California Faces Rolling Blackouts and Political Stalemate

With the onset of warming weather and rolling blackouts, California officials and energy industry stakeholders are trying to find more common ground, but the much-needed legislative and financial solutions failed to materialize last week. The governor, generators and legislators are expected to get together this week to seek a way to salvage proposed solutions, and state regulators will decide how to spread already-approved electricity retail rate increases.

Gov. Gray Davis and state legislative leaders are trying to get generators to accept about 70% of the monies owed them, but the request is drawing a cool reception. At least one generator, Reliant Energy's John Stout, senior vice president, indicated that would be "accepting less than our cost of producing the power," as part of remarks he gave last Friday at GasMart/Power 2001 in Tampa, FL.

Stout indicated that the governor is focused on finding solutions to the pending summer power shortages, and that he intends to talk with the state's newly named conservation czar, David Freeman, former head of the city of Los Angeles municipal utility, LADWP. Freeman apparently expressed interest in a proposal has for paying commercial/industrial customers for curtailing their power use during peak-demand periods on a daily exchange basis (See item on "negawatts" proposal in this issue).

Representatives from a dozen merchant generators met with Gov. Davis for four hours late Wednesday in discusssions that Stout characterized as "very constructive," but the result only reinforced differences between the state and electricity suppliers, whom the governor has characterized as "gougers." The only clear agreement among the participants was to maintain daily contact with the governor and his staff to keep a dialogue going. Davis indicated he hopes to hold some daily conference calls this week to help forge some agreements.

Davis continues to ask the generators to accept partial payment on their unpaid wholesale power bills and for the their support in talking California's legislature into passing legislation to implement the governor's memorandum of understanding (MOU) with Southern California Edison Co. Although the MOU doesn't specify that the generators take a cut in their past-due bills, the governor indicated he told the state lawmakers they can put that condition in enabling legislation.

"There are a number of issues that I think can be resolved with further talks between with the generators," Davis said at a press briefing following his May 9 meeting, noting that this week his administration and the generators---including several major government run power providers like BC Hydro, BPA and LADWP --- should be ready to meet with state lawmakers.

The following day after the meeting, the governor signed legislation (SB 31X) to begin the process of the state selling revenue bonds to reimburse the multi-billion dollar purchases it is making in the wholesale power market. But because of a Republican minority's opposition, the law cannot become effective for 90 days, which will further hold up reimbursements.

In a separate actions last week, the state energy commission approved two projects totaling 540 MW for this summer. One involves AES re-activating two mothballed units totaling 450 MW at its Huntington Beach, CA, power plant, and the other is a 95 MW cogeneration plant in the central valley town of Hanford, north of Bakersfield.

Reliant, which estimates its current unpaid bill is about $340 million, strongly opposes the idea of taking less money than what is is owed, and harbors "major concerns" about the governor's MOU with Edison, according to Richard Wheatley, a Houston-based spokesperson who was in Sacramento this week with Reliant executives. They left the governor with two proposals --- one for a sale of up to 2,500 MW over five years at a fixed rate of 2 cents/kW and another related to selling "negawatts" by paying large interruptible customers for shutting down during peak demand times.

"What we're calling the Little Sacramento Summit was constructive and frank, and we're hoping that the discussions going forward can remain constructive in tone," said Wheatley. He noted, however, that the governor, in a press conference after the session in his Capitol offices, emphasized he is still pursuing the investigations of alleged market manipulation by the generators and thinks that some "haircut" (forgiveness of part of the past-due billings) needs to be accepted by the generators. The latter is the type of "finger-pointing" Reliant and other generators are trying to have dropped.

Saying that Reliant continues to be concerned about creditworthiness of California and its major utilities, Wheatley said that his company has various new power plant proposals for the western grid totaling $1.4 billion and 2,300 MW, including a new plant in California. However, the company is holding up moving ahead with a formal application on the California plant, pending resolution of the current issues.

Last week also marked the return of political rallies and advertising blitzes in California by Davis and Edison, trying to inject a grass roots element to their separate conservation and state legislative campaigns. Seeking to save 5,000 MW of peak demand this summer, Davis orchestrated an energy conservation rally at a downtown Los Angeles high-rise office building, announcing a public-private partnership among commercial real estate building operators, landlords and janitors, a service employees union, and a plan for the state to reduce commercial office buildings' energy conservation up to 20% this summer during peak demand times.

Edison began a $3 million advertising campaign last weekend with 60-second TV-radio spot announcements running the next two weeks statewide, promoting the need for the legislature to validate the memorandum of understanding (MOU) between the utility and Davis, leading to the sale of Edison transmission assets to the state in return for a way out of its financial quagmire. Edison has gathered various consumer, community and labor union activists supporting its information campaign.

With the first signs of summer-like temperatures around the southwest and the inland parts of the state, California's transmission grid operator, Cal-ISO, last week scrambled for supplies and issued power alerts the first three days of the week, resulting in the need for rolling blackouts on a limited basis two of the days. Cal-ISO said the alerts were prompted by a combination of decreased imports due to the increase in air conditioning loads out-of-state, 12,500 MW of capacity idled for planned or unplanned maintenance, four nuclear plants in the western U.S. out of service for refueling, and "an additional 3,000 MW of qualifying facility (QF) supplies unavailable due to continuing financial concerns."

California's two major electric utilities, Edison and PG&E, continued to dispute the figures for the QFs out of service, claiming the number was much lower --- under 800 MW. Both said that they expect to have all of their QF suppliers back on line by June 1.

In last week's eclectic mix, California's chief utility regulator prepared for today's electric rate decision that is expected to saddle the largest residential users and all businesses with the burden of retail price increases up to 52% for some customers. Both low income and low energy-consuming residential customers will be exempted for the rate increase as part of the Davis Administration's attempt to motivate consumers to cut their power usage.

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