For the first time since California's power crisis began over a year ago, things seem to be moving in the right direction. Natural gas prices have fallen, as has the wholesale cost of electricity. Three new power plants have opened in the past two weeks. Conservation seems to be working, too. Electricity consumption fell more than 12% in June, vs. the same period last year.
So California is finally emerging from its long energy nightmare, right? Well, maybe. Wrangling between state politicians and independent power producers still threatens to prolong the pain. Talks in Washington aimed at getting producers to shave billions of dollars off outstanding power bills are going nowhere. Governor Gray Davis continues to insist that producers overcharged the state by $8.9 billion. A federal regulator has said the number is closer to $2 billion. And if the more than 130 utility, producer, and state representatives don't reach a consensus by a July 9 deadline, regulators will impose one. That won't necessarily be the end of it. "Invariably, one of the two sides will be unhappy with the outcome," says electric-utility analyst Frederick M. Schultz of Raymond James & Associates. "This could trigger lawsuits and challenges."
A prolonged battle between the state and generators could leave a host of problems unresolved. The state, for instance, may not be able to pass legislation to bail out Southern California Edison Co., which says ratepayers owe it $3.5 billion. Without a break from generators, a bailout wouldn't fly politically, since ratepayers would foot the bill. Another utility that would benefit from a Washington solution is PG&E Corp. Rather than go hat in hand to the state, it sought bankruptcy protection from producers and banks, to which it owes a total $19 billion. PG&E wants producers to cut its outstanding bill so it can more quickly get out of bankruptcy.
WINDFALL PROFITS. Crucially important to the state is the ability to raise funds to cover power costs assumed since the utilities ran out of money in January. The state hopes to sell $13 billion worth of bonds by the fall. Here, Davis has had some good news. A short-term loan has given the state breathing room, and Standard & Poor's, like BusinessWeek, a division of The McGraw-Hill Companies, has taken California off a list for possible credit downgrades. Still, if Davis can't determine how much the state is owed in refunds, he'll likely have to sell more bonds at a higher interest rate.
With no deal on the horizon, producers, too, have much to lose. An agreement would remove threats that the state would seize plants or impose a windfall-profits tax. And it would greatly diminish the likelihood of price-gouging suits. That would open the way for producers to boost capacity in California, some of which is on hold.
Of course, a big difference of opinion remains between the two sides. But state officials and power producers have a golden opportunity to craft a solution that ends the crisis, or at least to abide by whatever conclusion the judge reaches. If they don't, Californians could be in for more rolling blackouts. By Christopher Palmeri in Los Angeles, with Stephanie Anderson Forest in Dallas