While Pacific Gas and Electric Co. inched toward bankruptcy as early as Monday, the Legislature overwhelmingly adopted an emergency plan last night to bail out the utility with taxpayer money.
Lawmakers stopped far short of giving Gov. Gray Davis the blank check he wanted, but the governor promised to sign the $400 million rescue measure today.
Meanwhile, 675,000 Northern Californians lost power for the second time in as many days yesterday when regulators launched another round of rolling blackouts to ease pressure on the state's beleaguered electricity grid.
The outages hit at 9:50 a.m. and rolled over communities from the Central Valley to the Oregon border for about two hours. Conservation efforts prevented further outages yesterday, but more blackouts are expected today.
California's energy crisis prompted Davis late Wednesday to declare a state of emergency and proposed having the Department of Water Resources buy and sell electricity until lawmakers can reach a long-term solution.
Davis did not say what his proposal might cost but energy experts estimated that two weeks of electric power could cost the state as much as $900 million.
That proved to be too steep for legislators, who placed a $400 million cap on the bailout. Senators approved the measure 34-to-2 last evening, and the Assembly unanimously approved it shortly before 11 p.m. during its second-late night energy session in three days.
"No one is ever pleased to cast a vote like this, but it's the best of a range of absolutely terrible options facing this body," said Assemblyman Fred Keeley, D-Boulder Creek.
The bill authorizes the Department of Water Resources to buy electricity from power generators and then sell it to utilities.
The law expires Feb. 2 but allows the department to buy and resell power through Feb. 15.
"If we were going to do this for more than a couple of weeks, it would be sheer lunacy," said Rod Wright, D-Los Angeles, chairman of the Assembly special committee on energy.
Earlier yesterday, sources told The Chronicle that PG&E's lawyers are preparing the paperwork needed to declare bankruptcy, and senior executives are discussing how to break the news to shareholders of the utility's parent company, Pacific Gas and Electric Corp.
"We only have a matter of days to resolve these issues," said Shawn Cooper, a PG&E spokesman. "We might have no choice."
He confirmed that PG&E's lawyers are laying the groundwork for bankruptcy. "That's what they're paid for," Cooper said.
PG&E's attorneys are getting help from high-priced bankruptcy attorneys at the Texas firm of Weil, Gotshal & Manges. Representatives of that firm could not be reached for comment.
Sources said the legal team could file the papers as soon as Monday. But that could change with the "very fluid situation" surrounding California's energy crisis, one source said.
It is not yet clear how bankruptcy would play out. Under the most likely scenario, the utility would file for protection from creditors, but its corporate parent would remain intact. However, sources said PG&E's lawyers are preparing for all contingencies, including the financial failure of both the utility and its parent.
Nevertheless, PG&E executives remain hopeful that bankruptcy can be averted by a last-minute deal with state officials and power generators.
Possible remedies include power generators giving PG&E more time to pay almost $2 billion in charges due by March, as well as financial bailouts funded by taxpayers or ratepayers.
But these proposals would do little to address PG&E's mountain of debt, which has scared away financial institutions from loaning the utility additional funds.
The banks that lend to PG&E and Southern California Edison -- which also has run out of cash -- hope to forestall bankruptcy, which would place their claims behind other creditors in a court-supervised reorganization. They are prepared to give the utilities time while a political solution to the crisis is hammered out.
Still, there appears to be differences in the willingness of the banks to give the utilities room to maneuver. PG&E's lead lender, Bank of America, does not favor a formal grace period, the sources said. While BofA is not pressing for immediate repayment, it prefers to keep its options open, the sources said.
Wall Street is skeptical of a magic-wand solution taking shape for PG&E and Southern California Edison.
The state has had months to come up with something, noted David Hitchcock, a director of Standard & Poor's, which has slashed PG&E's bond rating to "junk" status. "It's not like they haven't had notice," he said.
Steve Fetter, managing director of rating agency Fitch Inc., said Gov. Gray Davis and California legislators still appear nowhere close to cutting a deal for long-term contracts with power generators.
"The key is getting a deal with the generators, and it appears they are years apart," he said.
PG&E signaled the precariousness of its situation on Wednesday by announcing that the utility and its parent company would default on payment of $76 million to holders of the company's commercial paper, a form of short-term debt.
This move followed word from Edison that it was defaulting on nearly $600 million in outstanding bill payments. Yesterday, the Southern California utility said it also would default on as much as $255 million in commercial paper.
Carl Wood, who sits on the California Public Utilities Commission, said Edison's collapse could have a "cascade effect" on PG&E as creditors begin lining up for their money.
Edison missed a $215 million payment this week to the California Power Exchange, which must pay the ISO for power bought and sold by utilities.
Exchange officials said yesterday afternoon that Edison was forced to forfeit more than $200 million in power contracts as a result of the missed payment. They said they would sell off the contracts to recoup their loss.
For its part, PG&E has a $583 million power bill due Feb. 1. Another payment of $431 million is due Feb. 15, followed by a charge for $1.2 billion on March 2.
Both utilities have run up a combined $12 billion in debt because of a rate freeze that has prevent them from passing along to customers their sky-high wholesale electricity costs.
In Sacramento, lawmakers resisted Davis' call for virtually unlimited funds so that the state could buy power over the next few days.
The Department of Water Resources has $400 million of its own money that it is currently using to buy power, which has helped California minimize rolling blackouts. But that money will likely last only through today.
"It gives us a little bit of breathing room," said Senate President Pro Tem John Burton, D-San Francisco.
Burton introduced a bill yesterday that would create a state power authority. Under the bill, long-term bonds would be used for everything from conservation programs to building power plants.
Davis signed two bills considered small steps in the larger puzzle of solving the state' energy mess.
One bill will abolish the current ISO board and replace it with a five- member pane appointed by the governor. The current board was criticized for being dominated by those profiting from high energy prices. Davis immediately appointed four of the five members: Michael Kahn, currently chairman of the California Energy Commission; Carl Guardino, president of the Silicon Valley Manufacturers Association; Michael Florio, attorney for The Utility Reform Network; and Maria Contreras-Sweet, secretary of business, transportation and housing.
The fifth member will be announced today.
The other bill requires the state's two investor-owned utilities to seek approval of the PUC before selling any of their generating assets.
Chronicle staff writers Sam Zuckerman and Chuck Squatriglia contributed to this report. / E-mail David Lazarus at firstname.lastname@example.org and Lynda Gledhill at email@example.com
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