CA:Hurried plans leave consumers in the dark

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Published Monday, Jan. 22, 2001, in the San Jose Mercury News

Hurried plans leave consumers in the dark

BY STEVE JOHNSON AND JOHN WOOLFOLK Mercury News As the state plunges into the unprecedented role of buying much of California's electricity, key questions that could wind up costing taxpayers billions of dollars remain largely unanswered.

Despite the governor's assurances that consumers won't pay more for electricity, no one knows if that's possible, particularly since power suppliers have voiced reluctance to sell at the price Gov. Gray Davis wants. If the costs exceed his expectations, it's not clear who would get stuck with the tab -- the utilities, their customers or all state taxpayers.

Other uncertainties loom as well. They include such questions as what happens if Pacific Gas & Electric Co. and Southern California Edison go bankrupt, and whether the state's new role will ease -- or worsen -- the threat of blackouts.

Under an emergency order from Davis, the state Department of Water Resources began buying electricity on Thursday and is expected to purchase much more over the next few months.

Lawmakers already have set aside $850 million for that, and the state plans an auction as soon as today to line up initial contracts for power.

Although state officials were still hammering out details about their new responsibilities in meetings over the weekend, Davis sounded optimistic -- particularly over the thorny issue of how much money electricity suppliers will demand.

``I am confident we will receive many bids in the range I believe is appropriate,'' the governor said.

But Harry Snyder of Consumers Union, who has been monitoring the activities of state government for more than two decades, could barely contain his gloom.

``Our elected officials are in over their heads,'' when it comes to the complicated business of buying electricity, he said. ``They are throwing money into a black hole.''

The cost to consumers

The biggest uncertainty is whether Davis can make good on his promise to keep consumer electricity bills from rising. Under a temporary rate-increase approved by the California Public Utilities Commission on Jan. 4, PG&E's residential customers now pay about $60 a month on average or about 6.5 cents per kilowatt-hour. To keep rates from going up, Davis wants power suppliers to sign long-term contracts with the state for 5.5 cents per kilowatt hour.

Davis said he already has offers of power at that price from several suppliers, which he won't name. But while some suppliers said in interviews they might be willing to sell for 5.5 cents, others wanted much more -- anywhere from 7 to more than 10 cents, depending on the contract length.

At the very least, they said, the contracts need to be adjustable, if their costs rise. Many power plants run on natural gas, which has been extremely expensive. Similarly, because some power plants are older and less efficient than others, suppliers say they need to charge more for that electricity to cover their operating costs.

Another major issue for the state is how much electricity would have to be purchased at the moment it is needed.

Because it's impossible to predict exactly how much power will be required in advance -- especially when hot weather suddenly drives up demand or power-plant breakdowns reduce supply -- some power will need to bought at the last minute. That electricity tends to be far costlier than what is purchased through long-term contracts.

A key bill under discussion in the Legislature would require the state Department of Water Resources to enter into extended electricity contracts at no more than 5.5 cents per kilowatt-hour.

But whether that price can be adjustable is under debate.

``It's a big question,'' said Sen. Charles Poochigian, R-Fresno, adding that the bids the state receives this week ``should help us a lot'' in resolving that issue.

State officials have to be extremely careful about how they negotiate all this. If they wind up paying substantially more than 5.5 cents per kilowatt-hour, the state presumably would have to raise consumer rates, shift the costs onto the utility companies somehow or pass the bill along to taxpayers. But Aaron Thomas, manager of AES Pacific, which operates several power plants in California, warned that government bureaucrats may be ill-prepared for electricity-price bargaining.

``They are not simple arrangements,'' Thomas said. ``It's less than an ideal situation to have the state involved, trying to get up to speed on those kinds of contracts.''

The water department's role

Another unknown is whether the Department of Water Resources can handle the sizable power purchases that would be required.

Under the governor's plan, the department would sell the power it buys to PG&E and Edison at the same price. The utilities then would provide it to their customers -- perhaps at a slight mark-up -- and repay the water department with the money collected from ratepayers' bills.

The department, which has about 2,700 employees and a $1 billion annual budget, already buys some electricity to run the State Water Project, a massive system of dams, aqueducts, pumps and power plants that move water to Southern California. But the amount of power it would have to deal with is nearly 200 times what it now buys.

``It's exciting and a little frightening as well,'' said department outage coordinator Lupe Rodriguez. ``How long are we going to be doing this -- a week, a month, five years? There are a lot of unknowns.''

The $12 billion question

So far, the power-purchase plans being worked on in Sacramento have been vague on one issue of crucial importance to PG&E and Edison -- whether they'll be compensated for the $12 billion in unanticipated electricity bills that they claim they ran up last year.

The companies say they incurred those bills because wholesale electricity costs far exceeded what state law allowed them to charge their customers.

Assuming the state manages to buy power at 5.5 cents per kilowatt hour and consumer rates remain at 6.5 cents, that one-cent difference could help pay off those costs.

But consumer advocates insist that the shortfall is much less than the utilities claim, and the Public Utilities Commission is auditing PG&E and Edison to determine if they are as bad off financially as they contend.

If the utilities don't get that money soon -- or at least the assurance that they'll be compensated in the future -- PG&E and Edison officials have said they'll have no recourse but to file for bankruptcy. If they do go insolvent, that raises other questions, including whether they could continue basic customer service, maintenance and badly needed expansion of high-voltage lines.

That raises concerns that the state may have to step in with even more taxpayer money.

While that might not turn out to be significant problem, said Nettie Hoge, executive director of The Utility Reform Network in San Francisco, ``I'm very disturbed that we've gone down the path of using the taxpayer's money to bail out this mess.''

The threat of blackouts

State officials have complained in recent days that some electricity suppliers are so afraid of not being paid by PG&E and Edison that they've refused to sell to the utilities -- even on days when state power supplies are critically low. So having the state lock up a sure supply of power in long-term contracts could ease the near-constant threat of blackouts in California.

But others fear that if the price the state negotiates is so low that it discourages generators from building the new power plants California desperately needs, it could lead to even more blackouts.

Unfortunately, according to some of those involved in the high-level discussions about the state's new responsibilities, the whole process has been governed less by clear planning than by sheer desperation.

``It's not very elegant to watch legislators legislate,'' said Gary Ackerman of the Western Power Trading Forum, which represents electricity suppliers. ``It's just not the way to do things. This is panic.''

Mark Gladstone contributed to this report.

http://www0.mercurycenter.com/premium/local/docs/power22.htm

-- Martin Thompson (mthom1927@aol.com), January 22, 2001


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