Electricity Crisis Puts PG&E in A Cash Bind Utility is borrowing $1million per hour

David Lazarus and Christian Berthelsen, Chronicle Staff Writers Tuesday, December 12, 2000

As California struggled yesterday with an unusual winter power crisis, Pacific Gas and Electric Co. warned that it soon could run out of money to buy electricity for its 4.5 million customers.

"The credit situation is getting much tighter," said Greg Pruett, a spokesman for the San Francisco utility. "There will come a time when we won't be able to buy power for people. This is going to happen more sooner than later."

The danger for PG&E is that financial institutions will stop lending the utility money to cover its expenses. Northern California's power undoubtedly would continue to flow, but it is unclear who would pay for it or how.

Meanwhile, the state's energy shortage eased slightly as PG&E's Diablo Canyon nuclear power plant, which had been closed for repairs, returned to operation ahead of schedule.

The, which oversees the power grid, declared a Stage 2 emergency alert late yesterday afternoon when reserves fell below 5 percent of total capacity. Power subsequently was cut to some industrial customers on a voluntary basis.

State officials had warned last week that a Stage 3 alert might be called if as much as a third of California's generating capacity remained down for repairs. A Stage 3 emergency allows utilities to initiate "rolling blackouts" to relieve pressure on the system.

Milder-than-expected weather and the return to service of Diablo Canyon prevented the situation from getting out of control, officials said.

But for PG&E, there is no relief in sight for what the company characterizes as a financial disaster in the making.

UTILITY $4.6 BILLION IN DEBT

As of the end of November, Pruett said, PG&E had racked up about $4.6 billion in charges buying power on the wholesale market -- charges that the utility was unable to pass along to customers because of a rate freeze.

"Every hour that goes by means we're in debt a million dollars more," Pruett said.

Although this may be the case, PG&E's gloom-and-doom stance can be seen as an attempt to prod California regulators into lifting the current rate freeze and allowing the utility to hit customers with billions in unforeseen costs.

Last week, the state Public Utilities Commission ruled that PG&E had not met requirements for lifting the freeze and must continue swallowing extra costs incurred in the volatile wholesale power market.

PG&E'S STOCK PRICE FALLS

This is playing havoc with PG&E's finances. The company's stock fell 7 percent to $21.94 yesterday after several leading brokerages issued pessimistic outlooks for PG&E's profitability.

The utility predicts that it could be as much as $6 billion in the hole by the end of the month.

"This situation cannot go on indefinitely," Pruett said. "The price of retail electricity needs to rise."

Consumer activists expressed sympathy with PG&E's plight but insisted that the utility remains responsible for all expenses incurred as California proceeds with deregulation of the state's power market.

"Consumers should not bail them out for the rate freeze," said Nettie Hoge, executive director of The Utility Reform Network in San Francisco.

"But going forward," she added, "we need to get wholesale prices under control. Otherwise this is a perilous concern for everyone."

Hoge said she hopes PG&E's implicit threat of potential bankruptcy will get the attention of federal regulators.

She said federal regulators will have to impose limits on California's wholesale power rates to prevent the sort of price increases that resulted in higher bills for some over the summer.

Wholesale electricity prices are now 16 times higher on average than in the spring. Prices surged over the summer as the supply of available juice was unable to keep pace with demand. They have remained high ever since.

Wholesale prices jumped yesterday after the ISO lifted a $250-per-megawatt rate limit late Friday to discourage power companies from selling electricity elsewhere.

But the move appeared to have some immediate unintended consequences.

$600 PER MEGAWATT WHOLESALE

The wholesale price of a megawatt hour of electricity on Monday was anywhere between $600 and $800, and an official at the ISO acknowledged the agency did not foresee prices reaching that level.

"We didn't think it would go that high," said Patrick Dorinson, a spokesman for the agency.

In addition, while lifting the cap did encourage more generators to put bids on the market, most of them were in the south. Because the distribution system cannot handle a large volume of electricity moving south to north, where demand is highest, the bids were of limited benefit.

Asked whether the bids managed to drive up the cost of electricity without meaningfully augmenting supply, Dorinson declined to comment.

DAVIS' PREDICTION COMES TRUE

Gov. Gray Davis protested the ISO's decision to the Federal Energy Regulatory Commission on Friday night, saying an end to the rate limit would do more harm than good.

"I suspect that, sadly, his prediction has come true," said Steve Maviglio, a spokesman for the governor.

Last night, the California Power Exchange, which coordinates the state's wholesale power market, asked the federal commissioners to overturn the ISO's decision.

Ending the rate limit, exchange officials said, "threatens to bring dire, irreparable and unintended consequences to the California markets."

About a quarter of California's generating capacity was offline as plants throughout the state remained down for both scheduled and unscheduled maintenance.

The Public Utilities Commission is expected to issue its findings this week after a series of surprise inspections of idled plants last week.

Loretta Lynch, the president of the PUC, said the inspections were merely a form of "information gathering," but she stressed that it was unacceptable for so many plants to be down at the same time. She called for a system to be developed to better schedule maintenance.

Federal regulators are expected to draw up a blueprint for overhauling California's energy market this week.

-- Cave Man (caves@are.us), December 12, 2000

Answers

http://www.sfgate.com/cgi-bin/article.cgi?f ile=/chronicle/archive/2000/12/12/MN134549.DTL

-- Cave Man (caves@are.us), December 12, 2000.

Wholesale electricity prices soar in California

Copyright © 2000 Nando Media Copyright © 2000 Nando Times

Market Indices | Dow Jones Industrials | Internet Stocks | Most Active | Gainers | Losers | Company Sleuth

By CARRIE PEYTON, Sacramento Bee

SACRAMENTO, Calif. (December 12, 2000 1:38 p.m. EST http://www.nandotimes.com) - Some wholesale electricity prices on California's Power Exchange nearly tripled between Friday and Monday, while others nearly quadrupled. Officials, meanwhile, declared another electric emergency.

In the first full business day under new, sharply disputed trading rules aimed at averting blackouts, prices of electricity on the Power Exchange, where the bulk of California's electricity is bought and sold, surged far above Friday's $250 per megawatt hour.

The day's first PX auction produced average prices of $904 per megawatt hour. A second auction used to adjust transmission line use produced prices of $668.

One year ago, the average PX price was about $30, Power Exchange spokesman Jesus Arredondo said. "Prices were crazy yesterday and they're crazier today," he said. "This will be the most expensive month ever in California, I'm sure of it."

The California Independent System Operator blamed high natural gas costs and strong electric demand throughout the West for Monday's price run-up, but critics suggested it was early evidence that the new trading rules have backfired.

At the ISO's request, the Federal Energy Regulatory Commission late Friday gave permission to lift a $250 price cap and replace it with a requirement that power sellers who set prices higher than $250 must explain them later. The ISO said the changes would improve the grid's stability by attracting more power to California, repaying plant owners for high natural gas costs and reducing last-minute deals.

The rules were immediately attacked by Gov. Gray Davis and state regulators, who argued that the rules would drive up prices without solving the other problems.

That's just what happened Monday, said Steve Maviglio, spokesman for Davis. "Price gouging has reached a new level," he said. "It's not surprising. It's exactly what the governor predicted."

In addition, a "glitch" in the way the ISO and the PX use two-stage electricity auctions to ease congestion on transmission lines will temporarily spur more last-minute trading instead of less, according to power plant owners and the ISO.

ISO officials, who have long warned that last-minute deals can hurt the stability of the electric grid, said the effect will be minimal, but Power Exchange officials predict it could be massive. The test will come today.

In an effort to solve the problem, the PX late Monday asked FERC to make another emergency change in trading rules, lifting caps on the second round of power auctions, which are used to set "congestion" pricing.

The PX buys electricity from power plant owners and sells it to buyers, almost universally the utilities, which then turn around and supply Californians power. The ISO was created to control the transmission grid, but it has emerged as the buyer of about one-fourth of California's power when stability problems arise, and it then resells that power to utilities.

Meanwhile, the ISO declared another "stage two" electric emergency Monday afternoon - the 12th since Nov. 1 - and pleaded for continued conservation. Some big power users were told to reduce consumption, although the ISO said generally the outlook has improved slightly.

About 8,700 megawatts of power were off line Monday, compared with a high of more than 11,000 last week. A megawatt can supply about 300 to 1,000 households, depending on season and location.

The ISO blames the almost unheard of cold-weather emergencies on an unusual number of power plants down for repairs and growth in other regions that compete with California for electricity.

"It's a very tough problem right now," ISO spokesman Patrick Dorinson said. "I almost could look back and say summer was fun."

The governor, PUC president Loretta Lynch, consumer advocates and others blame the deregulated electric market for the cold-weather power crunches.

As that controversy raged on, state officials who are monitoring the increasingly chaotic electricity situation began toting up the costs of last week's runaway prices.

On Friday alone, according to the California Electricity Oversight Board, it cost $212 million to deliver power through the ISO-controlled grid, which serves about three-fourths of the state's electric consumers. That would be enough to fully pay for a new, cleaner-burning 500-megawatt power plant about every two days.

Monday's bill won't be fully computed for another few days, but it appears that it will be significantly higher, according to the oversight board.

"We have a huge transfer of wealth going on, and we're not getting anything for it," Pacific Gas and Electric Corp. spokesman Gregg Pruett said.

Meanwhile, financial analysts warned investors Monday that the state's two largest utilities are finding it increasingly difficult to bridge the gap between frozen rates and power costs that escalate nearly daily.

Credit rating agency Fitch Inc. on Monday lowered its long-term and short-term debt ratings for PG&E and Southern California Edison, as well as the latter's parent company, Edison International. Fitch cited "increased liquidity pressure" and uncertainty about the utilities' ability to recover the costs of their power purchases. The rating downgrades mean it will be more expensive for the utilities to borrow money in the future.

Also on Monday, Morgan Stanley Dean Witter & Co. and Banc of America Securities lowered their ratings on PG&E Corp.'s stock, which fell Monday to $21.94 a share, down $1.63, nearly 7 percent. The firm also lowered its rating for Edison International, whose stock closed at $18.63 a share, down $1.81, nearly 9 percent.

Moody's Investors Service put the securities of PG&E and its parent PG&E Corp. on watch for a downgrade.

PG&E estimates that at the end of November it had paid out $4.6 billion more for power than it has been able to collect, although consumer advocates disagree, pointing out that that number is significantly offset by utility revenues in other special accounts.

Before the December run-up in wholesale prices, PG&E had requested a 17.5 percent rate increase, which state regulators put on hold. Now the rate increase needed to cover its costs appears to be increasing daily, Pruett said, but he declined to say how much PG&E might seek.

Although consumer advocates oppose a rate increase, some are beginning to talk quietly about increases being inevitable if wholesale prices cannot be brought back down.

"It's not sustainable," said Mike Florio, an attorney for The Utility Reform Network and a member of the ISO board. "It has to stop."

Bee staff writer Andrew LePage contributed to this report.

http://www.nando.com/noframes/business/story/0,2469,500289326-50045815 8-503024153-0,00.html

-- Cave Man (caves@are.us), December 12, 2000.

ublished Tuesday, December 12, 2000

Natural gas prices go through the roof

Power officials say the soaring rates justify the controversial actions taken last week to stabilize the state's poor electrical system

By Mike Taugher TIMES STAFF WRITER

Prices for natural gas soared again Monday, prompting state power grid officials to say that severely criticized plans they developed late last week to stabilize a faltering electrical system were justified.

The skyrocketing price tag for natural gas had forced several power plants around the state to sit idle because they could not operate profitably under a price cap that grid managers had instituted, according to managers at the California Independent System Operator.

The ISO, in response, softened that price cap late Friday as part of a three-part plan to get through a crisis in which the agency was on the verge of ordering rolling blackouts.

"I don't think that the thing we did Friday is going to raise costs. It actually is helping operationally," said Kellan Fluckiger, the ISO's chief operating officer. "The main issue is these astronomical natural gas prices."

Natural gas was selling between $45 and $60 per million British thermal units Monday, up from between $2 and $3 per million British thermal units last December, according to one industry official.

"It's just phenomenal," said Tom Williams, spokesman for Duke Energy North America, which owns four gas-powered power plants in California.

A shortage of power continued to plague California on Monday as the ISO issued a Stage 2 alert for the eighth consecutive day. When those alerts are issued, residents and businesses are asked to cut back on their use of electricity.

The ISO plan, which was approved within hours by federal regulators, allows the ISO to penalize power companies that refuse its orders to fire up their idle plants, and at the same time provides a way for those companies to get paid above the $250 per megawatt-hour price cap if they can justify higher production costs. For utility companies that have not purchased gas in advance, the cost of generating electricity is between $430 and $600 per megawatt-hour, according to Williams.

But the ISO plan has come under intense criticism.

Gov. Gray Davis called the price cap softening "disastrous for ratepayers and businesses." The governor accused the ISO of misleading his staff and federal regulators, and he accused the federal regulators who approved it of doing so "in the dark of night without notice to anyone in California."

"The commission continues to be in contact with the governor's office," said Barbara A. Connors, spokeswoman at the Federal Energy Regulatory Commission.

Representatives of Pacific Gas & Electric Co., which could face higher bills for electricity bought at the last minute under the new rules, were equally inflamed.

"These are prices that are going to have to be paid by our customers," said PG&E spokesman Ron Low. "To go out and pay the ransom being charged by the out-of-state generators (who have purchased California power plants, including some that were owned by PG&E) for power is very troubling to us."

All that criticism is fairly new to the ISO, which until this summer's power crunch had operated in relative obscurity as the state-created, nonprofit agency that is responsible for overseeing the power grid over 75 percent of the state. The creation of the ISO was made necessary when California began deregulating its electricity market in 1998, when the power grid ceased to be run by monopolistic utilities.

But deregulation has turned into a near-disaster, with retail rates already zinging San Diego consumers and with wholesale rates skyrocketing around the state. PG&E is seeking permission to bill its customers retroactively for those higher wholesale costs, which have rolled up to nearly $4 billion since last summer.

"Pointing to the ISO as somehow the reason all this happened is simply not so," said Fluckiger.

Instead, ISO officials said their plan was developed as a stop-gap: Regulators with the Federal Energy Regulatory Commission are scheduled Friday to implement several changes to California's troubled energy market, including a wholesale restructuring of the ISO's unwieldy 29-member governing board.

"Taking emergency action was the right thing to do," said Carolyn Kehrein, a Dixon energy consultant who is also a member of the ISO governing board. "And doing a package that could be approved in one or two hours was the right thing to do. Soft caps, in and of themselves, are problematic in the long term. But we'll come up with a better plan. It was the best thing we had at the moment."

When the federal order is done, it is likely to supersede the ISO's plan. But it is also likely to contain similarities because the ISO, knowing that its plan needed FERC approval, shaped the proposal around items it knew FERC was considering, according to Fluckiger.

On Friday, FERC is expected to, among other things, restructure the ISO's governing board, which even board members now acknowledge is unwieldy and pervaded with conflicts of interest.

Kehrein said that the board sailed smoothly during its first couple of years, but that it ran into trouble this summer when it had to review price caps, which eventually were reduced by the commission from $750 per megawatt-hour to $250 per megawatt-hour.

http://www.contracostatimes.com/news/stories_news/power_20001212.htm

-- Cave Man (caves@are.us), December 12, 2000.