Outside Power Supply Ordered Feds require other states to sell excess energy as reserves decline in California David Lazarus, Chronicle Staff Writer Wednesday, December 20, 2000 ©2000 San Francisco Chronicle

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State officials for the first time invoked a federal order yesterday requiring out-of-state power generators to supply electricity to California.

The Independent System Operator invoked the order, issued last week by U.S. Energy Secretary Bill Richardson, after a faulty transmission line prompted a Stage 2 energy emergency, meaning that power reserves had dropped below 5 percent of capacity.

The ISO, the nonprofit agency that oversees the state's power grid, said it was forced to act because it was unable to secure additional supplies of electricity. The federal order requires power generators in other states to sell excess juice to California until demand is met.

"We just squeaked through another day," said Patrick Dorinson, a spokesman for the ISO. "To get by, we invoked the federal power act."

The emergency order follows a series of energy alerts from the ISO as power reserves dropped to dangerously low levels because of a shortage of generating capacity.

Meanwhile, PG&E expects to lay off employees and cut its stock dividend as a result of absorbing billions of dollars in losses, a senior official at the utility said.

The official, asking to remain anonymous, told The Chronicle that even if a 10 percent rate hike were adopted as part of a deal now being negotiated between PG&E and representatives of Gov. Gray Davis, "the utility won't be in any better shape."

"There will be layoffs," the official said. "You could also expect us to cut our dividend."

Announcement of an accord between the governor's office and California's two largest utilities is expected today or tomorrow. Sources close to the talks said the two sides were still wrangling yesterday over the size of a rate increase to protect the companies from financial ruin.

"They're not close to being where they want to be," one source said. "But the governor is still pretty insistent."

"There are still some things to be hammered out," another source commented.

The talks center on a combined $8 billion in losses racked up by Pacific Gas & Electric Co. and Southern California Edison since wholesale power prices spiked this summer.

The utilities have been unable to pass along their energy costs to customers because of a rate freeze.

Spurred to action by the utilities' warnings that bankruptcy is increasingly possible, the governor is brokering talks on a compromise that would lay about half the debt burden on consumers and force the utilities to swallow the remainder.

However, the talks, which began last week, have hit a snag over how much of the burden consumers should bear. State officials are pushing for a 10 percent rate increase, while the utilities are seeking at least a 20 percent rate hike.

Meeting with reporters yesterday in Sacramento, Davis said allowing the state's utilities to go under was not an option.

"Bankruptcies involve two undesirable results," he said. "If major institutions that together employ 100,000 people have to lay off lots of people, and you have all this fallout, the lights will go off. I don't want either result."

In Washington, the energy secretary said at a meeting on California's power woes with federal regulators that thousands of utility workers could be fired if PG&E and Edison continued losing millions of dollars a day.

"I am concerned that we may be on the verge of a liquidity crisis," Richardson said. "We have some serious problems in California."

Western governors will meet today in Denver to discuss the strain on the multistate power grid.

Although the utilities were slow to win sympathy for their financial plight,

they have gained support in recent days from a number of influential figures, including Richardson, Davis and Sen. Dianne Feinstein, D-California.

Sources say the governor is eager to resolve the financial issue so that he and other officials can focus instead on finding ways to solve California's chronic power shortage.

The PG&E official said concerns among politicians about the financial well- being of the state's utilities had increased after Edison's management sent a letter to employees explicitly warning that jobs could be eliminated because of recent losses.

"The letter got leaked somehow," said Steve Hansen, a spokesman for Edison. "It was strictly designed to be internal."

In any case, PG&E's top executives were mystified that their counterparts to the south were discussing the possibility of layoffs so publicly.

"We were looking at each other and wondering what they're doing," the senior official said.

"There will probably be layoffs here as well," he said. "But you have to look at it closely before you talk about it."

The official declined to speculate on the scope of possible layoffs if PG&E accepted a deal involving a 10 percent or even a 15 percent rate increase.

However, he noted, the utility was forced to tighten its belt in the late 1980s when it recorded its first quarterly loss after writing off $512 million related to construction of the Diablo Canyon nuclear power plant.

At the time, the official said, an unspecified number of PG&E workers lost their jobs, the company's stock dividend was cut, and the share price took a hit.

The situation could be significantly worse now, he said, if the utility is forced to write off more than $2 billion in losses as part of the rate- increase agreement.

But sources close to the talks said it was nearly certain that huge write- offs would be a component of the deal.

This means that even though the financial viability of the utilities will be assured, the matter will be nowhere near resolved, the PG&E official said.

He said: "To borrow from Winston Churchill, this is not the end. It's the beginning of the end. There's going to be a lot more heavy lifting."

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California's Power Crisis: Facts at a Glance

Q: What's the status of the energy crisis?

A: The state yesterday moved to a Stage 2 Alert, which is called when power reserves fall below 5 percent of the actual supply.

Q: When did the power crisis start, and what role did deregulation play?

A: Electricity deregulation took effect in March 1998, but the crisis did not emerge until this summer, when San Diego residents saw their electricity bills more than double. Power prices soared because electricity use outstripped generating capacity. Now, winter power prices have spiked because of record prices for natural gas, which fuels many generating plants, and unusually cold weather in the Northwest.

Q: How has this affected PG&E customers?

A: So far, not much. PG&E customers have been protected from rising electricity prices by a rate freeze that was to have lasted until early 2002.

Q: Will the freeze remain in place?

A: No. State officials and PG&E are negotiating a deal to lift the freeze and increase rates by at least 10 percent. This will help the utility pay off some of the $5 billion it has spent on wholesale electricity.

Chronicle staff writer Lynda Gledhill contributed to this story. / E-mail David Lazarus at dlazarus@sfchronicle.com.

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-- Martin Thompson (mthom1927@aol.com), December 20, 2000