In what has to be a wilder ride than anything available atDisneyland’s soon-to-open new “California Experience,” theelectricity high jinx caromed all over the nation’s most populousstate last week. It included: rolling blackouts through northernCalifornia; enactment of crisis legislation, the most immediate ofwhich provides $400 million to the state water resources agency soit can buy bulk power for California; a last minute temporaryrestraining order by the California Public Utilities Commissionrequiring Pacific Gas & Electric and Southern California Edisonto continue supplying power to all their customers; variousfinancial downgradings and defaults; and suggestions for compromiseactions by outgoing FERC Chairman James Hoecker.

The state’s power grid operated with a Stage Three alert and thethreat of having to order rolling blackouts for a third straightday Friday. Assuring adequate supplies to prevent the blackouts wasliterally an hour-by-hour task, according to an official with thestate transmission grid operator (Cal-ISO).

In signing the new law (SB 7X) Friday, Gov. Gray Davis said thestate water resources department essentially will be assuming therole that the utilities used to play making purchases on the spotmarket, which he called “volatile, and more volatile for utilitieswho as of today are not credit-worthy.” He said the state iscredit-worthy and its power buying will “begin to bring down theprices,” 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 expectthose trends to continue next week,” said the governor, whilestressing that the ultimate solution for California is long-termcontracts, more power plants and more conservation.

One of the state legislative leaders noted that lawmakers andthe governor realize “this is not a long-term answer,” and the newlaw related to spot market buying “only buys the state a shortamount of time.”

Late Friday, Standard & Poor’s placed California’s GO andgeneral fund appropriation-backed debt ratings on CreditWatch withnegative implications. The ratings agency said the action resultedfrom “uncertainties surrounding the ability of the state to fashiona long-term solution to its power supply crisis and the ensuingfinancial effect.” The $400 million allocated Friday doesn’tjeopardize the state’s double-‘A’ GO credit rating, but the agencyis concerned “the potential exists for substantially greaterongoing appropriations,” and “there is currently no adequatefunding source.”

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

“Through the leadership of the state legislature, the state isnow putting its money toward the purchase of electricity,” Freemantold reporters at a Los Angeles press conference. “So we’re in atransition moving from selling to the Cal-ISO to selling to thestate water resources department. We expect to be paid, althoughthere may be some late payments, but no defaults. The statelegislation is designed to make sure we get paid every penny we areowed.”

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

“I suspect that there will be a great deal of interest,” Davissaid, “And we will get many offers in the five tofive-and-half-cent range.” Several of the chief power producersselling into the state were doubtful there would be much interestat the stated price (see related story, this issue).

While state politicians tried to address the pricing challengesof spot power, regulators and energy officials were literallytrying to keep the lights on in California by keeping theelectron-constrained power system operating. In addition to therolling blackouts of firm load, interruptible customers have beenforced off the grid repeatedly over the past six weeks in the manypower alerts and near-miss rolling blackout situations. This meansmany energy sensitive commercial/industrial customers — such asplastics and industrial gas manufacturers — have had to shut downmuch more than they typically have had to do under their favorablypriced 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 forvoluntarily shutting down during planned outage periods in thefuture.

“This system is broken, and it is not just the market,” said onestate 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 worseningdilemma) real fast.”

The CPUC held its emergency meeting in San Francisco Friday atthe request of the Cal-ISO and state Electricity Oversight Board,which reported that the PG&E utility and SoCal Ed. were goingto “review their scheduling coordination role and responsibilitiesstarting Jan. 20,” meaning, according to the regulators, that thetwo utilities would provide service through the ISO only for powergenerated by the two utilities themselves — without usingpurchased power — which only would cover a portion of theircustomers’ needs.

Therefore, the CPUC slapped a temporary restraining order on thetwo companies it regulates requiring them “to meet their legalobligation to serve ALL customers,” and adding that “recent actionsby the two utilities severely undermine their service obligation.”

The action prompted Pacific Gas & Electric CEO, Gordon Smithto call the CPUC actions “an insult” to his company’s 19,000employees who he said “have worked tirelessly to minimize customerinconvenience this week” during rolling blackouts ordered by theCal-ISO.

He said the CPUC’s actions did nothing to lessen the threat ofblackouts and he insisted that the utility “is not changing itsscheduling responsibilities.” In a bitterly prepared statement,Smith blamed “the state’s regulatory framework” for puttingPG&E in the position of not having enough cash to buy power forits customers. He said the CPUC’s action Friday “wasted precioustime chasing after a problem that did not exist.”

Equally outraged, John Bryson, CEO of SoCal Edison”s parentcompany, Edison International, the CPUC issuing of the TRO “aninsult to the ethic of the 13,000 employees of SCE who have workedto keep the lights on for their customers. In fact, SCE hasborrowed billions of dollars, which threatens the company’ssolvency, through 8« months of inaction and delay by the CPUC, inorder to continue to serve its customers.”

Earlier in the week, two other new electricity laws were signedby Gov. Davis within hours of their passage by the statelegislature meeting in a special emergency session called earlierin the month. They were expected by state officials to easeconcerns among creditors, market participants and the beleagueredinvestor-owned utilities in the state.

ISO Board Gets Overhaul

The laws finalized Thursday prohibit investor-owned utilitiesfrom selling any more generation interests through 2005 (AB 6X),and change the board for the state-chartered transmission gridoperator (Cal-ISO) to a five-member panel appointed by the governor(AB 5X). (Earlier last week, the California Public UtilitiesCommission rejected Southern California Edison Co.’s six-month-oldrequest to sell is majority interest in the 1,500-MW coal-firedMohave (NV) generation plant, which Edison operates.)

Davis named four of the five people to include the currentchairman of the state’s Electricity Oversight Board, Michael Kahn,as the chairman of the new Cal-ISO Board, replacing a 26-memberstakeholder board called for in the 1996 law. Davis called it a”major reform” in the independent grid operator’s oversight becausethe old board was dominated by people who were advocates for theenergy companies, and it will now be made up of “advocates for theconsumers.” The other board members include a representative fromthe Silicon Valley high-tech business establishment, a long-timeutility consumer group attorney and the current head of the state’sbusiness agency. A fifth member was to be named late last Friday.

Outgoing Chairman James Hoecker of the Federal Energy RegulatoryCommission said the state law reforming the board directlycontravened FERC’s directive on the same subject. He recommendedthe 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 weekdeclaring Stage Three emergency power alerts, but without rollingblackouts. By mid-morning at least two of the days, however, theCal-ISO ordered up to 1,000 MW of firm load curtailed on acontrolled, rotating basis concentrated in the northern half of thestate.

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

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

In declaring a state of emergency late Wednesday due to theelectricity shortages, Gov. Davis said he talked to the CEOs ofDuke Energy, Southern Company, Reliant Energy and Dynegy, alongwith four state legislative leaders from both parties, noting thatthe four generators were ready to “pull down the utilities intobankruptcy (the next day) at 12:01 p.m.”

However, according to the governor, the generators agreed thatif state legislation to help relieve the private sector utilities’credit crunch was passed last week, the generators would hold offtrying to collect their bills, and they will provide the state “thepower necessary to keep the lights on.”

“It’s (the state’s) obligation to provide power to the homes andbusinesses that drive California,” Gov. Davis said. “I’mdisappointed the utilities can’t do it. We have no choice but tostep in and we will do it.

“I know the generators and the utilities think that’simpossible, but we’ve already got four offers in the(5-5.5-cent/kWh) range, and I am confident if we have a blindauction, where nobody knows what anyone else bids, that we can geta lot of power in at that range.”

Richard Nemec, Los Angeles

©Copyright 2001 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.