CA, Davis Take Spotlight, but at What Cost?

Like most California governors over the past 40 or more years, Gray Davis came to office 28 months ago hoping to build a national reputation. Four months into his third year, most observers would agree he has accomplished that goal. But at what price?

The state and the governor continued last week to be mostly sweating under the glare of the national spotlight as Davis' emissaries swarmed over the nation's capital and Sacramento, but the electricity crisis that has given them such maximum media exposure carries mostly negative baggage. And another week of more rhetoric than results continued to raise questions about whether California's chief executive has the "right stuff."

Davis promises more of the same this week with scheduled, separate meetings with major power producers, small (qualifying facility) QF generators and individual talks with state legislators attempting to gain sponsors for legislation to implement his deal with Southern California Edison and another one in the making with San Diego Gas and Electric Co. He and his backers ask for a patient, measured approach.

In the meantime, the situation in California seemed as fragmented and factionalized as ever last week, with the governor's people and Bush administration supporters tossing verbal grenades at each other on both coasts.

The action settled into four camps: (1) immediate efforts to get more conservation and temporary power jump-started for this summer's peak-demand shortages; (2) negotiations with various generators and utilities to try to boost supplies and lower wholesale prices (see related story on Sempra Energy's deal with the state Department of Water Resources, or DWR); (3) legislative remedies in Sacramento and Washington, D.C.; and (4) activity in bankruptcy and civil courts.

A polite food fight broke out again last week between Sacramento and Washington, D.C., as Davis met at the end of the week with DOE Secretary Spencer Abraham after the Davis and President Bush camps traded barbs over whose conservation plan was the most comprehensive. The president maintains conservation is important but not the only part of his proposed energy supply plan (see related story this issue). Davis chided the feds to do more than reduce usage at least 10% during Stage Two and Three power alerts when energy reserves dip below 5%.

While DOE's Abraham was traveling to California May 3-4, California officials invaded Washington, D.C. for press conferences and appearance at the House energy subcommittee's hearings, reiterating calls for the Federal Energy Regulatory Commission to "do its job" and impose comprehensive wholesale electricity price caps over power sold throughout the western states.

At the same time, the California Public Utilities Commission ordered the state's major utilities to implement the governor's so-called "20/20" program for this summer in which private sector utility customers who reduce their power usage by 20% will get 20% rebates on their bills (paid by the DWR) for the months they are able to do that. The CPUC also directed the private sector electric and gas utilities to step up low-income assistance programs funded by state and federal grants to the estimated 2.7 million customers considered eligible.

On an emergency basis, the California regulators also approved the installation of real-time metering for San Diego Gas and Electric Co.'s 4,700 largest commercial and industrial customers that don't presently have real time metering as a means of helping cut electricity demand at peak periods this summer. And SDG&E at the same time announced a program to pay its largest customers with on-site back-up generation capability to run on auxiliary power during peak-demand times this summer. SDG&E estimates the on-site generation used to relieve peak-demand on the grid could save 50 MW and $1.6 billion in eliminating the need to purchase the most expensive emergency real-time supplies on the spot market.

Another step toward boosting the state's so-called "peaking-shaving" efforts came when the energy commission approved a fifth temporary peaking generation plant-a 50 MW unit Calpine Corp. will develop in King City, CA, in Monterey County. Negotiations with QF plant operators-headed by Davis's newly named chief energy advisor, former Los Angeles municipal utility head, S. David Freeman, are expected to wrap up this week. Alternately in recent weeks and months, various sources, including the state transmission grid operator, Cal-ISO, have estimated that about half (or 3,000 MW) of the QF's capacity has been out of service because of the financial crisis of not getting paid by the private sector utilities since November. It continues to be estimated that resolving the ongoing dispute will bring back at least 2,000 MW of idled capacity.

However, statistics from both Pacific Gas and Electric Co. and Edison last week indicated a total of only 760 MW of QF power was out of service as of May 3 out of a possible total of 6,000 MW. Edison said "numerous news stories have incorrectly reported that a large number of (QF) power providers are offline, "but in fact, "according to Cal-ISO and the PG&E utility, approximately 700 MW of QF generation capacity is currently offline statewide compared to the QF output during the same period last year."

Scheduled around the QF and Abraham meetings, Davis met with Enron's CEO Kenneth Lay last week, prompting speculation that the major national energy companies are ready to get more involved in crafting solutions to the California mess. Lay met with the governor and California state legislative leaders. Earlier in the week, Duke Energy North America made public a comprehensive proposed solution it secretly submitted to Davis's advisers in late March, including a possible quid pro quo of Duke forgiving some of the hundreds of millions of dollars in unpaid power bills it is owed in exchange for the state dropping its myriad of ongoing investigations into alleged market power abuse, "gouging," and possible "market manipulation" by the generators and marketers (see related story). Separately, Davis announced last Thursday he invited the CEOs of a dozen major merchant power providers in the state, including Enron and Duke, to meet in Sacramento on May 9.

Duke's plan, which Davis claims he personally has never seen, caused the governor to strongly reiterate that stopping ongoing investigations is not an alternative and never will be. "There will be no discussions of investigations, or dropping of studies undertaken by the attorney general, energy oversight board or the CPUC," Davis told the QF gathering. "I fully intend to see the state pursue all legal remedies available to it." He added his "strong belief" that the state has been "overcharged badly" for power and ultimately it is going to get some, if not all, of the overcharges refunded through court and regulatory actions.

Legislature Inches Along

Meanwhile, in the state legislature, a skeptical minority Republican caucus in each house is holding up efforts to move along on an emergency (two-thirds-vote) basis critical bills to: (1) implement the Edison MOU, and (2) more immediately, allow the state treasurer to move ahead early this week (deadline is Tuesday, May 8) with $4.5 billion in bridge financing to allow time until the funds from major long-term bonds (between $10 and $12.5 billion) are in place in late summer or early fall. State Treasurer Phil Angelides, a Democrat, said the Republicans are "playing a dangerous game of financial roulette."

While there are similar stalemates over implementation of the Edison deal, the state Senate did pass a measure (SB 6X) over Republican objections to establish a state power authority modeled after the New York state version which owns and operates some power plants and the state transmission grid. The bill awaits the governor's signature, and Freeman, a long-time public power operator in New York, Tennessee, Texas and California, is expected to be named to head it.

PG&E Rebuffed

In the courts, PG&E was rebuffed at least temporarily in its state court suit under the federal "filed-rate doctrine" to force the CPUC to raise rates to cover its unpaid wholesale power costs. PG&E separately filed in the bankruptcy court as part of its Chapter 11 reorganization proceedings to have the Cal-ISO stopped from billing the utility for its uncovered real-time emergency spot market purchases, which now exceed $1 billion for PG&E alone.

In the Los Angeles state court, the judge said PG&E's utility was "premature" in trying to apply the filed-rate doctrine because the CPUC has not completed its pending proposed rate increase for the utility, although the judge left the door open for the utility to re-file the case once the CPUC has completed its rate work later this month.

Not to be left out, California's Lt. Cruz Bustamante and a state legislator filed a lawsuit to recover costs from "unlawful and fraudulent" power sales in the state, naming Williams, Mirant, Reliant Energy, Duke and Dynegy (see related story). They allege that total energy costs (electricity and natural gas) are the result of the defendants' "anti-trust and unlawful fraudulent and unfair business practices."

Davis praised his fellow Democrat and statewide officeholder for "opening a second front in [the] California war against price gougers."

The specter of various lawsuits and ongoing investigations, along with the latest state legislative proposal to criminalize acts by companies and their CEOs found to "manipulate the market" or "price gouge" in the sale of energy have gotten the attention of the major energy players, and observers say that is why the dialogue between the governor and the companies is likely to step up considerably throughout the month and the summer for that matter.

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