With the official start of spring, time began to pressCalifornia’s wide-ranging efforts to fix past, present and future(short-and long-term) energy problems. For every positive lastweek, there seemed to be greater negative developments to dealwith, rolling blackouts being the most dramatic. By last Friday,the prospect for bigger problems ahead seemed unavoidable.

Still, on the positive side of the ledger last week, thegovernor and legislature handed state regulators a mandate to fixthe lingering utility rate dilemma, the mechanism for paying back$3 billion to the state water resources department (DWR) forelectricity purchases, and to settle the festering dispute betweennear-bankrupt utilities and 688 small qualifying facility (QF)generators. The California Public Utilities Commission is expectedto act on these issues when it meets Tuesday.

A further complication in the QF issue arose last Thursday whena superior court judge in the remote desert county of Imperial insouthern California temporarily freed CalEnergy’s 320 MW ofgeothermal generation from its long-term contract with SouthernCalifornia Edison to sell its power elsewhere. Some observersspeculate this could cause other QFs to try to break away from theutility contracts. CalEnergy officials said Edison owes it $140million in unpaid power bills. Edison last week in a Securities andExchange filing indicated it owed about $840 million to QFs.

Anticipating the CPUC action this week, state legislation todeal with the QFs and other rate matters was quickly passed by thesenate, but failed to get a required two-thirds vote in the lowerhouse last Thursday.

On another front, three more natural gas-fired generating plantstotaling 2,076 MW were approved for construction March 21, all tocome online between October 2002 and April 2003, and a fourthplant, Otay Mesa in the extreme southern end of the state near SanDiego won preliminary approvals and could be okayed by the stateenergy commission in the near future, at which time Calpine, undera deal it made with PG&E Generating, will build and operate theplant, as it has also agreed to do in a deal with Enron for its 750MW plant in southern Kern County that gained state approval lastDecember. Nevertheless, right now the state is about 6,000 MW shortof contracted supplies to cover summer peak-demand periods. If ithas to go to the spot market for these supplies, it will be riskyand expensive.

Gov. Gray Davis during the week also announced 12 state grantsand contracts totaling $9.2 million with private companies andmunicipal utilities to develop “energy smart” technology that caneventually improve the state’s demand-side management, thegenerally accepted key to the state’s efforts to minimize theprospects for rolling blackouts this summer when they are nowviewed as inevitable.

In the QF matter, Gov. Davis and the legislative leaders foundtalks with the small power producers “bogged down,” in thegovernor’s words, so they found a willing, flexible ally in theregulators who are supposed to implement the ratemaking part of thestate crisis.

According to Gov. Davis, speaking in an impromptu press briefingat the state Capitol, the CPUC will decide to extend a temporaryone-cent/kilowatt surcharge on retail electric utility rates,specify a methodology giving the state DWR first call on utilityretail power revenues and approve a new formula for determiningutility payments to QFs in five- or ten-year contracts.

The governor accused the state’s two near-bankruptinvestor-owned utilities, Southern California Edison and PacificGas and Electric, of making the situation worse by “pocketing”revenues that were intended to pay the QFs. The utilitiesreiterated that they intend to pay all of their past-due bills andthey are encouraged by the prospect for a CPUC resolution of the QFstalemate, but they were not happy about the governor’s criticism.PG&E’s utility had the strongest reaction to the governor’sremarks.

“It is unfortunate that the governor also chose to criticize thecompany’s action with respect to QFs,” PG&E said in a preparedstatement, calling the remarks “inappropriate and unjustified,”since the utility claims it informed both its QF suppliers and thegovernor’s office a week earlier that it intended to implement aprogram for fully paying the QFs going forward. “That is the sameresult the governor announced.”

In the CPUC administrative law judge’s proposed decisionregarding QFs, which mirrors work of the legislature in negotiatingwith the producers, several steps are to be taken, such asabandoning the Arizona-California border price of natural gas inthe formula for determining how much the QFs get paid, SouthernCalifornia Edison and PG&E’s utility had already beenadvocating be put in effect on an emergency basis last fall.

In regular conference calls with creditors and debtholders, itwas obvious last week that the financial community is losingpatience with the pace and direction of California’s attempts toright its sinking energy ship. Problems of credit-worthiness hungover all transactions. Groups like the Western Power Trading Forumwere searching for a way to quantify just how much more it iscosting the state in the prices paid for power on the spot marketand in the long-term contracts being negotiated, due to the growinglevel of unpaid bills and loans.

Reliant Energy Wholesale President Joe Bob Perkins in aconference call March 21 that credit-worthiness (his firm is owed$370 million for past-due power supplies) is the main obstacle toReliant finally signing a long-term contract with the state. It hassigned a memorandum of understanding (MOU), as have manygenerator/suppliers, but Perkins said he could not say “when or if,we will reach a final agreement.”

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