The legislative architect of California’s 1996 precedent-settingelectric industry restructuring law Monday proposed a $2 billionreserve be carved out of the state’s next fiscal budget to fund astate effort to buy or build new generation plants. Theannouncement came at the same time the state energy commission,which approves all new power plants of 50 MW or larger, released alegislatively mandated report that concludes the state’s generationresources are adequate, and temporary peaking plants are not neededfor the upcoming summer.

And as a further backdrop to this continuing electron soapopera, California again Monday began the week with power alertscaused by continued outages of generation plants totaling about12,000 MW, leaving the state’s independent transmission gridoperator, the Cal-ISO, asking customers for voluntary demandreductions as reserve margins were expected to drop below 7% whichthey did this past Sunday and Monday through Thursday last week. Atthe same time, natural gas prices spiked, according to powergenerators, as supplies drew tighter.

Adding to the problem was the unplanned outage for at least oneof the units at Pacific Gas and Electric’s Diablo Canyon NuclearPlant, and continued problems in importing power into Californiabecause of heavy demand and outages of generating plants throughoutthe West.

State Sen. Steve Peace, the budget committee chairman whorepresents parts of San Diego County, said the next state budget,which is awash in surplus funds, should include the provision for”a one-time special reserve for energy initiatives.”

“This special reserve is necessary to preserve the state’soptions in responding to the difficulties encountered in thetroubled electricity and natural gas markets,” Peace said.

“The use of public dollars to finance development,private-public partnerships, or to capitalize publicly-ownedutilities are all options which California policymakers may have toconsider if the Federal Energy Regulatory Commission (FERC) isunable to bring wholesale energy markets under control.”

Noting that it is “too soon” to determine what course the statemay take, Peace noted that Gov. Gray Davis has said the state willtake “whatever actions on electricity are necessary to protectCalifornia’s economy and its consumers.” And he added that heexpects that the governor will enjoy the full cooperation of thestate legislature. (Gov. Davis is a Democrat and both houses of thelegislature have large Democratic Party majorities.)

Among what the state’s nonpartisan legislative analyst isprojecting as a $10 billion budget reserve, Peace and the statelegislature’s Democratic majority are proposing that $2.5 billionbe set aside for contingencies related to economic uncertainty, butin addition another $2 billion be put in a “special reserve forinfrastructure investment.”

One electric utility official said the state’s continuinggeneration problem stems from a combination of nuclear plantoutages (planned and unplanned), more pressure on the natural gassystem for generation as a result, and a cold snap, along with gasstorage figures being down below historic levels. “Everyone gotscared causing a lot of panicky buying,” the source said. “Thepsychology is pretty bad.”

The Palo Verde Nuclear Plant in Arizona had its Unit-Twooperating at only about one-tenth of its power (150 MW-vs.-1,500MW), according to a California generating source. Warming weathermay help ease demand, but Southern California Gas Co. was expectedto be “chasing gas to replace the supplies it took out of storagelast week. If they were a patient, I’d call them day-to-day,” thesource said.

Sitting aloof from both the generating and gas crunch, the Cityof Los Angeles Department of Water and Power (LADWP), the nation’slargest municipal utility not tied to the Cal-ISO, indicated itsgas deal with Reliant Energy and spot purchases ahead of the mostimmediate spikes makes it look “either very smart or awfullylucky,” according to one of its gas buying managers.

The large, vertically integrated municipal utility boughtsupplies at $5.30 and in the $7 range at two different junctureslast week before gas prices jumped to the $8-$10 range, the LADWPmanager said. “We bought it a few hours before the AGA figures cameout and way before the $14 pop. We tend to buy gas forward becausewe have pretty good forecasts on our native load.”

“Natural gas started at $10 and jumped to $13 this morning, sowho knows what it is going to do today,” said another electricityfuel buyer Monday morning in the Los Angeles area. “The rumor outof Texas last week was that there were some big suppliers, such asEnron and Dynegy, who are short and chasing gas.”

In the meantime, even if the weather and the unplanned outagesease, California electricity stakeholders predict that the Cal-ISOalerts will continue this winter. The recent decisions of CalpineCorp. and Enron to pull out of proposed peaking plant projectsbecause of the “uncertainty in the California electricity market”is further threatening the California grid’s reliability.

Last week the situation even prompted the Los Angeles CityCouncil to request that LADWP and SoCalGas make a jointpresentation on Dec. 12 to describe the potential for skyrocketingretail gas bills and supply shortages this winter in a situationakin to what San Diego electric utility customers faced lastsummer. The council specifically is asking for answers to questionsabout: