-owned utilities — letting the IOUs off the hook for the only part of their business where they take chances, and shifting the risk of a volatile electricity market onto taxpayers and consumers.

Like it or not, some kind of deal also would have to be brokered between the governor and the utilities to address the $11.1 billion in energy costs that, in the swift passage of summer into fall and fall into winter, had transformed PG&E’s and SCE’s stellar credit ratings to junk bonds. Davis, while vowing that he was “in no mood” and had “no inclination to bail out anyone,” admitted in a press conference early last week that in exchange for “something of commensurate value,” the state would have “to provide a cash infusion to utilities so they can be viable . . . in order to perform functions that the state would otherwise have to absorb.”

The utilities, meanwhile, staked a take-no-prisoners negotiating stance. The massive debt, they argued, wasn’t even theirs. “We never signed on to subsidize consumers’ consumption,” Robert Foster, vice president of SCE, told the Weekly. Ratepayers should “pick up the tab” for skyrocketing energy prices. “They consumed the power,” the utility executive said flatly. The utilities went to federal court to make that case, filing suit to force the state PUC to retroactively lift the cap on utility rates.

While the governor huddled in closed-door negotiations with the IOUs and the Legislature sponsored a raft of “urgency” bills, the question arose, how broke are they? An economist at Credit Suisse First Boston, whose clients included power generators selling electricity to the state, and who was now a key adviser to Assembly Speaker Bob Hertzberg (D–Sherman Oaks), had his own mischievous answer. “The rolling blackouts in California are more likely to soften up the Legislature and the voters to the need for a rate increase than they are indicative of a permanent ‘when the lights went out in California’ scenario,” the analyst wrote. “The ‘unthinkable’ rarely will be permitted to happen.”

It is easy to see why PG&E and Edison appear broke. Quite simply, neither company has the cash to pay its debts. A pair of independent audits, commissioned and issued by the PUC at the end of January, agreed that had PG&E and SCE continued to do business as usual — meeting their obligations to buy power and to pay their debts — they would have run out of money by the beginning of February. As it was, the companies defaulted on a number of loans, easing the cash crunch. Edison’s “cash conservation” plan, for instance, left it with $1.2 billion on hand. PG&E stated in a January 17 Securities and Exchange Commission filing that it had “current cash reserves of $347 million.” True, their anemic cash supplies prevented them from paying for the power they’d bought in last year’s soaring market, but with the state taking over power purchasing, what remained of the IOUs’ business — generating and transmitting power — would extend their life spans, both audits concluded, at least until March 30. In short, although the utilities’ stocks had tumbled on Wall Street, the companies were not yet terminal.