Following last week’s flurry of state initiatives and an energyroundtable among 10 western governors, California will be busysorting through the details full this week, including signinginitial long-term power contracts, which Gov. Gray Davis haspromised will begin to move the continuing “crisis” into thelonger-term “challenge” mode. In the interim retail direct-accesssales will be suspended among other provisions in the newlegislation.

The bottom line emerging from Sacramento is that the state isfirmly involved in electricity supply and demand-side managementfollowing last week’s milestones, but it is placing limits on theduration and depth of that involvement, pushed by an uneasyRepublican minority in a solidly Democrat-majority statelegislature and administration. State political observers say itwas Republican reluctance that has spurred Gov. Davis to launchmore aggressive power-plant siting plans that will be announcedsome time this week, designed to get an extra 2,000 MW online bythe end of year and another 5,000 MW by the summer 2002.

Among the many details that were unclear even after the governorhad signed AB 1X into law was the question of how the state-backedbonds destined to be paid back over a number of years through asurcharge for utility ratepayers using 130% of baseline amounts ofelectricity will be structured, and more important, how they willbe received by bond markets.

On the eve of the western governors’ confab Friday in Portland,California lawmakers Thursday passed by the minimum two-thirdsmajority (54-25) a new law with a $10 billion price tag authorizingthe state to sign long-term electricity contracts and alsostabilize the financially troubled two largest investor-ownedutilities.

“This marks the first critical step on the road to recovery inCalifornia’s energy challenge… without raising rates,” saidDavis, who noted it was important for his state to “demonstrate weare making progress” to the other western governors who gathered inOregon (see related story this issue). “But we shouldn’t kidourselves, big challenges still lie ahead. We have to find otherways to conserve electricity and increase generation capacity.

“I believe there are ways to speed up the permit process,streamline it further, increase transmission capabilities, buildnew power plants, and with no violence to the environment.

“With this law, I can assure everyone California can and willpay its bills.”

Gov. Davis said he directed his power contract negotiators to dofour things: (1) secure short- and long-term contracts so the staterelies on the spot market for no more than 5% of its supplies; (2)finalize the bids received Jan. 23-24 no later than the end oftoday (Feb. 5); (3) as soon as possible extend the earlier requestfor bids to secure more short and long-term proposals; and (4) workwith the utilities to acquire their options for short-term power atreasonably prices. Davis said he is prepared for the DOE not toextend its current emergency order mandating suppliers to dobusiness with California.

Among its provisions, the new law allows the state waterresources department to issue revenue bonds to help finance itspower purchases, but it specifically prohibits the state agencyfrom taking ownership of transmission, generation or distributionassets of the investor-owned utilities; prohibits rate increasesfor residential customers’ initial usage of 130% of baselinequantities or power; and limits the state power buying to a periodrunning through next year (Jan. 1, 2003). The bill also “suspendsthe ability of retail customers to select alternative providers ofelectricity until the water resources department gives up its newpower-buying role. The head of the state’s independent powerproducers, Jan Smutny-Jones said Friday he understood some”clean-up” legislation due out this week would attempt tore-institute the last option, which was the centerpiece of thestate’s 1996 electricity restructuring law.

Jones called AB 1X “very important,” but only a first step,agreeing that long-term contracts should have the effect ofbringing down wholesale power prices in the West. Just as importantas the new law last week, Jones said, was a report from the FederalEnergy Regulatory Commission concluding that none of the state’smerchant generating plants used planned or unplanned outages lastyear to drive up wholesale prices.

“We’re very hopeful that this report will quiet those who aretrying to blame the producers for the crisis and recognize that we,in fact, are part of the solution,” said Smutny-Jones, who said hismembers are spending “billions of dollars” to try to modernizegenerating plants to serve the California market.

Gov. Davis indicated the state still does not have sufficientamounts of long-term bids, but that his negotiators want to signthe best deals they have at this point by Monday and then use themas leverage to sign up the additional supplies they need to getunder contract.

Before finally getting a bill to sign, Gov. Davis early Thursdayafternoon announced the outline for an $800 million statewideenergy conservation program, including incentives to reducecommercial lighting and he signed an executive order directingreductions in outdoor retail lighting by March 15, 2001.

The action Thursday was to add $404 million to an alreadydesignated $424 million conservation effort announced earlier bythe governor. In total, he said the results of the program are togive the state an addition 3,200 MW savings by this summer whenpower supplies are expected to be even tighter than they are thiswinter.

Davis also announced that the McDonalds fast food chain hasjoined the state’s energy conservation campaign by printing 4million tray liners for its 1,100 California outlets with energyconservation messages under the heading, “Flex Your Power.”

A different variation on that theme was provided by some of thestate’s leading utility consumer watchdog groups that teamed up tocriticize the utility’s alleged financial near-insolvency as aconspiracy and urge the legislature not to provide a bailout.

Consumer activists went on the warpath Thursday in SanFrancisco, calling the recently released independent audits ofCalifornia’s financially threatened investor-owned utilities “veryrevealing reports” that the state legislature should use as thebasis for refusing to grant any bail outs to Southern CaliforniaEdison Co. and Pacific Gas and Electric Co.

“The audits demonstrate no need to bail out the utilities,” saidBob Finkelstein, an attorney with the consumer group TURN.

Noting he thinks “crimes have been committed” and the utilitiesshould be “prosecuted to the full extent of the law,” HarveyRosenfield, director of the Foundation for Taxpayer and ConsumerRights, accused the holding companies of reaping excessive profitsfrom the utilities and going on a “spending spree” internationallywhile their utility subsidiaries were preparing for the threat ofbankruptcy.

In an SEC filing Thursday, PG&E indicated that its utilityhas defaulted on a combined $726 million in commercial paper andthat the utility intends to make only partial payment toward debtapproach $1 billion.

Meanwhile, state lawmakers struggled to come up with a long-termsolution to the state’s power crisis yesterday, cash strappedPacific Gas & Electric Co. disclosed that will only be able tocover about 15% ($161 million) of payments due to qualifyingfacilities ($437 million) and the California Power Exchange andCalifornia ISO ($611 million).

The utility and its parent company, PG&E Corp., also said ina filing with the Securities and Exchange Commission that they havedefaulted on $726 million of short-term debt. Together they haveless than $1.2 billion of cash left.

PG&E said its intent is to “pay its ongoing costs of doingbusiness while seeking resolution of the wholesale power crisis.”In the meantime, it will examine restructuring its bank loans andcommercial paper. The company said it might take six months forholders of defaulted debt to get back their principal.

“Making limited payments is the only responsible step we cantake to ensure that the utility retains sufficient funds to allowessential ongoing generation and maintenance of both its gas andelectric transmission and distribution systems, as we work withlawmakers and regulators to reach a solution to California’s energycrisis,” said Gordon Smith, CEO of Pacific Gas and Electric. “Weare committed to maintaining normal operations and to paying asmuch of our outstanding power bill as is available in rates, in amanner that seeks to ensure the safety and reliability of powerdelivery.”

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.