- The Washington Times - Friday, January 12, 2001

Hopes for a federally brokered solution to California's power crisis faded yesterday as the state declared a high-level power emergency and Gov. Gray Davis said he would not act to prevent a utility bankruptcy.

The state's two largest utilities are fast running out of cash to pay for their purchases of power, as well as for servicing $12 billion of debt they amassed, mostly during the power crisis last year.

Federal and state negotiators so far have failed to find a solution to this critical problem, because it would require either a large increase in consumer electricity rates or a state-financed bailout or guarantee of the utility debt. Mr. Davis ruled that out yesterday.

"We're not stepping in in the short term," the California Democrat said at a news conference in Sacramento after returning from a negotiating session here on Tuesday aimed at resolving the crisis. The session was arranged by the Clinton administration. "We will help in the long term," he said.

Hearings in the Democratic-controlled state Legislature also have focused only on long-term remedies for the state's energy crisis. Lawmakers say they do not want state ratepayers or taxpayers to finance a bailout.

But Wall Street analysts say there will be no "long term" unless the state resolves the short-term credit crunch faced by the utilities. And a growing number of economists on Wall Street say the state's energy crisis and impending bankruptcies are threatening to drag the state and the rest of the country into recession.

Major credit agencies say they will downgrade the utilities' debt to "junk" status unless the state acts. That would put the companies in default and make it impossible for them to get new loans.

Mr. Davis is considering having the state buy electricity for the utilities, owned by Pacific Gas & Electric Corp. and Edison International, and giving the utilities flexibility in paying for the power. But analysts say that plan would not restore their credit ratings and enable them to keep operating on their own.

"There have to be some serious credit guarantees," said Mark Palmer, vice president of Enron Corp., one of the power suppliers participating in the negotiations.

Participants in the negotiations said they had seen progress on some issues, such as reforming the way the utilities purchase power from generators through long-term contracts. But the talks are far short of finding a solution to the credit crunch that shook Wall Street markets a week ago.

Administration sources said there's a good chance the negotiations won't resolve the financial crisis. The utilities' creditors Bank of America, Wells Fargo and other banks and mutual funds have not been involved in the talks.

Negotiators have been constrained by Mr. Davis' unwillingness to find ways to make the utilities financially whole, though they are doing their best to work within the limits he set, administration sources said.

The talks are being held at the Treasury Department, which is comforting to Wall Street financiers who are hoping for a federal or state bailout. But administration sources said they have no intention of stepping in with a bailout if the state fails to act.

Energy Secretary Bill Richardson set a new deadline for negotiators by extending until Wednesday an emergency order that requires Western power generators to keep supplying the utilities with electricity, despite doubts about their ability to pay for it

"The best way to prevent a bankruptcy is to support the utilities' request to raise consumer rates," said Richard Wheatley of Reliant Energy, a Houston energy supplier participating in the negotiations.

Instead, Mr. Davis and the state legislators appear to be moving toward a takeover of parts of the power system. They also want the federal government to impose caps on wholesale power prices throughout the West. The state already caps consumer rates.

The Energy Department emergency order contains a cap on wholesale prices, set at $64 per megawatt hour. But the Federal Energy Regulatory Commission has strongly opposed such price controls over the long term.

"Re-regulation and state control cannot and will not solve the issue of supply the main factor creating the crisis in California," Mr. Wheatley said.

Mr. Davis said Reliant, Enron and other power generators involved in the negotiations are prepared to give the utilities extra time to repay their debts. But the power company spokesmen said an agreement is still far off, and may not be reached if the state provides no guarantees.

Meanwhile, bad weather and power plant closures yesterday forced the manager of California's power grid, the Independent System Operator, to declare a "stage three" emergency for only the second time in the crisis.

The emergency designation, which is declared when power reserves fall within 1.5 percent of demand, enables the utilities to cut off power for commercial customers that have interruptible contracts. Some universities and businesses closed for the day.

The state narrowly averted rolling blackouts yesterday after a powerful storm crippled a key nuclear plant while other electric-generating stations shut down for maintenance.

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