Blackouts Narrowly Averted, CA Still Crying for Help
"Hope" was the operative four-letter word in California last
week if you had anything to do with the energy industry or government as
Friday saw the previous day's specter of rolling blackouts from razor-thin
electricity reserves ease.
The week also ended with emergency legislation starting its dash through
the state capital, and the governor holding a 90-minute meeting with two
neighboring western governors to piece together a regional strategy on
joint energy conversation/supply cooperation among the western states.
Nevertheless, there was still no resolution to the nagging supply, price
and utility financial crisis that has taken on a life of its own.
While the state continued to struggle mightily, negotiating teams in
Washington, D.C., set in motion by a crisis meeting led by Treasury Secretary
Lawrence Summers last Tuesday night, were continuing to work on remedial
measures. California Gov. Gray Davis had joined Clinton Administration
officials and industry stakeholders in a seven-hour meeting laying out
the issues to be addressed.
Staff working groups continued to meet through the week and the principals
were expected to resume sessions Saturday by video conference to make the
critical decisions. Following the Tuesday meeting FERC Chairman James Hoecker
said participants were "highly cooperative" and "substantial
progress was made in finding both near-term, intermediate and long-term
solutions to California's difficult issues."
Along with five basic principles the working groups were hammering out
more details on, a brief written summary of the late-Tuesday session said
that the "parties (for the first time) acknowledge that (California's)
problem must be addressed while taking into account the regional nature
of the market." This was significant, given the fact that Gov. Davis'
state plan articulated in his "state-of-the-state" address last
Monday made no mention of California's ties to the regional western power
Hoecker noted he was "happy to say that it appears to me that discussions
are heading in a direction that's entirely consistent with our Dec. 15
order" in which FERC enacted a series of reforms for California's
out-of-control bulk power market.
The five principles adopted Tuesday night were:
- Development of long-term electricity purchases --- possibly by the
state government --- from generators at an "attractive fixed rate."
- Willingness of merchant generators, qualifying facilities (QFs) and
marketers to wait longer to get paid their full amounts by California's
two near-bankrupt major utilities, Southern California Edison and Pacific
Gas & Electric.
- A means of addressing the almost $12 billion in debt the two utilities
owe for wholesale power purchases uncovered by their allowable retail rates
that will be both "consistent with contractual obligations (for the
utilities) and in the public interest." (In other words, who pays
for this ultimately: utility customers, shareholders, generators (in mandated
refunds) or taxpayers in the form of state-backed bailouts, or a combination
of all or some of these?)
- Federal-state-industry cooperation to better match supply and demand
in both the short- and long-terms.
- Review of existing QF payment structures.
The more upbeat tone, following the mid-week announcement contrasted
with the reaction after Davis' Monday night speech, which called on the
state to get back in control of its "energy destiny" through
either a "joint powers authority among the state and its 30 municipal
utilities to develop the additional power we need, or a California public
power authority that can buy and build new plants." Industry watchers
searched his message in vain for any mention of real short-term fixes.
He did acknowledge it would be "irresponsible" to allow the utilities
to fail, saying "Our fate is tied to their fate."
On Friday Davis said if FERC fails to act, he is sure Congress will
take up legislation to stabilize power prices throughout the country, "or
at least give governors the option to opt into a stabilized pricing mechanism.
Sen. Diane Feinstein, D-CA, announced she was working on a bill to be offered
later this month which would allow the energy secretary to impose price
Davis indicated that he and federal officials would be working over
the weekend and he expects to have something to announce early next week,
and in the long term he expects to "solve this problem in the next
90 days and in six months hopefully this whole episode will be a distant
Also on Friday Standard & Poor's assigned an investment grade triple
B plus corporate credit rating to subsidiary PG&E Energy Trading Holdings,
and said subsidiaries Gas Transmission Northwest and PG&E Generating
also would maintain their investment grade rating, based on each entity's
own creditworthiness and economic self-sufficiency. These units would be
insulated from downgrades of the parent PG&E Corp., or the utility
subsidiary, Pacific Gas & Electric. PG&E took action last week
to suspend its fourth quarter dividend and cut staff and services (see
related story, this issue).
Following their meeting in Sacramento Friday, Gov. Davis and his counterparts
in Oregon (John Kitzhaber) and Washington (Gary Locke) announced a Feb.
2 western governors' meeting in Portland, OR, to push for a western region
wholesale power price cap, and a region-wide push by each state to conserve
energy and finally to share energy supplies on a seasonal basis. As fellow
Democrats, Washington's Gov. Locke and Oregon's Gov. Kitzhaber expressed
strong support for Gov. Davis's efforts and pushed for solutions from FERC
"It is extraordinarily important that this not be a partisan struggle
between West Coast Democratic governors and the inland governors who are
mostly Republican," said Kitzhaber, noting that not all the solutions
have to come from new generation. Conservation can play a major role, too.
Both visiting governors said they strongly support the state of California
becoming the purchaser of long-term power and then reselling to the utilities.
They are banking on the fact that the state's creditworthiness will
gain much better prices than the cash-strapped, near-bankrupt two major
utilities, Southern California Edison Co. and Pacific Gas and Electric
The lower house (Assembly) of the state legislature cranked out about
a dozen proposed laws, including one to completely restructure the oversight
boards of the state-chartered grid operator (Cal-ISO) and wholesale spot
power market (Cal-PX) from large stakeholder panels of 26 to 30 industry
representatives to small units of three people each --- all appointed by
the governor. Another proposed law would prevent the state's three major
private-sector utilities, including the two near bankruptcy, to sell their
remaining generation units, which are comprised mostly of nuclear, hydroelectric
and interests in out-of-state coal-fired plants.
Gov. Davis indicated he expects state lawmakers to pass the bill this
Wednesday, establishing three-person boards for the Cal-ISO and PX, and
the members of the ISO panel will be the head of the state's three principal
agencies overseeing electricity --- the California Public Utilities Commission,
California Energy Commission and Electricity Oversight Board, of which
two of the three are headed by Davis appointees.
The near-rolling blackouts of Thursday, caused by storm-driven wave
surges that curtailed power production at coastal plants, were eliminated
over the weekend through stepped up conservation, restoration of major
units at PG&E's Diablo Canyon Nuclear Generating Plant, and by what
the grid operator called "the biggest single-day" lowering of
demand he has ever experienced. This week Cal-ISO expects to have 5,000
to 6,000 MW that were out of service last week back online, further improving
the chance of avoiding power emergencies. Last Thursday an unprecedented
15,000 MW or one-third of the capacity usually available, was out of service,
either through planned outages or because of the storm.
Salvaging the state's system last week at the critical Stage Three was
California's water resources department, which operates the massive north-to-south
network of aqueducts. It purchased 1,200 MW from out of state using the
state's creditworthiness to get around the Cal-ISO financial problems that
are an offshoot of the utilities' inability to collect the full cost of
its supplies because its retail rates are frozen under the state's deregulation
As it has done on a lower-profile basis in the past, the water resources
department acted as a quasi-state power authority, and the Cal-ISO COO
Kellan Fluckiger said that other market participants also are providing
this sort of "intermediary financing" in light of the credit
concerns surrounding the ISO and utilities. The water department also contributed
to the supply crunch --- as it does routinely --- by shutting down its
heavy electricity consuming pumps that move massive quantities of water
around the state.
The reality of facing rolling blackouts caused a California-based creator
of e-commerce data centers and web site hosting to warn that "hundreds
of millions of dollars in manufacturing, stock trades, bank transactions
and online purchases would be lost in a 15-minute outage." In planned,
or rolling, blackouts typically the power cutoffs for firm customers last
up to an hour, Fluckiger said.
"Many high-tech businesses that have rushed to market in the last
two years have hastily designed and poorly maintained facilities with unreliable
back-up systems in place to deal with a power outage," said Dan McNary,
a spokesperson with Syska & Hennessy's OnLine Environments, Santa Monica,
An emergency order from DOE Secretary Bill Richardson lapsed at midnight
Wednesday, but then was extended until midnigh, Wednesday. The order is
not contributing as much as in earlier weeks, since the $64 cap was imposed
on the emergency power, Fluckiger said.
Attendees at the Tuesday night meeting included: Treasury Secretary
Summers; Energy Secretary Bill Richardson; Gene Sperling, President Clinton's
chief economic adviser; Martin Baily, chairman of the White House Council
of Economic Advisers; FERC's Hoecker; Davis; Lynn Schenk, chief of staff
to Davis; CPUC President Loretta Lynch; Robert Hertzberg, speaker of the
California State Assembly; John Burton, president pro tempore, California
State Senate; James Brulte, minority leader, California State Senate; William
Campbell, minority leader, California State Assembly; Jerry M.Winter, president
and CEO, California Independent System Operator; Edison International CEO
John Bryson; PG&E Corp. CEO Robert Glynn Jr.; Sempra Energy CEO Stephen
Baum; Calpine CEO Peter Cartwright; Duke Energy Group President for Energy
Services Harvey J. Padewer; Dynegy President Steve Bergstrom; Reliant COO
Joe Bob Perkins; Southern Energy CEO Marce Fuller; Independent Energy Producers
Association Executive Director Jan Smutny-Jones; Pacificorp CEO Alan Richardson;
Enron Chairman Ken Lay; and Williams CEO Keith Bailey.
Richard Nemec, Los Angeles