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http://www.contracostatimes.com/news/topstory/powerahead_20010408.htm Published Sunday, April 8, 2001

Taxpayers left to pick up the tab POWER CRISIS

Bay Area consumers, economy are threatened most by PG&E bankruptcy By John Simerman and Rick Jurgens TIMES STAFF WRITERS

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Judge Dennis Montali had finished his usual weekly docket of debt-riddled dot-coms and other bankruptcy cases. Gray Davis was in Escondido to hand out an energy conservation award at an elementary school.

At 9:04 a.m. Friday, a U.S. Bankruptcy Court clerk punched a historic date stamp on an alarming escalation of California's energy crisis.

The Pacific Gas and Electric Co.'s bankruptcy augured catastrophe for the company's shareholders and employees and sent shock waves through a region which held PG&E as an economic icon throughout the 20th century.

But while the bankruptcy captured headlines, the ongoing conflation of higher natural gas and energy prices behind it threatens to cause greater and longer-lasting damage to the people and the economy of the Bay Area.

With its filing, PG&E is free to sort out its finances under Montali's protection. But the state -- really, its taxpayers and ratepayers -- has no such shelter for electricity costs that nearly quadrupled in a year. They will be paying the bills that made the state's largest utility insolvent.

"There are still problems about how do we get more power online, how do we deal with the rate structure when the magnitude of the increases can't be borne by large segments of society?" said Kenneth N. Klee, a UCLA law professor and bankruptcy expert.

Somehow, the state must grapple on its own with wholesale charges for electricity that jumped 366 percent from 1999 to 2000, from $7.4 billion to $27.1 billion, while the volume of electricity moving across the statewide grid rose just 4.3 percent, according to the California Independent System Operator.

The state stepped in as the buyer in January when power producers and wholesalers were spooked by the utilities' mounting bills. That month, electricity costs were up 744 percent from January 1999, while electricity use declined slightly.

As bankruptcy lawyers around the country hike up their trousers, the focus for state lawmakers turns to future electricity supply and how to pay for it.

Negotiators for Gov. Gray Davis continued talks Saturday with Southern California Edison about a state buyout of the company's high-voltage transmission lines. And Davis spokesman Steve Maviglio said the governor still might try to buy PG&E's transmission lines on behalf of the state.

"We can still negotiate with PG&E; it just has to be overseen by a bankruptcy judge," Maviglio said.

While one state lawmaker urged Davis on Saturday to seize a handful of power plants in a show of political muscle, bankruptcy scholars debated whether court proceedings would hamper the state's ability to keep planned rate hikes for itself.

The state Public Utilities Commission is in the process of dedicating a portion of ratepayers' bills to the state, a plan that some feared could be scuttled by PG&E's decision to seek financial shelter.

A rate hike approved last month by the PUC would raise $4.8 billion per year to help stanch the outflow that has forced the state to commit half of its vaunted $8.5 billion budget surplus in less than three months.

"Does the bankruptcy judge have the authority to basically change customers' bills? The answer, I think, is 'no,'" said Frederick Lambert, professor of law at the University of California's Hastings College of the Law in San Francisco. "I think ultimately the question of rates will be resolved in the PUC."

One expert said state regulators' plans to dedicate a portion of ratepayers' bills to replenish state coffers would probably not be affected by the bankruptcy.

"It will be in everybody's interest to make sure that the entity that's buying the power get paid," said Peter Bradford, a adjunct professor of energy policy and utilities law at Yale University and Vermont Law School.

Bradford and other experts say the bankruptcy code protects state regulators' authority to set electric rates, which means the PUC would be able to approve or reject any rate increase devised in court. The law, however, does not explicitly give the PUC the authority to decide who gets paid with those funds.

Klee said creditors will surely seek to snap the protective ring set up by the utility's parent company, PG&E Corp., to guard its assets from the utility's creditors. A committee of creditors is likely to threaten a lawsuit against the parent corporation, which may result in a settlement, said Klee.

"We all know how the utilities upstreamed a lot of assets to their parent corporations," he said. "The problem, of course, is the parent took the money and blew it out to shareholders. Probably that money can't be taken back."

Bradford said it was unlikely that the assets of PG&E's corporate relatives would be tapped unless the judge finds the company transferred them in a bid to cheat creditors.

"Legally, those are separate entities," he said.

Whether the state will rein in rising electricity costs any time soon depends mainly on supply and demand for electricity within the grid of transmission lines linking generators and power users in 14 Western states and British Columbia.

Right now, things look pretty grim. The supply of electricity to meet summer peak demands will be limited by a dry winter that has reduced the availability of hydroelectric power. Electricity prices will also be driven up by natural gas prices that remain at historically high levels.

State regulators allege that natural gas suppliers and electricity generators have cut supplies to drive up prices. Cases on those issues are pending before judges and federal regulators. Only last week, in a little-noticed ruling, the 9th U.S. Circuit Court of Appeals overturned a lower court's order requiring generators to sell power into the grid.

The bankruptcy ruling could also add to the problem by prompting alternative energy producers to cease generating electricity, according to the head of an association of cogeneration companies. "It injects a greater level of instability and uncertainty into an already unstable and uncertain situation," said Ann MacLeod, director of the California Cogeneration Council. "PG&E's action will have a ripple effect."

Small alternative energy generators, known as qualifying facilities, will continue to provide power in the short run, said Jan Smutny-Jones, director of the Independent Energy Producers Association, a Sacramento-based group that includes about 50 qualifying facilities.

The newly assigned bankruptcy judge has 30 days to determine whether the facilities' contracts with PG&E will be affirmed. If they're not, Smutny-Jones said, the qualifying facilities will be free to shop their services to other buyers, including the California Department of Water Resources, which has been buying power on behalf of the state.

"We will do everything we can as generators to continue to provide electricity to this market," Smutny-Jones said.

Maviglio worried that those contracts could come "at prices 10, 15, 20 times higher" if the state was forced to buy them. He also said the bankruptcy could lead to the selloff of tens of thousands of acres of PG&E land to the highest bidder.

"It's a whole new world," he said.

For Smutny-Jones, the real looming crisis is not PG&E's financial crash, but the qualifying facilities that remain offline because they haven't been paid by the San Francisco utility or Edison.

The voluntary shutdown of those facilities last month helped bring two days of rolling blackouts. The PUC had ordered PG&E to pay the energy generators for future purchases. Smutny-Jones said he's unsure if the utility will make its first payment, scheduled for mid-April.

"If we do not get the qualifying facilities that are offline back online this summer, what was going to be a difficult summer will be pushing the impossible," he said.

With suppliers seemingly holding the upper hand, Californians' best bet in the short run may be to hope that electricity demand is limited by conservation measures and a mild summer, and that the state succeeds with efforts to boost supply and use long-term contracts and other leverage in the marketplace.

Staff Writers Matt Sebastian and Mike Taugher contributed to this story.

-- Martin Thompson (mthom1927@aol.com), April 08, 2001