May 1, 2001

California to Pay $15 Billion for Power, Report Says (Correct)

(Sacramento, California) California expects to spend about $15.1 billion buying power this year, a new report said, as the state seeks to avoid blackouts and prop up its cash-strapped utilities.

By 2003, the state may have contracts in place to purchase enough power to cover about 83 percent of its electricity shortfall, according to the report, which was commissioned by Governor Gray Davis. The contracts would provide enough power to light more than 64 million homes for 1,000 hours.

California began buying power for utilities this year, and has spent $5.6 billion so far. PG&E Corp.’s Pacific Gas & Electric and Edison International’s Southern California Edison, the state’s two largest electric utilities, have run up billions of dollars in power-buying losses. Blackouts hit the state in recent months because of electricity shortages.

“I don’t know how anybody can credibly predict anything in this market,” said Debra Bowen, chairwoman of the state Senate’s utilities committee. “This market is so dysfunctional that it’s difficult to predict anything that will happen.”

California Spending

About $3 billion worth of power this year will be bought by the state through contracts, the report by Blackstone Group LP and Saber Partners LLC said. The rest will be bought in the spot market, where prices are ranging from $115 to $550 a megawatt-hour. One megawatt-hour is enough electricity to light 1,000 typical U.S. homes for an hour.

For the first four months of this year, prices on the California-Oregon border for power delivered during peak-use hours averaged $294.78 a megawatt-hour. Last year, they averaged $142.36. In 1999, they averaged $31.23.

Davis’s report was distributed this week to state lawmakers, who are considering a bill authorizing the state to issue $10 billion to $12.5 billion in bonds to buy power. The bill is stalled in the Assembly. Another bill that was signed into law on Feb. 1 allowed California to start buying electricity.

This year, California has contracts for about 40 percent of its power shortfall, the report said. The shortfall is the amount of power need by investor-owned utilities, that they don’t generate or have under contract.

The state must make up for the shortage with purchases in the spot market. It is paying an average of $230 a megawatt-hour for power in the spot market, 73 percent higher than it’s paying for electricity under its contracts this year.

Lawmakers

Republicans in the Assembly say they are concerned about assumptions made by Davis, a Democrat, concerning power prices, conservation efforts and other factors that would affect the state’s power-buying costs. Some Democrats in the Legislature say they share those concerns.

Pacific Gas & Electric and Southern California Edison have run up more than $14 billion in losses buying power at prices higher than they have been allowed to charge customers. Under the state’s deregulation laws, wholesale power prices were allowed to float while customer rates have been frozen temporarily. PG&E’s utility filed for bankruptcy protection last month.

California lawmakers originally planned to issue $10 billion in bonds for buying power on behalf of the utilities, making it the largest municipal bond offering in U.S. history. Davis wants the bond offering increased to $12.5 billion.

The report “all keys to the bond issue of that size,” said Joseph Fichera, chief executive of Saber Partners and Davis’s top financial adviser on energy issues.

Southern California Edison officials are reviewing the report, though “it is a bit premature to make a statement” on whether its assumptions about California’s future power costs are realistic, said Chief Financial Officer James Scilacci in a conference call with debt holders.

“The governor’s staff finally provided the information we’ve been seeking for about the last three weeks,” Scilacci said. “At first glance, some of the critical information is in there. We have to analyze it to see how reasonable it is.”

–Daniel Taub in (Sacramento, California) (310) 770-1292 or dtaub@bloomberg.net, with reporting by Liz Goldenberg in New York, through the San Francisco newsroom (415) 912-2980/dfr/mtw/dfr