Taxpayers nationwide could wind up footing the bill for billionsof dollars if California’s utilities default on payments tosuppliers for the emergency power and natural gas that they’vereceived during the current crisis, warned Chairman Frank Murkowski(R-AK) of the Senate Energy and Natural Resources Committee lastweek.

“…[T]his administration has basically passed onto thetaxpayers of the entire United States the contingent liabilityassociated with billions of dollars of power [and natural gas] thathave been ordered by this administration to give California time towork out of this problem,” he said last Wednesday during acommittee oversight hearing into the state’s electricity crisis andits potential effects on neighboring western states.

But Rep. Joe Barton (R-TX), chairman of the House Energy andPower Subcommittee, “doesn’t think it’s the taxpayers’responsibility,” said a press aide. If defaults occur, Barton andother lawmakers may consider legislation to protect taxpayers, shenoted. But “if it turns into a court situation, it would limit our[Congress’s] ability to do anything.”

As the debate took place on Capitol Hill, Pacific Gas andElectric (PG&E) last Thursday announced that it planned to makeonly partial payments to power suppliers. It said it would pay on apro-rata basis just $161 million, or 15.4%, of the $1.048 billionthat it owed to various power generators, the California PowerExchange and the California Independent System Operator.

The Department of Energy (DOE) at the direction of the WhiteHouse has been ordering generators since Dec. 14 to sellelectricity to the cash-strapped California utilities, with noguarantee of payment. And it has mandated continued sales of gas toPG&E since Jan. 19. The current orders for power and gas salesexpire on Wednesday (Feb. 7), and the Bush administration has saidit doesn’t plan to extend them.

During this critical period, the administration has gone a “longway by basically underwriting payment. If California can’t pay it,[the federal government will] be billed for two months,” Murkowskinoted. This, in turn, could be passed through to taxpayers.

In addressing possible fixes for the market, Wall Street andenergy analysts, as well as power generators, urged lawmakers notto levy price caps – whether hard or soft – on wholesale powertransactions in the West, saying this would only exportCalifornia’s problems to adjacent states in the region. They alsoopposed a return to cost-based rates. Instead, they believe thefocus should be on long-term contracts between utilities andsuppliers, higher retail rates, expedited siting/permitting ofpower generation facilities, demand-side management activities andupgrading the state’s transmission network. In addition, theyfrowned on any attempt at state ownership of the troubledutilities. Sen. Don Nickles (R-OK) went as far as to call it”absurd.”

The near-bankrupt utilities, on the other hand, favored pricecaps or a return to cost-based rates. Stephen Frank, president andCEO of Southern California Edison, believes legislation introducedby Sen. Dianne Feinstein (D-CA) advocating such measures wouldprovide “immediate relief” to the out-of-control market, which onepanelist said was unparalleled in the “history of the developedworld.”

The Wall Street and energy analysts also confirmed the marketturmoil is no longer just contained to California, but is rapidlyspreading to neighboring states. Tacoma Power in Washington statehas just raised its rates 50%, and Idaho may be forced to increaseits retail rates by as much as 24%, noted Murkowski.

Both Murkowski and several panelists agreed the worst is stillto come. “We are using capacity generation for next summer” to meetcurrent demand in California, warned Joe Bob Perkins, president andCOO for Reliant Energy Wholesale Group. He also noted thatgenerators are cutting into the emission credits they will need tooperate their plants during the summer.

Perkins predicted that blackouts in California this summer willbe far worse than those experienced this winter. As much as 5,000MWs may have to be cut compared to 500 MWs this winter, and theoutages could last up to six hours per day as opposed to one or twohours a day, he told the committee. While it’s too late to bringnew power supplies on line to avoid a summer emergency, Perkinsproposed that a number of measures — economic incentives toentice industrial customers to participate in interruptible loadprograms, conservation measures and the temporary relaxation ofenvironmental restrictions — could help to free up about 10,100MWs in the West.

Given the current hydroelectric situation in the PacificNorthwest, “the brownouts of California now could very well be[the] brownouts of Idaho,” Washington and Oregon next summer,predicted Sen. Larry Craig (R-ID).

Although the White House and Chairman Murkowski favor a staterather than a federal solution to California’s power market crisis,several at the hearing believe the federal government should takeaggressive action.

The solution in California will require a combination offederal, state and regional policies to ease the way fordevelopment of competitive power markets, said Peter Fox-Penner,principal of The Brattle Group in Washington D.C.

He proposed that Congress or the Bush administration “take thelead” in creating a “dialogue” between state governors, localauthorities, the environmental community and industry to improvethe energy infrastructure. Also, he said federal legislation isnecessary to address FERC oversight of the entire transmissiongrid, PUHCA and PURPA, FERC authority to police market-powerabuses, and public-interest programs. Fox-Penner further called onCongress to convene an independent panel to tackle the market-powerissue.

The federal government may be forced to make “some distastefuldecisions” to help keep California afloat because if its economynose-dives “we’re all going to be pulled into it,” said Sen. BenNighthorse Campbell (R-CO). But, he noted, the nation shouldn’tcontinually aid the state if “the will to build new plants isn’tthere.”

“I think they’re still part of the union,” remarked Sen. ConradBurns (R-MT), and thus deserve some help. Sen. Jeff Bingaman(D-NM), the ranking Democrat on the committee, agreed thatCalifornia was “not an island unto itself,” but that its problemsextend to the western region and the nation. “Clearly the federalgovernment has not done and is still not doing all that can fix this real crisis.”

Bingaman said the Bush administration’s “only solution” to theongoing crisis in California appears to be opening the ArcticNational Wildlife Refuge (ANWR) to oil and gas drilling, but henoted this “will not fix what’s wrong” in the state’s powermarkets. Murkowski dismissed the accusation that the White Housewas using the California power crisis to promote ANWR.

On the regulatory front, the Federal Energy RegulatoryCommission has a duty to regulate interstate transmission andwholesale power sales, noted Sen. Barbara Boxer (D-CA). “For us[Congress] to say they have no role doesn’t even make any sense.”

Steven Kline, vice president of federal governmental andregulatory affairs for PG&E, said the federal government “needsto do everything it can to encourage” the formation of regionaltransmission organizations, develop renewable energy sources andincrease funding for low-income energy customers.

“To suggest the administration hasn’t done much is a grossinaccuracy of reality,” countered Murkowski, who pointed to thestring of DOE emergency orders for power and gas sales toCalifornia. He believes it’s time for the state’s retail customersto start feeling the pain of higher rates that mirror the realityof the wholesale power market. The state needs to recognize that”electricity does not appear magically at the plug,” the chairmansaid. “It has to be produced. I think some in California’senvironmental community forgot where it [power] came from.”

Larry Makovich of the Cambridge Energy Research Associates(CERA) agreed it was “unrealistic” to “isolate” retail customersfrom the effects of higher power prices, as California has done.Kit Konolige, managing director of Morgan Stanley Dean Witter,thinks that unfreezing retail rates for utility customers wouldhave a positive effect on demand. When San Diego Gas and Electricraised its prices last summer, he noted, “there was an immediatecorresponding decrease in demand” by customers.

“Sooner rather than later…the end customers have to beginpaying the freight,” Konolige said. Even Sen. Feinstein, an ardentdefender of her state, admitted that retail rates must go up. Shenoted that state legislation was pending that would do this. “Ithink there will be at least some attempt to fix the brokenness inthe market at that end.”

Sen. Byron Dorgan (D-ND) called California’s attempt atderegulation a “giant billboard for failure” because it “created aconstruct that [tried] to protect the consumer” from rateincreases.

On the issue of price caps, CERA’s Makovich called them a”limited tool” for taming wholesale power prices, saying that ifthey are used, it should be on a temporary basis and tied to marketreforms. Price caps should be a “last resort,” noted Fox-Penner,but he added they may be necessary next summer. He believeslong-term contracts are a much better option.

But Sen. Feinstein doesn’t think long-term bilateral contractsare the answer to the continuing crisis. “There [is] price gougingin this market,” she said, adding that FERC even said so, but didnothing to correct it. Feinstein favors temporary price caps orcost-based rates as a remedy.

Fred John of Sempra Energy also favored long-term contracts asan alternative to price caps, but he said they must be the rightkind of contracts and reasonably priced. So far, “nobody in thefederal government [has been] willing to step up to the plate” totell suppliers that if they don’t provide power at reasonableprices, cost-based rates will be imposed on their sales, he noted.

Responding to critics of the state’s plant siting and permittingprocess, California Gov. Gray Davis informed Sens. Murkowski andBingaman last week that the state is rapidly siting over 20 newpower generation facilities, including nine that have beenpermitted and five that are under construction. By the end of theyear, the state should have an additional 2,000 MWs on line, Daviswrote in a Jan. 30 letter.

Davis estimated six new power plants should be in operation inCalifornia prior to the end of 2002. To further help with supply,he noted that the state is coordinating power plant maintenanceschedules through the state Independent System Operator (Cal-ISO),and has passed legislation to prevent utilities from divestingexisting generation plants through 2004.

The state’s hurdles to siting and permitting new facilities arelargely responsible for its current predicament, said CERA’sMakovich. He favors some type of time limit being imposed forpermitting and siting new plants in California. He estimated thestate should be approving 1,200 MWs of new generation capacity ayear.

Susan Parker

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