Blackouts Prompt Action; CA Finds $400 Million to Buy Power

In what has to be a wilder ride than anything available at Disneyland's soon-to-open new "California Experience," the electricity high jinx caromed all over the nation's most populous state last week. It included: rolling blackouts through northern California; enactment of crisis legislation, the most immediate of which provides $400 million to the state water resources agency so it can buy bulk power for California; a last minute temporary restraining order by the California Public Utilities Commission requiring Pacific Gas & Electric and Southern California Edison to continue supplying power to all their customers; various financial downgradings and defaults; and suggestions for compromise actions by outgoing FERC Chairman James Hoecker.

The state's power grid operated with a Stage Three alert and the threat of having to order rolling blackouts for a third straight day Friday. Assuring adequate supplies to prevent the blackouts was literally an hour-by-hour task, according to an official with the state transmission grid operator (Cal-ISO).

In signing the new law (SB 7X) Friday, Gov. Gray Davis said the state water resources department essentially will be assuming the role that the utilities used to play making purchases on the spot market, which he called "volatile, and more volatile for utilities who as of today are not credit-worthy." He said the state is credit-worthy and its power buying will "begin to bring down the prices," which have begun a downward slide since Wednesday ($580/MWh to $350/MWh Friday and $181/MWh on the weekend).

"The trend line (in spot prices) is very positive, and we expect those trends to continue next week," said the governor, while stressing that the ultimate solution for California is long-term contracts, more power plants and more conservation.

One of the state legislative leaders noted that lawmakers and the governor realize "this is not a long-term answer," and the new law related to spot market buying "only buys the state a short amount of time."

Late Friday, Standard & Poor's placed California's GO and general fund appropriation-backed debt ratings on CreditWatch with negative implications. The ratings agency said the action resulted from "uncertainties surrounding the ability of the state to fashion a long-term solution to its power supply crisis and the ensuing financial effect." The $400 million allocated Friday doesn't jeopardize the state's double-'A' GO credit rating, but the agency is concerned "the potential exists for substantially greater ongoing appropriations," and "there is currently no adequate funding source."

The head of the Los Angeles Department of Water and Power (LADWP), the nation's largest municipal utility and the seller of excess power into California's market to the tune of more than $200 million over the past 18 months, S. David Freeman, lauded the state legislative efforts Friday in which he announced that LADWP will continue to sell power on credit (it is currently owed in excess of $170 million) to the state, and that Los Angeles Mayor Richard Riordan and he agree with that. He also affirmed his belief that the city will recover "every penny" of the growing amounts owed it for electricity.

"Through the leadership of the state legislature, the state is now putting its money toward the purchase of electricity," Freeman told reporters at a Los Angeles press conference. "So we're in a transition moving from selling to the Cal-ISO to selling to the state water resources department. We expect to be paid, although there may be some late payments, but no defaults. The state legislation is designed to make sure we get paid every penny we are owed."

As a separate action Friday, Davis said he directed the state water agency to immediately begin establishing an auction process for getting long-term, fixed-price power deals for the state, anticipating that a new state law to authorize the long-term deals will be finalized and signed later this week.

"I suspect that there will be a great deal of interest," Davis said, "And we will get many offers in the five to five-and-half-cent range." Several of the chief power producers selling into the state were doubtful there would be much interest at the stated price (see related story, this issue).

While state politicians tried to address the pricing challenges of spot power, regulators and energy officials were literally trying to keep the lights on in California by keeping the electron-constrained power system operating. In addition to the rolling blackouts of firm load, interruptible customers have been forced off the grid repeatedly over the past six weeks in the many power alerts and near-miss rolling blackout situations. This means many energy sensitive commercial/industrial customers --- such as plastics and industrial gas manufacturers --- have had to shut down much more than they typically have had to do under their favorably priced contracts.

Based on interruptible customers calling the Cal-ISO last week, it appeared many are beginning to feel the effects more acutely, and many will be asking for ways to keep operating or be paid for voluntarily shutting down during planned outage periods in the future.

"This system is broken, and it is not just the market," said one state energy official, not wishing to be identified. "It is an old, aging system that has been held together with bailing wire. Somebody better figure out that part (of the state's worsening dilemma) real fast."

The CPUC held its emergency meeting in San Francisco Friday at the request of the Cal-ISO and state Electricity Oversight Board, which reported that the PG&E utility and SoCal Ed. were going to "review their scheduling coordination role and responsibilities starting Jan. 20," meaning, according to the regulators, that the two utilities would provide service through the ISO only for power generated by the two utilities themselves --- without using purchased power --- which only would cover a portion of their customers' needs.

Therefore, the CPUC slapped a temporary restraining order on the two companies it regulates requiring them "to meet their legal obligation to serve ALL customers," and adding that "recent actions by the two utilities severely undermine their service obligation."

The action prompted Pacific Gas & Electric CEO, Gordon Smith to call the CPUC actions "an insult" to his company's 19,000 employees who he said "have worked tirelessly to minimize customer inconvenience this week" during rolling blackouts ordered by the Cal-ISO.

He said the CPUC's actions did nothing to lessen the threat of blackouts and he insisted that the utility "is not changing its scheduling responsibilities." In a bitterly prepared statement, Smith blamed "the state's regulatory framework" for putting PG&E in the position of not having enough cash to buy power for its customers. He said the CPUC's action Friday "wasted precious time chasing after a problem that did not exist."

Equally outraged, John Bryson, CEO of SoCal Edison"s parent company, Edison International, the CPUC issuing of the TRO "an insult to the ethic of the 13,000 employees of SCE who have worked to keep the lights on for their customers. In fact, SCE has borrowed billions of dollars, which threatens the company's solvency, through 8« months of inaction and delay by the CPUC, in order to continue to serve its customers."

Earlier in the week, two other new electricity laws were signed by Gov. Davis within hours of their passage by the state legislature meeting in a special emergency session called earlier in the month. They were expected by state officials to ease concerns among creditors, market participants and the beleaguered investor-owned utilities in the state.

ISO Board Gets Overhaul

The laws finalized Thursday prohibit investor-owned utilities from selling any more generation interests through 2005 (AB 6X), and change the board for the state-chartered transmission grid operator (Cal-ISO) to a five-member panel appointed by the governor (AB 5X). (Earlier last week, the California Public Utilities Commission rejected Southern California Edison Co.'s six-month-old request to sell is majority interest in the 1,500-MW coal-fired Mohave (NV) generation plant, which Edison operates.)

Davis named four of the five people to include the current chairman of the state's Electricity Oversight Board, Michael Kahn, as the chairman of the new Cal-ISO Board, replacing a 26-member stakeholder board called for in the 1996 law. Davis called it a "major reform" in the independent grid operator's oversight because the old board was dominated by people who were advocates for the energy companies, and it will now be made up of "advocates for the consumers." The other board members include a representative from the Silicon Valley high-tech business establishment, a long-time utility consumer group attorney and the current head of the state's business agency. A fifth member was to be named late last Friday.

Outgoing Chairman James Hoecker of the Federal Energy Regulatory Commission said the state law reforming the board directly contravened FERC's directive on the same subject. He recommended the Commission enjoin the state for "unlawful usurpation of [FERC's] authority" (see separate report, this issue).

California began each of the last three work days last week declaring Stage Three emergency power alerts, but without rolling blackouts. By mid-morning at least two of the days, however, the Cal-ISO ordered up to 1,000 MW of firm load curtailed on a controlled, rotating basis concentrated in the northern half of the state.

By early afternoon each day, the rolling blackouts were stopped as a result of more-than-expected conservation and an unexpected power plant units coming back on line. Cal-ISO officials projected that the state might be able to avoid the prospect of rolling blackouts through the weekend. They cautioned constantly in a regular series of three-a-day emergency briefings that the situation could change from hour-to-hour, however.

Longer term, Cal-ISO COO Kellan Fluckiger indicated that the state grid operator expects the specter of rolling blackouts and supply shortages to be present in California for the next two years, no matter what financial and political solutions are reached among elected officials, utilities, regulators and generators.

In declaring a state of emergency late Wednesday due to the electricity shortages, Gov. Davis said he talked to the CEOs of Duke Energy, Southern Company, Reliant Energy and Dynegy, along with four state legislative leaders from both parties, noting that the four generators were ready to "pull down the utilities into bankruptcy (the next day) at 12:01 p.m."

However, according to the governor, the generators agreed that if state legislation to help relieve the private sector utilities' credit crunch was passed last week, the generators would hold off trying to collect their bills, and they will provide the state "the power necessary to keep the lights on."

"It's (the state's) obligation to provide power to the homes and businesses that drive California," Gov. Davis said. "I'm disappointed the utilities can't do it. We have no choice but to step in and we will do it.

"I know the generators and the utilities think that's impossible, but we've already got four offers in the (5-5.5-cent/kWh) range, and I am confident if we have a blind auction, where nobody knows what anyone else bids, that we can get a lot of power in at that range."

Richard Nemec, Los Angeles

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