CA Power Market Awaits Bailout

California power watchers were hoping for results early this week from the marathon government-industry negotiations. The principals of last Tuesday night's marathon session were expected to meet by video-conference over the weekend to review solutions developed by staff working groups, which met through the end of the week. (see Daily GPI, Jan. 11)

On the West Coast the week 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.

On Friday Gov. Gray 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 caps.

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 memory."

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 PE&G 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 any downgrades of the parent PG&E Corp., or the utility subsidiary, Pacific Gas & Electric. This action came after PG&E suspended its fourth quarter dividend and announced it was cutting staff and services (see Daily GPI, Jan. 12).

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 would be held 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 Co.

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, 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.

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.

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.

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