CA Working Out Power Problems

Operating under a two-week extension of emergency orders to keep power and gas supplies flowing, courtesy of the new Bush administration, California government leaders last week conducted the state's first-ever power auction for long-term contracts, and continued to work on new legislation to revitalize its crumbling power structure.

Despite continuing Stage Three power alerts, rolling blackouts were avoided, and despite the absence of any immediate state regulatory or legislative relief, creditors and suppliers held off forcing the state's two cash-strapped major investor-owned utilities to file for bankruptcy.

It helped that the first major act of President Bush's new Energy Secretary Spencer Abraham last Tuesday was to give Pacific Gas & Electric and Southern California Edison another two weeks of breathing room by extending emergency orders requiring gas and power suppliers to continue supplying the cash-strapped utilities. The emergency gas order now expires at 3 a.m. (EST) Feb. 7. The California governor also added financial and energy heavyweights from New York, Washington and Los Angeles to his advisory team.

In granting the extensions, Abraham urged the state to get to work to solve its own problems. "Our action today is designed to give the governor, the California legislature and other relevant parties the time to take necessary action. I strongly urge the parties to act immediately," said Abraham. He also said he was keenly aware that other western states have expressed concerns about their own supply situation and the impact the order is having on power prices in their areas.

Despite the action, PG&E said it still was having trouble getting gas suppliers to comply with the emergency order originally issued Jan. 19. "The gas supply situation is [not good]," utility spokeswoman Staci Homrig said Tuesday afternoon. Homrig said PG&E's storage currently is well below 50% full, or less than 16 Bcf and depleting rapidly by about 500 MMcf/d to 1 Bcf/d.

The bail-out may come soon. Based on progress made by bipartisan leadership in the state legislature last week, that body is expected to enact omnibus new legislation fully sanctioning the state's plunge into the power procurement business by Thursday, Feb. 1.

Even without a threat of controlled blackouts Friday, the state grid operator kept a Stage Three alert in effect and had to invoke 1,000 MW of interruptible load in southern California because of supply problems out of state in the Southwest. There was also an unexpected outage of 260 MW of generation in already-constrained northern California. State regulators meeting in a special "continuation meeting" Friday changed the state's interruptible programs so large customers who voluntarily cut their power when reserves get low on the grid will not face any penalties if they decide to continue their business operations in the face of these now too-frequent emergencies.

As of Friday, the leading legislative proposal would allow utilities to recover their under-collections in rates, but in return the state would get equity interest in the companies through the issuance of state-backed warrants that eventually could be cashed in when utility stock values improve. The proceeds would be returned to taxpayers in the form of rebates. Alternately, the new law that is eventually passed could also lead to the state ultimately owning the private-sector utility hydroelectric and/or transmission systems.

Gov. Gray Davis last week reached out to the private and public sector for an all-star cast of temporary, unpaid advisers that include Robert Rubin, the former Clinton Administration treasury secretary behind the scenes, and three others working with the governor or parts of his administration.

The new legislative proposal gaining momentum last Friday would provide state-backed bonds to help ease the utilities financial woes while authorizing the state to sign some of the long-term contracts it is analyzing in the wake of the sealed-bid power auction completed Jan. 24.

Claiming bipartisan support among lawmakers and "conceptual agreement" from the governor, state legislative Assembly Speaker Bob Hertzberg proposed a bill in public hearings last Thursday (AB 18X) that he says will give the added relief to supply and cash-constrained utilities while meeting four criteria: (1) no use of taxpayer monies, (2) more market stability, (3) incent utilities and others to get the best deal they can for consumers and (4) provide economic stability.

"(Federal Reserve Chairman) Alan Greenspan in hearings before the U.S. Senate (Jan. 25) emphasized the danger to California and the nation's economy unless we increase our energy capacity and reserves," Hertzberg said in summarizing his latest legislative proposal, a version of which is expected to be made law by the end of this month. "Now is the time to act. Now it is time to restore power to California."

In the midst of proclaiming a successful power auction, whose weighted average price was being debated by Friday, Davis used the upbeat occasion to announce three temporary energy-related advisors to state capital news media: Mike Peevey, a former utility president-turned-successful-energy startup entrepreneur; S. David Freeman, general manager of the nation's largest (successful) municipal utility in Los Angeles and a veteran of more than four decades in public power; and Frank Zarb, Nasdaq Stock Market CEO and a former top-level energy adviser in the Nixon and Ford Administrations in the 1970s.

Peevey, whose wife was elected to the state legislature in November, will serve as Davis's energy adviser; Freeman will help the state water resources department develop long-term power contracts and Zarb will advise Davis on energy finance and market issues.

Although it did not divulge peak-demand power price bids, California's state-run auction turned up 39 bidders and a weighted-average price of 6.9 cents/kWh, in the immediate aftermath of the whirlwind 27-hour, sealed-bid power auction conducted over the Internet. Now the real work begins --- that of face-to-face negotiations with the most promising bidders --- something that LADWP's 75-year-old veteran, Freeman, is expected to help the state do.

Tom Hannigan, director of the state water resource department who oversaw the auction, said the state obtained "a useful sample across all times of the day across the spectrum of the year, and we are quite pleased with the initial results. I look forward to looking through bids and developing some long-term contracts. Our fundamental responsibility here is to purchase power at the best possible prices for consumers and businesses."

On Wednesday as the bids from the Internet-based auction were initially accessed, Davis said he expected a new law from the state legislature by Feb. 1, giving the state authority to consummate deals involving the best of the bids received in the quick-turnaround auction. The bids covered six-month, three-, five- and 10-year durations. Hearings in Sacramento continued on the omnibus new law(s) that would give the state long-term buying authority, but also decide how to handle operation of the utility hydroelectric generation system and over-market purchased power contracts with so-called "qualifying facilities" (QFs).

Bidders, utilities and other market participants expressed initial enthusiasm for the state's new program, with San Diego-based Sempra's CEO telling the financial community Thursday that he was "encouraged" by the state auction.

"We don't yet have detailed information on the bids in the first round --- and in my opinion that's what it is, a first round --- but from what the governor has said, I am quite encouraged that we are going to see power allocated to the three utilities at below the costs that they have recently been paying in the wholesale power market," said Sempra's CEO Stephen Baum. "That should ease the financial situation of all three utilities and give us greater liquidity, opening the way to further measures being discussed, such as securitization of uncollected balances."

SDG&E Files for Pay-Up

Baum said SDG&E rate filing Wednesday was its plan for the so-called "securitization" of its uncollected balance, noting that other discussions are ongoing in Sacramento with respect to Pacific Gas and Electric and Southern California Edison.

"I think there will be further auctions by the state and prices will be obtained that are below the current spot prices, and so I see an improving picture for all three utilities in California in that regard."

As another part of the state's meandering energy crisis, SDG&E appealed to state regulators as the auction was being completed for a five-year surcharge and a $100 million cash-conservation program to avoid the financial torpor of its two larger fellow private-sector utilities to be effective March 1, 2001.

SDG&E's parent company senior executives in announcing a 20% earnings increase for 2000 on Thursday emphasized that they were "acutely aware" of the near-bankruptcy status of the state's two other private sector utilities. The San Diego utility is in a different position because of special legislative protections it received last year (AB 265).

In the meantime, both Edison and PG&E's utility in separate federal court actions are attempting to force the California Public Utilities Commission (CPUC) to raise the utilities' rates so they can collect past and future under-collections because of the continuing sky-high wholesale prices, which are not fully covered by current rates. Edison's federal court case in the Los Angeles district is farther along than PG&E's and a hearing was set last week for Feb. 12 on the Edison suit.

Saying both the federal and state governments have failed to stop the bleeding, SDG&E, which firs felt the sting of California's deepening energy crisis last summer, filed Wednesday with the CPUC for a five-year, 2.3 cents/kWh rateÿincrease and a $100 million "cash-conservation" program toÿaddress its more than $450 million in under-collections to avoid the financial crisis now plaguing the state's other two major investor-owned utilities.

SDG&E also asked the CPUC to allow it to resume its normal bill collection activities, which have been suspended since last July to ease the burden on retail customers faced with skyrocketing summer electricity bills.

Under a special state law passed last year, SDG&E re-froze its retail rates at 6.5 cents/kWh, retroactive to June 1, but the utility said over the past 30 days the wholesale power prices in the state have averaged a record 25 cents/kWh, which SDG&E said is seven times what they were a year ago.

SDG&E estimated the proposed hike would mean an increase of $11.50 a month for the typical residential customer, whose current average bill is $72 monthly.

Richard Nemec, Los Angeles

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