Operating under a two-week extension of emergency orders to keeppower and gas supplies flowing, courtesy of the new Bushadministration, California government leaders last week conductedthe state’s first-ever power auction for long-term contracts, andcontinued to work on new legislation to revitalize its crumblingpower structure.
Despite continuing Stage Three power alerts, rolling blackoutswere avoided, and despite the absence of any immediate stateregulatory or legislative relief, creditors and suppliers held offforcing the state’s two cash-strapped major investor-ownedutilities to file for bankruptcy.
It helped that the first major act of President Bush’s newEnergy Secretary Spencer Abraham last Tuesday was to give PacificGas & Electric and Southern California Edison another two weeksof breathing room by extending emergency orders requiring gas andpower suppliers to continue supplying the cash-strapped utilities.The emergency gas order now expires at 3 a.m. (EST) Feb. 7. TheCalifornia governor also added financial and energy heavyweightsfrom New York, Washington and Los Angeles to his advisory team.
In granting the extensions, Abraham urged the state to get towork to solve its own problems. “Our action today is designed togive the governor, the California legislature and other relevantparties the time to take necessary action. I strongly urge theparties to act immediately,” said Abraham. He also said he waskeenly aware that other western states have expressed concernsabout their own supply situation and the impact the order is havingon power prices in their areas.
Despite the action, PG&E said it still was having troublegetting gas suppliers to comply with the emergency order originallyissued Jan. 19. “The gas supply situation is [not good],” utilityspokeswoman Staci Homrig said Tuesday afternoon. Homrig saidPG&E’s storage currently is well below 50% full, or less than16 Bcf and depleting rapidly by about 500 MMcf/d to 1 Bcf/d.
The bail-out may come soon. Based on progress made by bipartisanleadership in the state legislature last week, that body isexpected to enact omnibus new legislation fully sanctioning thestate’s plunge into the power procurement business by Thursday,Feb. 1.
Even without a threat of controlled blackouts Friday, the stategrid operator kept a Stage Three alert in effect and had to invoke1,000 MW of interruptible load in southern California because ofsupply problems out of state in the Southwest. There was also anunexpected outage of 260 MW of generation in already-constrainednorthern California. State regulators meeting in a special”continuation meeting” Friday changed the state’s interruptibleprograms so large customers who voluntarily cut their power whenreserves get low on the grid will not face any penalties if theydecide to continue their business operations in the face of thesenow too-frequent emergencies.
As of Friday, the leading legislative proposal would allowutilities to recover their under-collections in rates, but inreturn the state would get equity interest in the companies throughthe issuance of state-backed warrants that eventually could becashed in when utility stock values improve. The proceeds would bereturned to taxpayers in the form of rebates. Alternately, the newlaw that is eventually passed could also lead to the stateultimately owning the private-sector utility hydroelectric and/ortransmission systems.
Gov. Gray Davis last week reached out to the private and publicsector for an all-star cast of temporary, unpaid advisers thatinclude Robert Rubin, the former Clinton Administration treasurysecretary behind the scenes, and three others working with thegovernor or parts of his administration.
The new legislative proposal gaining momentum last Friday wouldprovide state-backed bonds to help ease the utilities financialwoes while authorizing the state to sign some of the long-termcontracts it is analyzing in the wake of the sealed-bid powerauction completed Jan. 24.
Claiming bipartisan support among lawmakers and “conceptualagreement” from the governor, state legislative Assembly SpeakerBob Hertzberg proposed a bill in public hearings last Thursday (AB18X) that he says will give the added relief to supply andcash-constrained utilities while meeting four criteria: (1) no useof taxpayer monies, (2) more market stability, (3) incent utilitiesand others to get the best deal they can for consumers and (4)provide economic stability.
“(Federal Reserve Chairman) Alan Greenspan in hearings beforethe U.S. Senate (Jan. 25) emphasized the danger to California andthe nation’s economy unless we increase our energy capacity andreserves,” Hertzberg said in summarizing his latest legislativeproposal, a version of which is expected to be made law by the endof this month. “Now is the time to act. Now it is time to restorepower to California.”
In the midst of proclaiming a successful power auction, whoseweighted average price was being debated by Friday, Davis used theupbeat occasion to announce three temporary energy-related advisorsto state capital news media: Mike Peevey, a former utilitypresident-turned-successful-energy startup entrepreneur; S. DavidFreeman, general manager of the nation’s largest (successful)municipal utility in Los Angeles and a veteran of more than fourdecades in public power; and Frank Zarb, Nasdaq Stock Market CEOand a former top-level energy adviser in the Nixon and FordAdministrations in the 1970s.
Peevey, whose wife was elected to the state legislature inNovember, will serve as Davis’s energy adviser; Freeman will helpthe state water resources department develop long-term powercontracts and Zarb will advise Davis on energy finance and marketissues.
Although it did not divulge peak-demand power price bids,California’s state-run auction turned up 39 bidders and aweighted-average price of 6.9 cents/kWh, in the immediate aftermathof the whirlwind 27-hour, sealed-bid power auction conducted overthe Internet. Now the real work begins — that of face-to-facenegotiations with the most promising bidders — something thatLADWP’s 75-year-old veteran, Freeman, is expected to help the statedo.
Tom Hannigan, director of the state water resource departmentwho oversaw the auction, said the state obtained “a useful sampleacross all times of the day across the spectrum of the year, and weare quite pleased with the initial results. I look forward tolooking through bids and developing some long-term contracts. Ourfundamental responsibility here is to purchase power at the bestpossible prices for consumers and businesses.”
On Wednesday as the bids from the Internet-based auction wereinitially accessed, Davis said he expected a new law from the statelegislature by Feb. 1, giving the state authority to consummatedeals involving the best of the bids received in thequick-turnaround auction. The bids covered six-month, three-, five-and 10-year durations. Hearings in Sacramento continued on theomnibus new law(s) that would give the state long-term buyingauthority, but also decide how to handle operation of the utilityhydroelectric generation system and over-market purchased powercontracts with so-called “qualifying facilities” (QFs).
Bidders, utilities and other market participants expressedinitial enthusiasm for the state’s new program, with SanDiego-based Sempra’s CEO telling the financial community Thursdaythat he was “encouraged” by the state auction.
“We don’t yet have detailed information on the bids in the firstround — and in my opinion that’s what it is, a first round —but from what the governor has said, I am quite encouraged that weare going to see power allocated to the three utilities at belowthe costs that they have recently been paying in the wholesalepower market,” said Sempra’s CEO Stephen Baum. “That should easethe financial situation of all three utilities and give us greaterliquidity, opening the way to further measures being discussed,such as securitization of uncollected balances.”
SDG&E Files for Pay-Up
Baum said SDG&E rate filing Wednesday was its plan for theso-called “securitization” of its uncollected balance, noting thatother discussions are ongoing in Sacramento with respect to PacificGas and Electric and Southern California Edison.
“I think there will be further auctions by the state and priceswill be obtained that are below the current spot prices, and so Isee an improving picture for all three utilities in California inthat regard.”
As another part of the state’s meandering energy crisis,SDG&E appealed to state regulators as the auction was beingcompleted for a five-year surcharge and a $100 millioncash-conservation program to avoid the financial torpor of its twolarger fellow private-sector utilities to be effective March 1,2001.
SDG&E’s parent company senior executives in announcing a 20%earnings increase for 2000 on Thursday emphasized that they were”acutely aware” of the near-bankruptcy status of the state’s twoother private sector utilities. The San Diego utility is in adifferent position because of special legislative protections itreceived last year (AB 265).
In the meantime, both Edison and PG&E’s utility in separatefederal court actions are attempting to force the California PublicUtilities Commission (CPUC) to raise the utilities’ rates so theycan collect past and future under-collections because of thecontinuing sky-high wholesale prices, which are not fully coveredby current rates. Edison’s federal court case in the Los Angelesdistrict is farther along than PG&E’s and a hearing was setlast week for Feb. 12 on the Edison suit.
Saying both the federal and state governments have failed tostop the bleeding, SDG&E, which firs felt the sting ofCalifornia’s deepening energy crisis last summer, filed Wednesdaywith the CPUC for a five-year, 2.3 cents/kWh rateÃ¿increase and a$100 million “cash-conservation” program toÃ¿address its more than$450 million in under-collections to avoid the financial crisis nowplaguing the state’s other two major investor-owned utilities.
SDG&E also asked the CPUC to allow it to resume its normalbill collection activities, which have been suspended since lastJuly to ease the burden on retail customers faced with skyrocketingsummer electricity bills.
Under a special state law passed last year, SDG&E re-frozeits retail rates at 6.5 cents/kWh, retroactive to June 1, but theutility said over the past 30 days the wholesale power prices inthe state have averaged a record 25 cents/kWh, which SDG&E saidis seven times what they were a year ago.
SDG&E estimated the proposed hike would mean an increase of$11.50 a month for the typical residential customer, whose currentaverage bill is $72 monthly.
Richard Nemec, Los Angeles
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