A more comprehensive legislative proposal emerged in CaliforniaMonday designed to stabilize power prices and save the state’s twoprincipal investor-owned utilities from bankruptcy. But it camewith what would be a high price for deregulation advocates, namelythe state taking over the utilities’ hydroelectric generation andtransmission assets. In Washington DC, a Senate bill was introducedthat would give the Department of Energy (DOE) the power to setregional price caps on bulk power transactions in western states.

California Gov. Gray Davis late Monday announced the Departmentof Water Resources (DWR) will conduct an Internet-based auctiontoday for long term electricity contracts, covering terms of sixmonths, three years, five years, and ten years respectively.Qualified energy providers may bid, beginning at 9 a.m. at DWR’sWeb site at www.dwr.water.ca.gov. The sealed bidding process willremain open for 24 hours.

“I expect these bids on long term energy contracts shouldstabilize the market and drive the price of electricity down,” saidDavis. “This is a key step in our efforts keep the lights on inCalifornia at a reasonable price.”

Since January 17 DWR has been negotiating contracts forelectricity on the day-ahead and hour-ahead energy markets. Sincethen, the state has purchased power at a price of more than $75million.ÿÿ

“There is no easy way out,” said the Western Power Trading Forumexecutive director Gary Ackerman. “You are buying at the top of themarket — whether it is spot or long-term deals. All the othertradeoffs are tough tradeoffs. Do people want to have rollingblackouts instead of higher rates for electricity?

“I have a hunch that people are going to get pretty tired ofblackouts. More than an inconvenience, it can have huge economicimpact.

“By choosing blackouts, you are chasing away expansion ofexisting business andÿdevelopment of new business, and Californiabecomes an undesirable place to invest, all because one man figuresit is his duty to protect consumers from a rate increase. It isgoing to hurt California for a long, long time. I think the priceof a blackout is much higher than one of my members would evercharge (for megawatts).”

The $75 million spent so on power purchases so far come underthe new law passed last Friday authorizing the DWR to spend $400million for spot market purchases between Jan. 19 and when longerterm buying authority is hammered out by the legislature. Anotherdevelopment in the deconstruction of California’sonce-adventuresome deregulation program is the beginning of athree-month going-out-business sale by the state-charteredCalifornia Power Exchange (PX), which ordered an immediate cut of15% of its 200-person workforce last Friday.

On the legislative front Monday, State Assembly Speaker RobertHertzberg and other legislative leaders released the highlights ofa new comprehensive legislative package. It would put the stategovernment in the driver’s seat for buying power on a long-term,fixed price basis, and for assuming ownership/operation of privatesector hydroelectric systems and renegotiating billions of dollarsin contracts between the utilities and qualifying facilities.

In turn, the utilities would not have to obtain power suppliesbeyond their own generation capabilities. The state would beallowed to use utility transmission, distribution and billingsystems to get power directly to consumers. The utilities alsowould have to drop any lawsuits against the state and “donate orsell” their hydroelectric assets to the state. In addition, theutilities would privately refinance their existing debts forbillions of dollars in wholesale electricity purchases based onrevenues from current regulated retail rates.

In the meantime, given the credit-worthiness of the state andits newfound role in power generation and procurement, the merchantgenerators would continue to provide power to California while themeans for getting paid is worked out. They would participate withthe state in its attempt to get long-term supplies under contractand “recover only that portion of their uncollected balances forpower sold to (private sector utilities) that were prudent andreasonable, as determined by an ongoing federal review.”

An initial response from one merchant generator was that thepreviously agreed-to forbearance on the wholesale power bills wasfor “weeks, not months,” so whatever is developed by the stateneeds to be done quickly, and no one is sure the hydro-electrictakeover can be done quickly. Furthermore, the generator noted thatthe long-term contracts must “reflect market reality and thereality is that the price of natural gas is high and is notexpected to come back down to traditional $2 to $3 levels anytimesoon.”

However, two other issues have come up. The generators say mostof their supplies are already committed under long-term forwardcontracts. Another sticking point is that the longer the terms ofthe contract, the higher the credit requirements.

Initial reports Monday indicated that under the latest statelegislative proposal California might turn to the bond market toraise billions of dollars needed to allow the two utilities’ to payoff their mounting, unpaid wholesale power bills. The state wouldfloat the bonds in exchange for getting the hydroelectric system.

While reiterating that everything should be done to keep theutilities’ from going belly up, Ackerman, whose trading forummembers include California’s merchant generators and marketers,said “what is foremost on my members’ minds right now is gettingpaid for their November and December deliveries, the volumes forwhich are quite large. If that doesn’t happen, that would be a realproblem.”

However, Ackerman thinks the proposed hydroelectric buyout bythe state could be “a plus because it then provides the benefits ofhydroelectric resources to everyone in the state — not justPG&E. But then the question becomes who benefits? Should it bejust utility customers or everyone including direct-accesscustomers? “Just buying the assets doesn’t necessarily answer thosequestions, but it sure raises them. The proposal raises a number ofquestions, which are not necessarily bad, but they arecomplications that could eventually lead us to conclude it is a baddeal. At this initial stage, however, it might make sense asopposed to some kind of utility bailout.

“Nevertheless, if the state owned the hydro system, I don’tthink it would affect prices all that much. I’d just say that weare cautiously optimistic toward the proposal.”

On Capitol Hill, Sen. Dianne Feinstein (D-CA) introducedlegislation Monday that would give the DOE the authority tooverstep FERC by setting an interim regional price cap on orcost-based rates for wholesale power transactions in 11 westernstates.

The legislation, which was co-sponsored by Sen. Barbara Boxer(D-CA), seeks to amend the Department of Energy Authorization Actof 1997 to allow the secretary to impose a temporary regional pricecap or cost-of-service rates (to cover a generator’s productioncosts, plus a reasonable rate of return) when FERC determines therates to be “unjust and unreasonable,” but fails to remedy them.

The DOE secretary’s action would remain in effect until “justand reasonable” rates are restored to a market. The governor of anystate within the region would be able to opt out of the cap,according to the legislation. The measure would apply to bulk powertransactions in California, Oregon, Washington, Nevada, Arizona,Idaho, Montana, New Mexico, Colorado, Utah and Wyoming.

FERC has steadfastly opposed a regional price cap, while thegovernors of the western states have favored it. “This bill isbeing introduced after [the] Federal Energy Regulatory Commissionhas turned down frequent requests to establish a temporary regionalwholesale price cap despite finding that the electricity generatorsare charging ‘unjust and unreasonable’ rates,” Feinstein said.

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