CA Governor Brings 'Power' to Political Campaign Trail

California's energy woes have taken on the look and feel of a political campaign with the state's beleaguered governor running a re-election campaign more than 18 months before voters go to the polls. However, if Hollywood were doing a movie on the continuing drama, none of the principal actors --- except the governor --- would be delivering predictable lines to the camera.

Gov. Gray Davis moved from one photo-op to the next last week, helping shovel dirt at a major power plant groundbreaking one day, briefing state lawmakers on a one-on-one basis another day and ending the week in Los Angeles hyping the state's role in making an all-out push for more conservation with the advent of summer power shortages and rolling blackouts.

At a Los Angeles state office building that is serving as a poster child for the governor's energy-saving programs, Davis and former LA city utility head S. David Freeman, the new state conservation czar, told a group of state employees they were declaring "war on out-of-state price gougers" through an $850 million conservation effort. The event could have been mistaken for an old-fashion political rally, with a candidate trying to whip up enthusiasm among the party field workers.

The governor at one point referred to one of his Sacramento-based conservation administrators as a "field marshal."

In the meantime, the major stakeholders, including utilities, consumer activists and state legislators are headed in different directions --- some openly skeptical toward the governor's plans to mix conservation, stepped up power plant development and state ownership of the transmission grid as the cornerstones of his wavering recovery plan.

Everyone discounted the federal attempt at modest wholesale price caps during power alerts, and the state's transmission grid operator, Cal-ISO, called two days of Stage Two alerts in response to relatively mild summer-like temperatures and continuing large amounts of generation capacity idled by forced and planned maintenance.

While legislators and the governor's staff tried to reach agreement on a new law to implement the agreement (MOU) with Southern California Edison Co., a second private sector utility, San Diego Gas and Electric Co. and its parent company, Sempra Energy, were on the verge of a major deal that would not only sell its transmission assets to the state at 2.3 times their book value, but would set a long-term power contract with the state water resources department (DWR), according to Sempra's CEO Steve Baum, speaking to financial analysts last week after reporting greatly increased first quarter 2001 earnings.

Baum said the companies are close to a deal with DWR that would provide more than 1,000 MW of power on a long-term basis with the gas used for the supplies to be indexed, offering prices in the range that the governor has considered reasonable in earlier announced new long-term power contracts.

Although the sale of SDG&E transmission assets, which are expected to fetch about $1 billion, plus the state's assumption of about $200 million in current related debt, are often the focal point of public discussions about the state's current negotiations toward a deal similar to the Edison MOU, Baum said that there are "many, many other moving parts" to his companies talks with the governor's people.

"There are a whole variety of other issues, including how to treat nuclear plants (SDG&E holds a 20% interest in San Onofre), securitization of regulatory balancing accounts. I could go on and on," Baum told analysts. "We think it is a good thing for the state to buy the transmission assets and form a large state-run grid company, which can bring back a measure of control in California over the broken wholesale market. We think that is a good thing. It is one of Gov. Davis's better ideas."

However, having said Sempra supports the transmission sale, Baum added that unlike Edison, his utility does not have to do that to gain financial stability. He said the state most likely could pay more than any other party for the assets because he thinks California can operate the transmission grid outside of federal regulatory controls.

Nevertheless, a reluctant minority of mostly Republican state legislators opposing the transmission sale is threatening to block proposed legislation to get the Edison MOU untracked, and the governor and his aides spent most of last week trying to sell the deal to lawmakers and state political reporters covering the issue in the state capital. Draft bills were being passed around but nothing detailed, an Edison executive said last Friday.

The utility consumer watchdog group, TURN (The Utility Reform Network), blasted the deal as an unmitigated giveaway to Edison, saying Gov. Davis "had the wool pulled over his eyes" by the utility, allegedly allowing Edison to keep more than $10 billion in stranded costs recovered under the state's failed electric restructuring plan and locking in double-digit rates of return for the utility retained power generation in return for 10-year contracts to sell all of the power to the state at below-market, cost-based rates.

At the same time, some state lawmakers were putting more emphasis on a proposed bill (AB 67X) to apply criminal penalties to companies and CEOs of energy firms found to be "gouging," and imposing fines of up to 10% of the firm's gross corporate assets for companies found to be "manipulating the market." One state legislator, Assemblywoman Rebecca Cohn (D-from Northern California) said Californians were being "plundered by a cartel of out-of-state energy generators."

Little or no relief from high wholesale power prices throughout the western states was envisioned as a result of the Federal Energy Regulatory Commission April 25 order imposing price mitigation on a limited basis. CPUC President Loretta Lynch predicted the FERC order would have no impact on prices, calling it a "band-aid" where a "full frontal attack" was needed.

Early analyses by state stakeholders indicated they thought the FERC action would make things worse, not better, this summer because the limited, temporary controls, slated to take effect May 29, would not apply to generators outside of California and would not apply to marketers and other nongenerator sellers of wholesale power.

FERC's belated action on a 2-1 vote with Commissioner William Massey dissenting allows the California transmission grid operator, Cal-ISO, to impose price limits on suppliers whenever a power alert (Stage One, Two or Three) is called when reserves are projected to get below 7.5%. The temporary caps, which generators who can justify their charges can get around, are contingent upon the Cal-ISO submitting to FERC by June 1 a plan to become part of a larger, multi-state regional transmission system encompassing the major western states. A Cal-ISO spokesperson said the grid operator would defer comments on the FERC action until after it has more thoroughly analyzed the order, which was slated to become effective May 10.

A utility official speculated if there are as many power alerts this summer as last year, some substantial cost savings of up to $200/MWh might be realized, but Gary Ackerman, head of the Western Power Trading Forum, disagreed, saying FERC's mitigation efforts don't appear to apply to marketers, so some generators may just sell their spot market output to the third parties to circumvent the market clearing price imposed by the Cal-ISO.

Before the FERC action last Wednesday, several generators indicated they might be able to accept temporary and limited wholesale prices caps. Most stakeholders, however, said any caps should be for the western region-not just California (see related story).

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