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Published on: 4/1/2001
Last Visited: 8/8/2001
Tom Higgins , senior vice-president of Edison International , explains : The principle reason for the wholesale electricity market beginning to malfunction was due to a fatal flaw in the design of the market.Regulators made the utilities purchase electricity in the spot market , but there is a relatively small number of companies that control the supply of the spot market.This allowed them to exercise market power , and the result is that average prices have been more than 10 times higher than what they were before..While factors such as increases in natural gas prices and the growth in demand account for some of the rise in cost , Higgins feels that no reasons were sufficient to explain the heights to which prices in the spot market soared.
In addition , the companies repeatedly requested permission from regulators to purchase long-term contracts for the supply of power – which was not allowed under the deregulation legislation , but were refused.We were finally , after asking for more than a year , able to get permission from regulators to enter into long-term contracts last August , so we did that immediately , but the price had already escalated..
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Says Higgins at Edison : We could no longer obtain lines of credit , and were in a state of technical insolvency.We couldn't pay the costs that were accruing..
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Explains Higgins : In the transmission system sale , utilities would recover the depreciated book value of their transmission lines , which for us works out to $1.3 billion , and the gain on the sale , which is tentatively $2.7 billion , would be used to retire a portion of the past undercollection debt..
He says that the amended settlement agreement includes some new provisos : It clarifies that the state has the financial responsibility for recovering the procurement cost it has incurred and guarantees that the procurement cost that we have incurred will similarly be financeable , either through bonds or securitizations issued by the utility.Under this framework the bonds issued by the utilities would be paid for by a dedicated component on the bill..
What this means is that the investor-owned utilities will be able to securitize future flows on receivables and pay for that with a dedicated component of the bill , which will leave them free to make payments to creditors and generators.At press time , PG&E had not signed the agreement and the third investor-owned utility , San Diego Gas & Electric , was not available for comment.
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It remains to be seen if this will hold up through the legislative process and an electoral challenge to the legislation , says Higgins.
The road is long.
With more rolling blackouts having taken effect in March , the crisis is far from over – it is not expected to be resolved for more than a year.
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