Californians Continue to Fumble in the Dark for Answers

With the official start of spring, time began to press California's wide-ranging efforts to fix past, present and future (short and long-term) energy problems. For every positive last week, there seemed to be greater negative developments to deal with, rolling blackouts being the most dramatic. By last Friday, the prospect for bigger problems ahead seemed unavoidable.

Still, on the positive side of the ledger last week, the governor and legislature handed state regulators a mandate to fix the lingering utility rate dilemma, the mechanism for paying back $3 billion to the state water resources department (DWR) for electricity purchases, and to settle the festering dispute between near-bankrupt utilities and 688 small ("qualifying facility," QF) generators. The California Public Utilities Commission is expected to act on these issues when it meets Tuesday.

A further complication in the QF issue, arose last Thursday when a superior court judge in the remote desert county of Imperial in southern California temporarily freed CalEnergy's 320 MW of geothermal generation from its long-term contract with Southern California Edison to sell its power elsewhere. Some observers speculate this could cause other QFs to try to break away from the utility contracts. CalEnergy officials said Edison owes it $140 million in unpaid power bills. Edison last week in a Securities and Exchange filing indicated it owed about $840 million to QFs.

Anticipating the CPUC action this week, state legislation to deal with the QFs and other rate matters was quickly passed by the senate, but failed to get a required two-thirds vote in the lower house last Thursday.

On another front, three more natural gas-fired generating plants totaling 2,076 MW were approved for construction March 21, all to come online between October 2002 and April 2003, and a fourth plant, Otay Mesa in the extreme southern end of the state by San Diego won preliminary approvals and could be okayed by the state energy commission in the near future, at which time Calpine, under a deal it made with PG&E Generating, will build and operate the plant, as it has also agreed to do in a deal with Enron for its 750 MW plant in southern Kern County that gained state approval last December. Nevertheless, right now the state is about 6,000 MW short of contracted supplies to cover summer peak-demand periods. If it has to go to the spot market for these supplies, it will be risky and expensive.

Gov. Gray Davis during the week also announced 12 state grants and contracts totaling $9.2 million with private companies and municipal utilities to develop "energy smart" technology that can eventually improve the state's demand-side management, the generally accepted key to the state's efforts to minimize the prospects for rolling blackouts this summer when they are now viewed as inevitable.

The occurrence March 19 and 20 of the controlled outages-at times touching a total of 2 million citizens and shutting down 3,500 MW overshadowed various legislative and commercial steps forward. While by last Friday, a lot of the key unplanned outages of generating units had been corrected and they were back online, the acute lack of imported power from the Pacific Northwest, where the worst drought in 80 years is taking shape, and vulnerability to the credit crunch taking almost half of the QF generation capacity out of service, were ominous signs of what's in store for the state's independent grid operator, Cal-ISO, this summer.

The Cal-ISO last Thursday filed a new, comprehensive analysis with the Federal Energy Regulatory Commission, carrying data that showed possibly as much as $6.2 billion in excess charges for power from May 2000 through February 2001, 30% above what the ISO deemed fair market prices. With all kinds of qualifiers and lacking complete cost data from the generators and suppliers, along with FERC's reluctance to order substantial refunds, state officials were not optimistic this would result in multi-billion-dollar refunds that could help pay back the state and stabilize the sinking finances of the two largest investor-owned utilities.

In a special press briefing because of the premature news reports on the filing, Cal-ISO's officials stopped short of actually claiming energy buyers in the state were owed the $6.2 billion. "It is way too early to make that sort of conclusion," said Cal-ISO General Counsel Charles Robinson. The estimate was contained in the ISO's comments filed in response to the Federal Energy Regulatory Commission's investigation of the bulk power market.

The Cal-ISO asked the federal regulators to be more aggressive in mitigating potential market power in California's wholesale power sales overall - not just when supplies are extremely tight in Stage Three alerts imposed by the grid operator. In general, the Cal-ISO's filing strongly suggests that FERC can and should do more to prevent suppliers from charging whatever the market will bear. Currently, FERC's $150 per MWh "soft" price cap only applies in Stage Three alerts.

The often targeted half-dozen major merchant generators were not the only suppliers included in the Cal-ISO's estimates of multi-billion-dollar excessive charges; various municipals and government entities are included, such as Los Angeles Department of Water and Power and BC Hydro, a total of 26 in all. FERC does not have the jurisdiction to order refunds from these entities.

A major concern of the Cal-ISO is that FERC's staff is assuming California going forward will only depend on the spot market for about 5% of its supplies, compared with the 15% to 20% levels in recent weeks and higher levels (25%-30%) over the past eight months that have greatly inflated the state's electricity bill.

"Our report is not claiming there was 'overcharging' necessarily, but the prices are well beyond what we would think as reasonable in a competitive market," said Anjali Sheffrin, Cal-ISO market analysis director. "When the market doesn't have competitive prices, these suppliers have taken advantage of it. They were bidding whatever the market will bear.

"In a competitive market, no single supplier can determine and influence the market-clearing price, and what we show in our analysis is that, in fact, they have that ability. FERC allowed markets to take place in California on the assumption suppliers couldn't influence the price. What we are trying to do (in this latest filing) is show that assumption is wrong, and show how the suppliers did in fact, manipulate the prices."

Cal-ISO's Robinson drew short of saying that some of the overcharges constituted illegal or criminal behavior. He did confirm that Cal-ISO has shared its data with all of the ongoing investigations of the wholesale prices being carried on the state attorney general, state legislature and California Public Utilities Commission.

"This is our response to a study that FERC staff has released (see Daily GPI, Nov. 2, 2000)," said Cal-ISO spokesperson Patrick Dorinson, noting as Sheffrin did, that the Cal-ISO calculations of over-collections do not have detailed cost information that presumably the generators will be submitting to FERC with their responses to this same staff study.

In the QF matter, Gov. Davis and the legislative leaders said talks with the small power producers "bogged down," in the governor's words, so they found a willing, flexible ally in the regulators who are supposed to implement the ratemaking part of the state crisis.

According to Gov. Davis, speaking in an impromptu press briefing at the state Capitol, the CPUC will decide to extend a temporary one-cent/kilowatt surcharge on retail electric utility rates, specify a methodology giving the state DWR first call on utility retail power revenues and approve a new formula for determining utility payments to QFs in five- or ten-year contracts.

The governor accused the state's two near-bankrupt investor-owned utilities, Southern California Edison and Pacific Gas and Electric, of making the situation worse by "pocketing" revenues that were intended to pay the QFs. The utilities reiterated that they intend to pay all of their past-due bills and they are encouraged by the prospect for a CPUC resolution of the QF stalemate, but they were not happy about the governor's criticism. PG&E's utility had the strongest reaction to the governor's remarks.

"It is unfortunate that the governor also chose to criticize the company's action with respect to QFs," PG&E said in a prepared statement, calling the remarks "inappropriate and unjustified," since the utility claims it informed both its QF suppliers and the governor's office a week earlier that it intended to implement a program for fully paying the QFs going forward. "That is the same result the governor announced."

In the CPUC administrative law judge's proposed decision regarding QFs, which mirrors work of the legislature in negotiating with the producers, several steps are to be taken, such as abandoning the Arizona-California border price of natural gas in the formula for determining how much the QFs get paid, Southern California Edison and PG&E's utility had already been advocating be put in effect on an emergency basis last fall.

In regular conference calls with creditors and debtholders, it was obvious last week that the financial community is losing patience with the pace and direction of California's attempts to right its sinking energy ship. Problems of credit-worthiness hung over all transactions. Groups like the Western Power Trading Forum were searching for a way to quantify just how much more it is costing the state in the prices paid for power on the spot market and in the long-term contracts being negotiated, due to the growing level of unpaid bills and loans.

Reliant Energy Wholesale President Joe Bob Perkins in a conference call March 21 said credit-worthiness (his firm is owed $370 million for past-due power supplies) was the main obstacle to Reliant finally signing a long-term contract with the state. It has signed a memorandum of understanding (MOU), as have many generator/suppliers, but Perkins said he could not say "when or if, we will reach a final agreement."

A senior executive with Cambridge Energy Research Associates, Lawrence Makovich, told a U.S. House subcommittee last Thursday that some of the measures taken by California may actually be making matters worse, noting the state is "creating large problems for the future by financing current power purchases and pushing payments into the future."

The newly installed Chairman of Nymex, Vincent Viola, wrote Gov. Davis last week, offering to help the state work through its current energy woes by replacing new state initiatives with market-based solutions. He told the governor that Nymex repeatedly since 1995 offered possible solutions, but the state has "mistakenly, placed (government) mechanisms, such as the defunct power exchange or the ISO as the principal buyer and seller of power for all consumers in the state."

Viola recommended that California immediately rescind the ban on direct access sales for industrials and large businesses, now included in new emergency legislation that gave the state authority to purchase power. The companies are capable of negotiating contracts themselves, and the entry of so many parties into the market would increase competition and reduce prices. Richard Nemec, Los Angeles

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