In the News: Recent Developments

January 9, 2002

State Stops Using Public Money to Buy Power


SACRAMENTO — In what state officials called a “significant milestone” for California’s year-old electricity crisis, power costs have fallen to the point that no public money was needed in November and December to pay for the electricity the state purchased on behalf of utility customers.

After spending more than $6 billion of taxpayer money in the last year to keep electricity flowing to customers of Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, the state has begun covering its power purchases with just the money it collects from utility customers.

“Now what we’re seeing is the trend of a positive cash flow,” said California Department of Water Resources spokesman Oscar Hidalgo. His agency was shoved into the business of buying about 30% of the power the utilities needed in January 2001, after months of high wholesale electricity prices drained the utilities of cash. But utility customers shouldn’t look for a rate cut any time soon. Whatever money the water department collects beyond what is needed to buy electricity will be used to whittle away at the state’s mountain of debt.

And the trend of the department collecting more money than it spends will definitely reverse itself in April. That’s when the state must begin making monthly payments of more than $130 million on a $4.3-billion short-term loan it floated in July to help cover electricity purchases.

Still unresolved, too, is how the state will replace the $6.1 billion it spent from the general fund on power. A plan to issue bonds, to be paid back by utility customers, is mired in politics. But the turning point in the water department’s finances comes a year earlier than Gov. Gray Davis’ energy advisors forecast.

“The governor planned for the worst and hoped for the best,” said Joseph S. Fichera, chief executive of Saber Partners, a Wall Street firm that helped Davis draft a plan to control energy costs and avoid blackouts. The plan hinged on three elements–signing long-term power contracts at prices lower than on the spot market, rapid construction of power plants and heavy conservation by consumers.

Big risks remain, Fichera said. They include what happens in January 2003, when the water department by law must get out of the power-buying business, even if Edison and PG&E have not recovered enough financially to resume buying electricity for their customers. Another risk, he said, is whether power plants get built at the pace that state energy planners assume. “It’s not over,” he said.

The water department’s overall power costs have plunged from a monthly high of $2 billion in May to $373 million in December. Factors cited by experts include a drop in natural gas prices, a price cap imposed by federal regulators and the effect of the state’s long-term power deals. Also the Public Utilities Commission has raised utility rates an average of 30% in the last year.

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