“Hope” was the operative four-letter word in California last week if you had anything to do with the energy industry or government as Friday saw the previous day’s specter of rolling blackouts from razor-thin electricity reserves ease.

The week also 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 among the western states.

Nevertheless, there was still no resolution to the nagging supply, price and utility financial crisis that has taken on a life of its own.

While the state continued to struggle mightily, negotiating teams in Washington, D.C., set in motion by a crisis meeting led by Treasury Secretary Lawrence Summers last Tuesday night, were continuing to work on remedial measures. California Gov. Gray Davis had joined Clinton Administration officials and industry stakeholders in a seven-hour meeting laying out the issues to be addressed.

Staff working groups continued to meet through the week and the principals were expected to resume sessions Saturday by video conference to make the critical decisions. Following the Tuesday meeting FERC Chairman James Hoecker said participants were “highly cooperative” and “substantial progress was made in finding both near-term, intermediate and long-term solutions to California’s difficult issues.”

Along with five basic principles the working groups were hammering out more details on, a brief written summary of the late-Tuesday session said that the “parties (for the first time) acknowledge that (California’s) problem must be addressed while taking into account the regional nature of the market.” This was significant, given the fact that Gov. Davis’ state plan articulated in his “state-of-the-state” address last Monday made no mention of California’s ties to the regional western power grid.

Hoecker noted he was “happy to say that it appears to me that discussions are heading in a direction that’s entirely consistent with our Dec. 15 order” in which FERC enacted a series of reforms for California’s out-of-control bulk power market.

The five principles adopted Tuesday night were:

The more upbeat tone, following the mid-week announcement contrasted with the reaction after Davis’ Monday night speech, which called on the state to get back in control of its “energy destiny” through either a “joint powers authority among the state and its 30 municipal utilities to develop the additional power we need, or a California public power authority that can buy and build new plants.” Industry watchers searched his message in vain for any mention of real short-term fixes. He did acknowledge it would be “irresponsible” to allow the utilities to fail, saying “Our fate is tied to their fate.”

On Friday 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 PG&E 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 downgrades of the parent PG&E Corp., or the utility subsidiary, Pacific Gas & Electric. PG&E took action last week to suspend its fourth quarter dividend and cut staff and services (see related story, this issue).

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 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 for the Cal-ISO and PX, 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. Last Thursday an unprecedented 15,000 MW or one-third of the capacity usually available, was out of service, either through planned outages or because of the storm.

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 that are an offshoot of the utilities’ inability to collect the full cost of its supplies because its retail rates are frozen under the state’s deregulation program.

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.

The reality of facing rolling blackouts caused a California-based creator of e-commerce data centers and web site hosting to warn that “hundreds of millions of dollars in manufacturing, stock trades, bank transactions and online purchases would be lost in a 15-minute outage.” In planned, or rolling, blackouts typically the power cutoffs for firm customers last up to an hour, Fluckiger said.

“Many high-tech businesses that have rushed to market in the last two years have hastily designed and poorly maintained facilities with unreliable back-up systems in place to deal with a power outage,” said Dan McNary, a spokesperson with Syska & Hennessy’s OnLine Environments, Santa Monica, CA.

An emergency order from DOE Secretary Bill Richardson lapsed at midnight Wednesday, but then was extended until midnigh, Wednesday. The order is not contributing as much as in earlier weeks, since the $64 cap was imposed on the emergency power, Fluckiger said.

Attendees at the Tuesday night meeting included: Treasury Secretary Summers; Energy Secretary Bill Richardson; Gene Sperling, President Clinton’s chief economic adviser; Martin Baily, chairman of the White House Council of Economic Advisers; FERC’s Hoecker; Davis; Lynn Schenk, chief of staff to Davis; CPUC President Loretta Lynch; Robert Hertzberg, speaker of the California State Assembly; John Burton, president pro tempore, California State Senate; James Brulte, minority leader, California State Senate; William Campbell, minority leader, California State Assembly; Jerry M.Winter, president and CEO, California Independent System Operator; Edison International CEO John Bryson; PG&E Corp. CEO Robert Glynn Jr.; Sempra Energy CEO Stephen Baum; Calpine CEO Peter Cartwright; Duke Energy Group President for Energy Services Harvey J. Padewer; Dynegy President Steve Bergstrom; Reliant COO Joe Bob Perkins; Southern Energy CEO Marce Fuller; Independent Energy Producers Association Executive Director Jan Smutny-Jones; Pacificorp CEO Alan Richardson; Enron Chairman Ken Lay; and Williams CEO Keith Bailey.

Richard Nemec, Los Angeles

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