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California Crisis Update

California Crisis Update. February 5, 2001. Going Forward. AB-1X signed into law on Thursday, February 1

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California Crisis Update

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  1. California Crisis Update February 5, 2001

  2. Going Forward • AB-1X signed into law on Thursday, February 1 • Permits California’s Department of Water Resources (DWR) to negotiate long-term power purchases with generators and sell the power directly to rate payers, with the utilities serving the role of agent for rate collection. • The state will use revenue bonds totaling $10-16 Billion to finance the power purchase contracts. • The bonds would be paid off through the California Procurement Adjustment (CPA) carve-out, which is the difference between rates collected by the utilities and the utilities’ costs. The utilities never take legal title to the CPA carve-out, leaving it untouchable in any potential bankruptcy proceedings. • If the CPA carve-out is insufficient to cover debt service, the CPUC has the ability to raise rates for commercial, industrial, and some residential customers. • The DWR is not allowed to enter into contracts after Jan 1, 2003. • An immediate 10% rate hike was made permanent. • The DWR is expected to spend an incremental $600 million dollars on spot market wholesale power while the long-term contracting and bond placement processes are being finalized. • Gov. Gray Davis has said his goal is to sign long-term contracts for below $69 / MWh. This represents an increase from the previously stated $55 / MWh target. • Expectations are that the long-term power contracting will ultimately result in a residual 5% exposure to spot market power. • The latest round of bidding began Friday (Feb 2) morning • The bids seem to moving toward longer dated terms in order to bring down the fixed prices to desired levels. • Question: At what long-dated term do credit concerns and the bid-ask spread actually start increasing the fixed price offers? Conceptually, there is some term that balances the curve backwardation with long-dated market uncertainty, resulting in a minimum price. • Morgan Stanley on AB-1X: “A positive for gencos. Long-term contracts negotiated in a seller’s market should establish strong margins for five years or longer in a key market.”

  3. Utilities’ Past Undercollection • Under recovered purchase power balances for EIX and PCG total over $11.5 billion and a solution has yet to be resolved. • Internal audits indicated EIX and PCG indicate the companies are on track to out of money in early February and March, respectively. • There are various bills or proposed bills in the legislature that are looking to address this problem through potential revenue bonds or the issuance of securitized debt. • Concurrently, both utilities have cases in federal district court alleging that their inability to pass on power costs through to ratepayers is illegal. • The utilities are requesting that they should be able to raise rates to pass through their power procurement costs retroactive to August 2000. • EIX’s petition against the CPUC will be heard on February 12.

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