Deepening California Crisis Raises Specter of Power Rationing

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Thursday, December 21, 2000 Deepening Crisis Raises Specter of Power Rationing

Electricity: Amid fears that blackouts might begin this weekend--and possible downgrading of big utilities' credit ratings--pressure on state to let rates rise grows intense.

By DAN MORAIN CHRIS KRAUL, MITCHELL LANDSBERG, Times Staff Writers

California's energy crisis took an ominous turn Wednesday when Southern California Edison threatened to begin rationing electricity over the Christmas weekend and a major Wall Street agency warned that it might downgrade the credit ratings of the state's two biggest utilities to junk bond status. With the power emergency beginning to devolve into a political game of chicken, the California Public Utilities Commission was expected to begin laying the groundwork today for an electricity rate increase that could be approved as early as Jan. 4. How much more consumers will be paying in the months ahead is still unknown. A top aide to Gov. Gray Davis said Edison warned the administration that unless speedy action is taken, the utility could be forced to begin rationing electricity as soon as Friday, a step that could leave some of its 11 million customers without power for hours at a time. Davis has said he fears that power could be cut to traffic lights and even hospitals. For weeks, state regulators have been warning of rolling blackouts throughout California because of inadequate supply. But in Edison's case, apparently the problem is not a shortage of electricity, but of money to buy it. Turning off the juice would save the company the cost of purchasing electricity in the state's haywire wholesale market. A spokesman for Edison would neither confirm nor deny the company's rationing plan. He would only say that the governor's aide, who is involved in the effort to solve the crisis, was wrong about the timing. "I'm only responding to the idea we'd start rationing on Friday," Steve Conroy said. "There is no such plan." Asked if rationing could be imposed after Friday, he replied, "It's unclear what circumstances would dictate initiation of a rationing plan at this time." The prospect of utility blackouts has been discussed privately with state officials during several meetings, including one Tuesday. Davis met for several hours with legislative leaders and top executives of Pacific Gas & Electric and Edison. Among those attending was former Secretary of State Warren Christopher, a member of Edison's board of directors. Christopher gave what one participant described as a lecture to Davis about the nature of leadership, and the need for the governor to take control of the situation. "My sense is that they [Edison officials] are quite serious," said the participant. "There is no question that what Edison said will come to pass. If there is no [state] action, you only can buy what you can buy." The Public Utilities Commission, which will meet in San Francisco, does not have the authority to immediately grant requests by Edison and PG&E, which have asked for rate increases of between 10% and 17%. However, Davis' aide, requesting anonymity, said the commission intends to act quickly on a series of requirements leading up to a rate increase, which could be granted at its Jan. 4 meeting or later in the month. Although Davis has not said what he would do if Edison makes good on its threat of blackouts, a California governor has extraordinary emergency power. The state could use its own purchasing power to buy electricity for use in California. In the extreme--a step that no official will discuss--Davis could direct the National Guard and California Highway Patrol to seize power plants within the state's borders and order that they supply electricity. While those measures remain in the hypothetical realm, most discussion on Wednesday swirled around the inevitability of bigger bills for utility customers. As the rate increase began to take on the buzz of inevitability, a coalition of consumer groups launched a withering attack on Davis for what they perceived to be his role as an advocate for the utilities. "This falls into a new, lower level of sellout than I've ever seen . . . in Sacramento," said Harry Snyder, a top official in the West Coast branch of Consumers Union, the advocacy group that publishes Consumer Reports magazine. He said he was particularly outraged that Davis had been negotiating with the utilities over the possibility of a rate hike without including any representatives of the state's ratepayers. "It's been easy to solve the problem," Snyder said. "You get a bunch of people in a room, and the person who's paying the bills isn't in the room. Then it's easy." Davis said he had no choice but to negotiate one-on-one with the utilities. Because the utilities sued the PUC recently for blocking rate relief, the talks are being held under the rubric of legal settlement negotiations. Under the law, he said, third parties aren't allowed to participate. But Davis promised to involve the public soon. In a brief interview with The Times, the governor said his office was starting to reach out to consumer groups. "At the end of the day, consumers will be full partners in the decision as to whether the utilities survive and the lights stay on," he said. Representatives of two consumer groups said Davis' office had called them to set up discussions.

Other Western States Not Sympathetic As the rhetoric escalated Wednesday, Western governors met in Denver to consider broader solutions to what is fast becoming a regionwide crisis--and to take turns pummeling California for its role as the 800-pound, electron-eating gorilla. "Frankly," said Wyoming Gov. Jim Geringer, "if we got to the point where everyone is suffering like this and we found out that California wasn't doing absolutely everything to solve its problems, we'd start to see some real resentment." California was a national pioneer when it passed legislation deregulating its electricity market in 1996, freeing its major investor-owned utilities from government price restrictions on energy. That experience turned sour this year when electricity prices, instead of going down, soared skyward, and electricity supplies in California could not accommodate the load. Edison said Tuesday that it would be forced to declare bankruptcy next month if it is not granted relief in the form of a rate hike and a federal cap on energy prices. PG&E officials avoided use of the word "bankruptcy" but said they would soon be unable to buy power to serve their customers. The Los Angeles Department of Water and Power and some other municipally owned utilities have been largely unscathed by the crisis. DWP, in fact, announced Wednesday that it was running at a sizable, 1,000-megawatt surplus, most of which was being sold to help its ailing counterparts such as Edison and PG&E. Standard & Poor's, a major Wall Street debt-rating agency, agreed Wednesday that Edison and PG&E are headed toward insolvency, and said it could downgrade the utilities' credit ratings as early as today unless state officials take steps to increase electric rates paid by consumers. The two utilities say they have spent $8 billion more on wholesale electricity purchases than they have been allowed to collect from consumers because rates are frozen under terms of the state's electricity deregulation. Consumer groups say the true figure is probably half that much. S&P, which in October put both utilities on "negative watch," said the utilities are "running out of cash" and could default on payments due on $15 billion in total direct debt early next year. As a result, S&P warned that it could downgrade the two utilities from their current sterling "A+" ratings to "below investment grade"--"reflecting the likelihood of imminent default"--unless it gets clear signals within the next 24 to 48 hours that rates are headed upward. Such a downgrade could increase the utilities' costs for borrowing money and depress their stock prices. It also could compound California's problems by making out-of-state power generators even warier of selling energy in the state, which some companies are doing only because U.S. Energy Secretary Bill Richardson has ordered them to do so. "We are not advocates--not taking a position either on the side of the utilities or ratepayers--but keeping investors apprised as to the risks associated with their investments," said David Bodek, a director of Standard & Poor's in New York. The California Public Utilities Commission cannot act unilaterally to raise consumer rates at its meeting today. But to avoid the downgrade, Paul Fremont, a utility analyst with the investment firm Jefferies & Co., said the commission must at the very least send an unmistakable signal that consumer rates are headed upward and that the utilities will recoup some of their losses. Severin Borenstein, director of the UC Energy Institute in Berkeley, said the PUC has little choice but to authorize an increase to avert the utilities' running aground. "It's clearly going to happen--the only question is the structure of what's going to happen and how much," he said. "We clearly are not going to keep rates at this level. Some pain will be borne by consumers; we are just arguing over how much." The perception of the utilities' problems worsened in the last week after Edison disclosed it was having difficulty finding loans to finance the continuing purchases of wholesale electricity in light of the growing pile of debt related to undercollections. PG&E had to borrow $2.7 billion in such funds in October alone, and Edison $1.3 billion. The critical date for refinancing that debt is "just weeks away," Bodek said, yet it is not at all clear that lenders will front the money without action by California to assure investors of repayment.

Another Stage 2 Emergency Declared The state's electricity reserves sank low enough Wednesday afternoon to trigger a Stage 2 emergency, the 34th of the year. The California Independent System Operator, which is charged with keeping energy flowing through the state, was forced to declare the emergency in large part due to congestion on the main electricity transmission path that brings power from Southern California plants to Northern California. Anticipating just such a problem, Cal-ISO on Tuesday had asked the U.S. Department of Energy to use its emergency authority and force power generators across the West to sell any surplus electricity to California. The request, which was quickly granted, helped bring the state enough electricity Wednesday to serve between 300,000 and 400,000 homes. Most of the extra supplies came from small power plants within California that had not been running at full capacity because their federally mandated contracts did not allow them to recover the full cost of the natural gas used to generate the electricity. The U.S. Energy Department's emergency order allows those power plant owners to get a price high enough to cover their gas prices, which have jumped tremendously in the last several months. U.S. Energy Secretary Richardson said Wednesday that he was extending his order by a week. Speaking to the Western governors in Denver, he proposed a regional electricity price cap. The governors rejected the idea, offering a five-point plan of their own to stave off what many called an impending energy crisis in a region that holds eight of the nation's 10 fastest growing states. The tone of the five hours of meetings among governors, utilities officials and federal regulators was far from neighborly toward California, whose absent officials were scolded for not having done enough to solve their own problems. Some governors wondered aloud why their constituents should have to pay for a neighboring state's inaction. "In Colorado, we've been building the power plants to serve our energy needs," said Gov. Bill Owens. "It's tough, no one wants one in their backyard. It takes political will. Gov. Davis is a new governor but you can't brag on the one hand that California is No. 3 or No. 4 in the world as an economic force and on the other can't supply your own energy needs. I don't want Coloradans to pay higher rates because someone else can't build plants and transmission stations. It's going to take political will to build the generating capacity." Some also questioned whether California was operating its power stations at full capacity and whether the state's citizens were being asked to conserve energy as much as their smaller, less affluent neighbors in the interior West. In its five-point action plan, the group said California must take prompt steps to conserve energy and straighten out its unraveling market. The governor's proposals also called for an investigation by the Federal Energy Regulatory Commission of the implications of regional price caps and bilateral contracts, and an answer as to why Western electricity prices are higher than in the rest of the nation. The group asked President-elect George W. Bush to form a team to work with the governors on the issue. Davis already has said he intends to earmark $1 billion in next year's budget for energy conservation efforts. The initiative could include tax credits for people to buy energy-efficient appliances. The governor collected $464,000 in campaign donations from energy producers, marketers and utilities between the time he took office in January 1999 and last June. Unions representing electrical workers, including many who work for utilities, gave him $113,500 during his first 18 months in office. Davis won't report any donations from the second half of 2000 until early next year. Utilities themselves have accounted for $239,263 of that amount. Edison accounted for $105,000. PG&E reported giving his campaign $72,500, and Sempra, the parent company of SDG&E, has given him $56,763. Enron, the Houston-based firm that is among those that have profited during California's energy crisis, has given Davis' campaign $42,000. The utilities also have a large stable of lobbyists. PG&E is among the clients of Davis' 1998 campaign finance chairman, Darius Anderson.

http://www.latimes.com/cgi-bin/print.cgi

* * * Morain reported from Sacramento, Kraul and Landsberg from Los Angeles. Also contributing to this story were Times staff writers Nancy Vogel in Sacramento, Julie Cart in Denver and Stuart Silverstein and researcher Vicki Gallay in Los Angeles.

-- Martin Thompson (mthom1927@aol.com), December 21, 2000

Answers

I think this is the other 'shoe' that I have been expecting to fall.

-- Martin Thompson (mthom1927@aol.com), December 21, 2000.

lackouts or Conserved Power To The People? Part I

by Broderick Perkins

Dismantle deregulation? Corral the wholesalers? Beg for a federal bail out? Remove price freezes? Gouge consumers?

As if California's housing crisis wasn't enough, the nation's bastion of the New Economy now faces an energy crisis that threatens both its economy and its inextricably intertwined real estate market.

If the high tech industry can't get the juice it needs from California to fuel continued creation of all those new technological widgets and whiz bang information services, other states will be more than willing to provide well-lighted facilities.

And where goes the high tech industry so goes its jobs and the insatiable demand for housing that's been pumping up real estate values for most of the decade.

Right now, conservation is the first line of defense and, perhaps, the only short term solution.

If lost home value doesn't put the fear of not conserving into your household, utility companies could very well turn out the lights for you.

On numerous occasions in recent weeks, California has been one alert level away from rolling blackouts -- a sort of forced conservation designed to prevent the state from slipping into total darkness.

A combination of greater power use, expensive spot market energy purchases, power plant maintenance outages, aging power grids and other troubles have been been blamed for the Golden State's latest crisis.

And while California has been hit hardest, it isn't suffering alone.

The crisis is spreading.

Even with oil prices staging a retreat this winter, natural gas prices are up 100 percent or more in many locations this year as the Midwest suffers through one snow storm after another. The Northeast is also digging out, while in the Pacific Northwest, limited rainfall left little water to fuel hydroelectric systems.

Earlier this week western state governors, electric utility officials and federal regulators, including Energy Secretary Bill Richardson met in Denver to grabble with all the energy woes.

Deregulation dilemma

Consumer advocates are pointing the big finger at deregulation, a consumer-friendly approach to doing business that has worked for some industries, but not for the nation's electric power monopolies.

Three years of price spikes and brown outs across the country indicate that supply and demand conditions in electricity markets will not allow major segments of the industry to function effectively on a competitive basis, destroying their ability to deliver the promised consumer benefits of electricity restructuring, according to "Reconsidering Electricity Restructuring: Do Market Problems Indicate A Short Circuit Or A Total Blackout?" recently released by the Consumer Federation of America (CFA) and Consumers Union (CU).

"We do not have to deregulate every segment of every market," Gene Kimmelman, Washington co-director of Consumers Union said.

"Deregulation is a means to an end - lower prices, higher quality, and more real choices for consumers. If the conditions are not right for a vital commodity like electricity, consumers will be hurt by deregulation," he added.

Simply put, the nation's power supply system more and more often can't meet the demands of the nation in the throes of the largest economic expansion on record.

According to the report, aside from sheer demand, deregulation places an additional burden on power systems in a number of ways, including:

Short-term supply responses are constrained because the outdated power infrastructure makes it difficult to store electricity.

The coordination of an integrated, real-time network has broken down because competition reduces the incentive for market participants to cooperate and that makes it difficult for system operators to manage the electricity grid.

Provisions for reserve margins is uncertain in a competitive market, because no one has an interest in building excess capacity.

Utilities cut back on power generation and transmission investments because of an uncertain regulatory environment, while refusing to open networks to competitors, further inhibiting competitive capacity construction.

Inadequate transmission capacity and self-interested manipulation of access to the transmission system limits the power flow.

Non-competitive bidding reveals an insufficient number of electricity producers to prevent gaming and that drives prices sky high. "By traditional performance indicators like price and quality, a massive market failure is occurring," Kimmelman added, "and states like California, Nevada, and Oklahoma are having the debate that should have taken place in the 1990s -- not a debate about when, or how to deregulate electricity markets, but whether parts of the market should be deregulated at all," said Kimmelman.

http://realtytimes.com/rtnews/rtcpages/20001221_blackouts1.htm

-- Martin Thompson (mthom1927@aol.com), December 21, 2000.


Impasse Pulls Plug on Power Bailout Talks with Davis collapse after PG&E, Edison refuse to accept rate increase, sources say David Lazarus, Chronicle Staff Writer Thursday, December 21, 2000 ©2000 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi? file=/chronicle/archive/2000/12/21/MN154514.DTL

A secret deal brokered by Gov. Gray Davis to bail out California's two biggest utilities fell apart yesterday as both sides reached an impasse over the size of a proposed rate increase, sources said.

The talks were abandoned after Davis failed to persuade the heads of PG&E Corp. and Edison International to accept a compromise over how much of a combined $8 billion in debt the two companies would swallow and how much would be passed along to consumers.

"There is no deal," a source said.

In turn, there is also no easy way to ensure that California's utilities have enough cash on hand to purchase electricity for their millions of customers.

The collapse of the negotiations left the president of the Public Utilities Commission, Loretta Lynch, scrambling to come up with an alternative plan ahead of today's commission meeting in San Francisco.

Although the PUC is scheduled to take up the matter of lifting a rate freeze affecting PG&E and Edison -- a required step in any deal involving a rate increase -- sources said Lynch instead planned to ask the utilities to produce additional documentation related to the matter.

This would allow the PUC to address the rate freeze at a later date and would buy additional time for an agreement to be reached among the various players, the sources said.

"It would also send a signal to the banks that we're getting closer to a solution," one source said, referring to the growing reluctance among financial institutions to lend money to California's cash- strapped utilities.

The deal fell through as power officials again called a Stage 2 emergency, meaning that power reserves had dropped below 5 percent of capacity.

The governor met late Tuesday with the chairman of PG&E Corp., Robert Glynn,

and the chairman of Edison International, John Bryson. The talks, Davis' first direct contact with the two utilities, were intended to set the stage for a final accord on a rate increase.

Sources said Glynn and Bryson argued that their respective utilities faced financial ruin if forced to swallow billions of dollars in outstanding debt. They want consumers to pay off most if not all of the expenses.

Davis countered that the utilities must share in the burden for him to secure backing for a rate increase among legislators and consumer groups, the sources said.

"It went round and round," one source observed. "Politics finally started coming into play, and no action came out of the talks."

Lower-level negotiations between Davis' representatives and officials at the two utilities subsequently were canceled yesterday.

Meanwhile, California's power shortage became even more severe when Arizona's New West Energy, which was providing 600 megawatts of power to California, said it was cutting off service in part because of fears that PG&E and Edison would not be able to pay their bills.

A megawatt is the energy necessary to power 1,000 homes.

"We're taking immediate steps to mitigate this risk and to remain a viable energy service provider," said Robert Nichols, New West's managing director. "The prudent thing to do is to temporarily step back and let the market evolve. "

However, New West and other out-of-state generators may still be forced to offer at least some of their juice in California under the federal order issued by the energy secretary. The order requires generators to make excess power available to the state after meeting other customers' needs.

The Independent System Operator, which oversees California's power network, invoked the order for the first time Tuesday to ensure a steady supply of electricity.

The order was issued by U.S. Energy Secretary Bill Richardson last week after dozens of power companies balked at making electricity available to the state's cash-strapped utilities.

Richardson, acting on the request of President Clinton, extended the order for another week yesterday at a meeting of Western governors in Denver. He also urged the governors to support a regional cap on wholesale electricity prices.

California's Davis did not attend the meeting. He remained in Sacramento, where an aide said he had briefed Wall Street analysts on the failed deal to bail out PG&E and Edison.

"The markets are watching what's going on in California," said Steve Maviglio, a spokesman for the governor. "He's telling Wall Street that consumers are going to bear some of the brunt of deregulation and that the PUC is looking at raising rates."

Sources close to the talks between Davis' office and the utilities said the negotiations had fallen apart over the scope of a rate increase. Davis was pushing for a 10 percent rate hike, while the utilities were seeking increases of at least 20 percent.

The utilities had their case strengthened when rating agency Standard & Poor's said both companies faced bankruptcy and would see their bonds reduced to "junk" status if they did not receive bail-out assistance by today.

"The ratings are expected to drop deeply into speculative grade to reflect the likelihood of imminent default," said Richard Cortright, an S&P analyst.

"To be frank," said Ron Barone, who heads S&P's utility group, "we are amazed that events have been permitted to reach anywhere near this critical stage. It truly is unfathomable. We really do need some emergency actions taken now."

Consumer groups strongly disagreed.

"It's an absolute atrocity," said Nettie Hoge, executive director of The Utility Reform Network in San Francisco. "What we need to do is stop the gouging, not pass the gouging onto consumers."

"The utility companies are only out to protect their shareholders," said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. "All they care about is profits."

Rosenfield is planning a ballot initiative to scrap California's deregulation scheme and transform it into a state-run system.

"There will be a ratepayer revolt," he said.

---------------------------------------------------------------------- ----------

-- CURRENT STATUS

-- Stage 2: Power reserves fell below 5 percent of available supply. Electricity was cut to some voluntary users.

OTHER KEY DEVELOPMENTS

-- An Arizona power company said it would no longer sell electricity in California, in part because of the shaky financial state of PG&E and Edison International.

-- U.S. Energy Secretary Bill Richardson, acting at the request of President Clinton, extended for a week an order for out-of-state generators to transmit excess electricity to California.

-- A leading credit-rating agency warned that PG&E and Edison could go bankrupt within weeks if they did not receive immediate assistance.

E-mail David Lazarus at dlazarus@sfchronicle.com

-- Martin Thompson (mthom1927@aol.com), December 21, 2000.


Calif. power crisis could short-circuit state economy Thursday December 21, 3:32 PM EST By Michael Kahn

SAN FRANCISCO, Dec 21 (Reuters) - A growing power crisis could pull the plug on California's booming economy and spur firms to move jobs elsewhere unless the government finds ways to ensure long-term sources of electricity, according to economists and state officials.

The state's two biggest utilities are staring at possible bankruptcy due to skyrocketing power prices stemming from chronic electricity shortages and blackout warnings that have plagued the state throughout the year.

http://money.iwon.com/jsp/nw/nwdt_rt.jsp?section=news&news_id=reu- n214599&feed=reu&date=20001221&cat=INDUSTRY

The crisis also threatens the world's sixth-largest economy as California-based industries ranging from agriculture to manufacturing wonder whether they will have an affordable and reliable source of electricity, said one economist.

"This economy is dependent on electricity and natural gas to an enormous degree," said Tapan Munroe, a California economist and head of an energy and economic research firm. "Your turn off the light switches, you can turn out the light on the economy."

The crisis comes as California regulators consider on Thursday whether to allow San Francisco-based PG&E Corp. (PCG) and Southern California Edison, a subsidiary of Edison International (EIX) to raise their retail power prices amid rating agency Standard & Poor's warning it may downgrade the utilities' debt ratings to junk status.

The problem is the utilities have run up billions of dollars in costs which they have been unable to pass on to customers due to a rate freeze. Standard & Poor's estimated those costs at $7.1 billion at the end of October and said they have risen significantly in the past two months.

The California Public Utilities Commission could decide to lift the freeze and allow the utilities to raise rates, although such a move would be strongly opposed by consumers.

Gov. Gray Davis, who has taken an active role in trying to find a solution, has indicated he would like to see a far smaller increase than the utilities are seeking.

The Democrat's administration has also warned that unless something is done soon, financial constraints could force the utilities to ration electricity as earlier as Friday.

LONG-TERM PAIN

Tom Lieser, author of a widely watched survey of California's economy for the Anderson School at the University of California, Los Angeles, said the power crisis could lead to layoffs at the utilities.

But he said the bigger concern was down the road, when the problem could put a crimp on growth in the nation's most populous state -- especially if the U.S. economy sags into a recession.

"The real cost could come in the future if we don't get a longer term solution for better supply and price structure," Lieser said.

More worrying could be the impact on high-tech Silicon Valley, which relies on a steady supply of power and has largely driven California's humming economy.

Intel Corp. (INTC), the world's No. 1 semiconductor maker, for example, recently said its chip-making operation in nearby Santa Clara would be seriously damaged by a major failure of the power grid and has spread its risk by building new plants in other states and overseas.

"I think the full impact is not being felt yet by businesses in California but they are going to start feeling it," added economist Munroe. "The real concern is about the power grid in California, about the reliability of the infrastructure to power the high-tech economy."

California state Treasurer Phil Angelides cautioned the problem could become as severe as the current housing crunch, which many say has dissuaded firms from expanding in the state and spurred others to relocate elsewhere.

He added the current uncertainty over power supplies harms the economy by putting firms in a "freeze" mode where investment and business decisions are put on hold. This makes it vital for the state to move swiftly to stabilize the markets, he added.

"The long-term challenge is that we need the right blend of power production and conservation to ensure a steady supply," Angelides said.

-- Martin Thompson (mthom1927@aol.com), December 21, 2000.


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