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California: rate increases, asset seizure, Cal-PX announces layoffs

1/22/2001 Lloyd’s of London doesn’t expect increased insurance claims from California power crisis, but litigation will continue. By April C. Murelio, Managing Editor, Power Online/ElectricNet

California Assembly Speaker Robert Hertzberg (D-Van Nuys) continues to push legislation that would create a bond issue to pay for past power purchases made by Pacific Gas & Electric (PG&E) and Southern California Edison (SCE).

Also under Hertzberg’s proposed plan, California’s utilities wouldn’t have to buy power through the California Power Exchange and the state would establish a “default provider.” In exchange for this relief, PG&E and SCE, a unit of Edison International, must hand over their hydro assets -- 5,200 MW valued at around US$5 billion -- to the state of California.

According to today’s Wall Street Journal, Hertzberg put together the plan with the help of other legislators, staff members, bankruptcy attorneys, energy consultants and investment bankers from Credit Suisse First Boston.

Consumers, of course, would fund the proposed bonds most likely over a 10-year period. With these bonds, utility rates will more than likely increase (10% to 20% at PG&E) by 2003 or 2004. This aspect of Hertzberg’s proposal could draw the ire of Gov. Gray Davis, who insists that any attempted solution receiving his stamp of approval won’t include rate increases.

Although neither PG&E or SCE or the state’s power producers, have issued any formal statements regarding their positions, Hertzberg’s proposal first debuted during a meeting last week with Gov. Davis, other political leaders and utility executives.

Still, the plan faces many hurdles. Opponents voiced concern that making state government the primary electricity supplier poses significant risk to taxpayers. The total cost of energy supplied to the state through its power auctions jumped 276% last year to US$27.97 billion from US$7.43 billion in 1999. Power costs for November and December exceeded the total cost for all of last year by 28%.

So unless wholesale prices can be managed --- keeping them to between US$55 and US$75 per MW -- opponents said it’s likely the state would end up in the same condition as PG&E and SCE, struggling to pay its power bills.

Gov. Davis last week signed emergency legislation that authorized the state Department of Water Resources to buy US$400 million worth of power and supply it to consumers. But, the situation continues to worsen.

For example, in a rather bizarre move, the California Public Utility Commission (PUC) met in emergency session and by a vote of 2-1 imposed a temporary restraining order on PG&E and Edison. Apparently, the PUC suspected the utilities of preparing to yank the cord so to speak on its customers, refusing to furnish any more electricity than what their own plants could provide. The utilities have not indicated a desire to do this.

Meanwhile, credit problems continue, with the California Independent System Operator and the California Exchange now reporting major fall out. Friday, Jan. 19, the California Power Exchange said it planned to reduce its workforce by 15% and “wind up the affairs of the corporation.”

Lloyd’s of London believes litigation will continue; no insurance claims yet

On the insurance and litigation front, a top official with the Lloyd’s of London insurance market today said it expected no major insurance claims to arise from the California power crisis. However, said Julian James, Lloyd’s head of worldwide markets, the possibility of claims against the directors and officers of the power distributors and generators seems likely.

“The suit issued by San Francisco against 13 power producers is likely to be the tip of a litigation iceberg if this situation continues,” James said. “That could well lead to insurers facing claims under Directors & Officers cover, as management find themselves personally liable.”

Although the California situation probably won’t trigger business interruption clauses in many policies, it could be an issue with technology companies in Silicon Valley.

“Their sensitivity to power fluctuations could create claims under ‘work in progress’ clauses where delicate processes are affected by changes in power,” he said. “In short, there are a number of specific power outage policies available from Lloyd’s and other insurers, but the market today is small, and we doubt that this incident will have an impact.”

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-- Martin Thompson (mthom1927@aol.com), January 23, 2001