As the state faced the threat of a third day of rollingblack-outs Friday, the California government enacted legislationproviding $400 million to the state water resources agency so itcan substitute for the two failing utilities, Pacific Gas &Electric and Southern California Edison, in buying bulk power forconsumers in northern California.

Also Friday, the California Public Utilities Commission issued atemporary restraining order — immediately labeled an unnecessaryinsult by the utilities — requiring them to continue supplyingpower to all their customers. On the other side of the continentoutgoing FERC Chairman James Hoecker suggested the federal agencyshould enjoin the law enacted by the state Thursday setting up anew governing body for the Cal-ISO and offered some new suggestionsfor compromise actions (see separate report, this issue).

In signing the new law (SB 7X) Friday, Gov. Gray Davis said thestate water resources department essentially will be assuming therole that the utilities used to play making purchases on the spotmarket, which he called “volatile, and more volatile for utilitieswho as of today are not credit-worthy.” He said the state iscredit-worthy and its power buying will “begin to bring down theprices,” which have begun a downward since Wednesday ($580/MWh to$350/MWh today and $181/MWh on the weekend).

“The trend line (in spot prices) is very positive, and we expectthose trends to continue next week,” said the governor, whilestressing that the ultimate solution for California is long-termcontracts, more power plants and more conservation.

One of the state legislative leaders noted that lawmakers andthe governor realize “this is not a long-term answer,” and the newlaw related to spot market buying “only buys the state a shortamount of time.”

Late Friday Standard & Poor’s placed California’s GO andgeneral fund appropriation-backed debt ratings on CreditWatch withnegative implications. The ratings agency said the action resultedfrom “uncertainties surrounding the ability of the state to fashiona long-term solution to its power supply crisis and the ensuingfinancial effect.” The $400 million allocated Friday doesn’tjeopardize the state’s double-‘A’ GO credit rating, but the agencyis concerned “the potential exists for substantially greaterongoing appropriations,” and “there is currently no adequatefunding source.”

The head of the Los Angeles Department of Water and Power(LADWP), the nation’s largest municipal utility and the seller ofexcess power into California’s market to the tune of more than $200million over the past 18 months, S. David Freeman, lauded the statelegislative efforts Friday in which he announced that LADWP willcontinue to sell power on credit (it is currently owed in excess of$170 million) to the state, and that Los Angeles Mayor RichardRiordan and he agree with that. He also affirmed his belief thatthe city will recover “every penny” of the growing amounts owed itfor electricity.

“Through the leadership of the state legislature, the state isnow putting its money toward the purchase of electricity,” Freemantold reporters at a Los Angeles press conference. “So we’re in atransition moving from selling to the Cal-ISO to selling to thestate water resources department. We expect to be paid, althoughthere may be some late payments, but no defaults. The statelegislation is designed to make sure we get paid every penny we areowed.”

As a separate action Friday, Davis said he directed the statewater agency to immediately begin establishing an auction processfor getting long-term, fixed-price power deals for the state,anticipating that a new state law to authorize the long-term dealswill be finalized and signed later this week.

“I suspect that there will be a great deal of interest,” Davissaid, “And we will get many offers in the five tofive-and-half-cent range.”

In its current form, Assembly Bill 1-X bars the Department ofWater Resources from buying power for a price of greater than 5.5cents/kWh ($55/MWh). The DWR would sell the power for the same rateto the utilities and they in turn would sell it to their customersat rates fixed a penny and a half or so higher. The difference inwholesale and retail price supposedly would be used to slowlypaydown the utilities mounting $12 billion in unrecovered costs.

However, many power generators argue 5.5 cents/kWh ($55/MWh) isfar too little unless contracts have significant terms of greaterthan 10 years. Short-term power supplies have been going for$35/kWh. “The $55/MWh threshold for power contracts and absence ofany near-term credit support make AB 1-X unviable,” said MerrillLynch in a research note on Friday.

“We haven’t said that we would” sell power at that price, saidDuke Energy spokesman Tom Williams. “What we’ve said is we wouldparticipate in an auction process… But if it comes out that theauction process is not a good thing for us to do, [we will just sayno]. Williams noted that about 90% of the cost of producing poweris the fuel, and right now the five-year strip for natural gas inCalifornia would make the price of power between 8 and 8.5cents/kWh. The price goes down if the term is longer.

“We offered 5-cent power in August,” he added, “but due to theprice of natural gas that went up to 6 cents/kWh in mid-November.”Currently Duke has little or no power left to sell in the shortterm. It has sold 90% of its power in the forward market and left10% in reserve to compensate for outages. Duke, with 3,351 MW atfour power plants, represents 5% of the state generation market.

Reliant Energy offered to the state last week five- to 10-yearcontracts in which it would supply power at 2 cents/kWh. There’s acatch, however: the state or the utilities would have to supply thenatural gas, which as Duke’s Williams noted makes up the majorityof the cost of the power. Spot gas prices at the SouthernCalifornia border are about $11/MMBtu.

“We’ve got a couple of other proposals that we are discussingconfidentially with the state officials today for long termcontracts under different price structures,” said Reliant’s RichardWheatley. “The best thing I can tell you is one of the mostworkable solutions is the 2 cent/kWh charge; that’s if they bringthe gas to our plants. [The gas cost] is a heck of a priceescalator. In effect it would get around that [price cap]requirement. Whether or not they want to bring the gas to the tableor not is another matter.”

Wheatley said Reliant was spending $5 to $15 million a day ongas to fuel its own California power plants, which produce 3,800 MWin-state. He predicted the $400 million allocated to the DWR to buypower would last only about seven days under recent demandscenarios. “You have to question the ability of the DWRsubsequently to go out and try to sell $8 billion to $10 billion inrevenue bonds given the uncertainty of the marketplace and theinstability and volatility out there. There are a lot of questionsout there and very few answers.”

The CPUC held its emergency meeting in San Francisco Friday atthe request of the Cal-ISO and state Electricity Oversight Board,which reported that the PG&E utility. and SoCal Ed. were goingto “review their scheduling coordination role and responsibilitiesstarting Jan. 20,” meaning, according to the regulators, that thetwo utilities would provide service through the ISO only for powergenerated by the two utilities themselves — without usingpurchased power — which only would cover a portion of theircustomers’ needs.

Therefore, the CPUC slapped a temporary restraining order on thetwo companies it regulates requiring them “to meet their legalobligation to serve ALL customers,” and adding that “recent actionsby the two utilities severely undermine their service obligation.”

The action prompted the president/CEO of the PG&E utility,Gordon Smith, to call the CPUC actions “an insult” to his company’s19,000 employees who he said “have worked tirelessly to minimizecustomer inconvenience this week” during rolling blackouts orderedby the Cal-ISO.

He said the CPUC’s actions did nothing to lessen the threat ofblackouts and he insisted that the utility “is not changing itsscheduling responsibilities.” In a bitter prepared statement, Smithblamed “the state’s regulatory framework” for putting PG&E inthe position of not having enough cash to buy power for itscustomers. He said the CPUC’s action Friday “wasted precious timechasing after a problem that did not exist.”

Equally outraged, John Bryson, CEO of SoCal Edison”s parentcompany, Edison International, the CPUC issuing of the TRO “aninsult to the ethic of the 13,000 employees of SCE who have workedto keep the lights on for their customers. In fact, SCE hasborrowed billions of dollars, which threatens the company’ssolvency, through 8« months of inaction and delay by the CPUC, inorder to continue to serve its customers.”

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