Subject: california update 3 / 21 / 01
executive summary :
? situation " confused " but filing probably postponed until monday
? could be sooner if negotiations completely collapse , or if commercial paper holders file pre - emptively to the qfs
? qfs pressuring legislature for rate hikes , in - state generators negotiating with ferc
? davis ' s proposed cpuc payment to qfs would require legislative approval - - tough to get before friday
? absent rate hikes , bankruptcy filing against edison is still best option for qfs - doubts about gas supply contracts and market value of davis ' price proposals
1 . situation confused , but bankruptcy unlikely before monday
the situation in california is described as " confused " due to the flurry of activity by the governor over the last twenty - four hours . it seems likely that this state of confusion will serve to forestall an involuntary bankruptcy filing until next week , when the situation should become clearer .
2 . earlier bankruptcy possible if . . . .
sources believe that two events could change this and precipitate an " immediate " filing : 1 ) a breakdown in negotiations between the governor and the qfs and 2 ) a puc order to pay the qfs $ 1 billion , which would be seen as a preference payment and cause the commercial paper holders to file an involuntary bankruptcy .
3 . qfs negotiating with davis , in - state generators talking to ferc
sources report that the qfs are currently either meeting with their lawyers are involved in negotiations with the governor ' s people and the legislature . they are reportedly " working on keeley , " since he has actually suggested openly that there needs to be a rate increase .
sources report that the in - state merchant generators are occupied today with preparing reports for the ferc . the ferc has made demands that the generators report to them on market conditions , etc . that have governed their reactions . the reports are due tomorrow . sources indicate that ferc has placed these demands to placate the california delegation and to " give the appearance of concern " for the situation in california . note , however , that the ferc did not make similar demands on out - of - state generators .
4 . $ 1 billion payment to qfs requires legislative approval , could trigger filing by commercial paper holders
sources report that the governor continues to focus on trying to get a $ 1 billion payment made to the qfs to forestall a bankruptcy filing . he is trying to get the legislature to grant the puc the authority to order this payment . this is in spite of the fact that such a payment would be seen by commercial paper holders as a preference payment , and that the money might have to be returned in the event of a bankruptcy filing . such an order by the puc would likely precipitate an involuntary bankruptcy filing by the commercial paper holders .
5 . why is involuntary bankruptcy still attractive for the qfs ?
davis / capuc plan does not incorporate payments on existing debt and requires a less than " market standard " price concession from the qfs ( $ 75 mw 5 yrs , $ 69 mw for ten years ) . current spot market power prices in the west far exceed these values . qfs who are already off - line have no need to worry about " pre - payments " or future payments for power ; they just want payment for the power they have provided .
the key weakness in this proposed plan is the inability of the qfs to fix their costs going forward . their biggest cost is natural gas . the natural gas supply contracts are between the utilities and gas providers . it would be up to the utilities to fulfill the terms of the contracts . it does not appear reasonable that a natural gas supplier would enter into a 5 - or 10 - year gas supply contract with pg & e or socal , since in the even of a bankruptcy these contracts could be rejected . the utilities remain a credit risk . unless the price of natural gas is fixed , the qfs cannot enter into 5 - or 10 - year power contracts at these prices .
moreover , gas price volatility is expected to increase rather than decrease . some sort of state support is needed to fix the gas supply contracts , and there has been no indication that the state is willing to make this sort of commitment . the state legislature does not seem willing to assume more risk at this point .