Participants report there is definitely light at the end of thewinding tunnel that has encapsulated California’s troubledelectricity market, but the question Wednesday was whether it wasthe result of a temporary power surge or light from the opening ofbroader, longer term solutions that include fixing the market,persistent supply shortages, beleaguered generators andcash-starved utilities.

Following a late-night meeting Tuesday among California’spolitical/regulatory leaders, Clinton administration officials andenergy industry stakeholders, “technical” follow-up sessions inWashington, D.C., continued Wednesday.Following the “workinggroup” meetings the policymakers will reconvene in Washington,D.C., this weekend.

Outgoing FERC Chairman James J. Hoecker yesterday declined todiscuss specific proposals that were raised during Tuesday’smeeting, but he said the meeting was “highly cooperative” and”substantial progress was made in finding both near-term,intermediate and long-term solutions to California’s difficultissues.”

He told NGI that the “teams of industry and regulatory personnelworking on details of implementing” the statement of principleswould include FERC staffers, so “we’ll be able to say a lot more[about this effort] early next week.”

Along with five basic principles the working groups werehammering out more details on, a brief written summary of thelate-Tuesday session said that the “parties (for the first time)acknowledge that (California’s) problem must be addressed whiletaking into account the regional nature of the market.” This wassignificant, given the fact that Gov. Davis’ state plan articulatedin his “state-of-the-state” address Monday made no mention ofCalifornia’s ties to the regional western power grid.

The statement of principles issued by the parties “acknowledgesthe importance of taking into account the entire [western] region,”not just California, when considering corrective measures, Hoeckersaid. “In my view, the end result will in the long run be betterwholesale markets in California. But to get there, we have toovercome some very serious obstacles,” Hoecker noted, adding thegathering was a “very positive step in that direction.”ÿ

Although it’s “too early to declare victory,” Hoecker said hewas “very proud of what we were able to accomplish” at the meeting,which was hastily called last week when the prospect of bankruptcyfor California’s two top investor-owned utilities — SouthernCalifornia Edison and Pacific Gas and Electric — appearedimminent. (Wednesday, the utility parent company, PG&E Corp.announced it was forgoing its fourth quarter dividend; Edison’sparent, Edison International, made a similar announcement inDecember.)

While short on specifics, Hoecker noted he was “happy to saythat it appears to me that discussions are heading in a directionthat’s entirely consistent with our Dec. 15 order” in which FERCenacted a series of reforms for California’s out-of-control bulkpower market.

The details expected to be agreed on this weekend would be howto implement the following five principles adopted Tuesday night:

Overall, the need to “maintain stability and avoid bankruptcy ofthe California utilities” was agreed to by all, with federalofficials increasingly concerned about California’s escalatingelectricity crisis spilling over to other states and other parts ofthe U.S. economy, including the banks. Energy stakeholders, on theother hand, are concerned that the state will reverse recent yearsof progression toward a deregulated industry.

Some of the nation’s energy industry top leaders sat around thetable in the U.S. Treasury offices in the nation’s capital withClinton administration and California policymakers and electedofficials (see participants’ list at end)

California legislative leaders who were in attendance rushedback to Sacramento for the start of the first hearings today(Thursday) on proposed new state laws to address Gov. Davis’proposals under a special session called by the governor last week.Under a specially convened session, normal legislative rules andprocedures are waived, so at least one house of the state bodycould be voting on some initial measures by the end of the daytomorrow (Friday).

Among the initial proposed new laws are: (1) changing theoversight board of the state-chartered, but FERC-regulatedindependent transmission grid operator (Cal-ISO) from its presentstakeholder composition to one of state government-appointees,including elected officials; (2) requiring investor-owned utilitiesto hang on to the generation plants they now own (presumably bothin-state and out-of-state) and (3) expanding the governor’sauthority to order merchant power plants back into operation duringpower alert emergencies.

Other legislation is expected to deal with longer term issuessuch as the creation of a state power authority, greatlyaccelerated conservation (demand-side management) and generationplant siting processes, and even the question of help for thefinancially strapped utilities, although California’s three mostactive utility consumer watchdog groups are adamant in theiropposition to any taxpayer or ratepayer supported relief.

Meanwhile in a filing with the Securities and ExchangeCommission Wednesday, PG&E Corp. warned that it is on the brinkof bankruptcy and may be forced to cut off power and gas suppliesto some of its 12 million California customers as early as nextmonth. The San Francisco-based utility said it’s unable to borrowmore money to buy electricity or natural gas and will default onits current obligations without “immediate regulatory, legislativeor judicial relief.”

Davis’ plan for a state power authority was not well received bythe state’s association for its 30 municipal utilities, whichaccount for about 25% of the state’s electricity load andcustomers. Stu Wilson, associate director the Sacramento-basedCalifornia Municipal Utility Association (CMUA), said the group is”not necessarily” supportive of a power authority. It previouslyhas recommended to the governor that a new state agency be createdto takeover the private sector utilities’ portion of the statetransmission grid.

Regardless of what form the state entity takes, Wilson said CMUAis interested in seeing an organization formed that will”aggressively pursue construction of new power plants to createmore than sufficient reserves and will provide added megawatts on acost-based basis rather than whatever the market will bear.”

One other side note Wednesday, was centered on the state’s otherspecially chartered nonprofit organization, the California PowerExchange (Cal-PX). The PX has sued federal regulators and the courtdirected FERC to respond by 5 p.m. PST on Cal-PX request for relieffrom FERC’s Dec. 15 order on California’s wholesale market. The PXcharges the order will put it out of business. FERC’s replay wasnot available by presstime. Cal-PX wants FERC to allow utilities tobuy and sell power once again through the exchange, reverse itsdecision to kill the state exchange’s forward market as of May 1,2001 and exempt it from the $150 price cap.

Attendees at the Tuesday night meeting included: TreasurySecretary Lawrence Summers; Energy Secretary Bill Richardson; GeneSperling, President Clinton’s chief economic adviser; Martin Baily,chairman of the White House Council of Economic Advisers; FERCChairman James Hoecker; California Gov. Gray Davis; Lynn Schenk,chief of staff to Davis; CPUC President Loretta Lynch; RobertHertzberg, speaker of the California State Assembly; John Burton,president pro tempore, California State Senate; James Brulte,minority leader, California State Senate; William Campbell,minority leader, California State Assembly; Jerry M. Winter,president and CEO, California Independent System Operator; EdisonInternational CEO John Bryson; PG&E Corp. CEO Robert Glynn Jr.;Sempra Energy CEO Stephen Baum; Calpine CEO Peter Cartwright; DukeEnergy Group President for Energy Services Harvey J. Padewer;Dynegy President Steve Bergstrom; Reliant COO Joe Bob Perkins;Southern Energy CEO Marce Fuller; Independent Energy ProducersAssociation Executive Director Jan Smutny-Jones; Pacificorp CEOAlan Richardson; Enron Chairman Ken Lay; and Williams CEO KeithBailey.

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