Power deal just a temporary fix

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Power Deal Just a Temporary Fix

Rescue: Experts say severe long-term energy problems remain. They warn that this summer's peak demand could bring even worse blackouts.

By ROBIN FIELDS and MITCHELL LANDSBERG, Times Staff Writers

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Beneath the giant, if pained, sigh of relief that came with passage of a $10-billion bond issue designed to stabilize California's electricity system, a grimmer reality is setting in. At best, California has bought itself a few years of financial breathing room, energy experts say.

The power system's laundry list of problems--practical, political and philosophical--remains long and largely unaffected by the Legislature's Band-Aid.

The state still needs to build up its stagnant power supply and bring its soaring demand under control. It still must confront the ire of businesses and consumers demoralized by deregulation's collapse and by rate increases that have become all but certain.

And, perhaps most challenging, it must bridge the philosophical divide over deregulation and decide whether--and how--to move forward. Of course, all this presumes that the electricity grid first survives this summer's power-draining glower.

"You don't need to be a rocket scientist to see that things could get a whole lot worse," said Frank Wolak, a Stanford University professor who specializes in utility deregulation.

The measure that passed the Legislature on Thursday and was immediately signed into law by Gov. Gray Davis allows the state to sell $10 billion worth of bonds so it can purchase power. It also allots nearly $500 million from state reserves to spend immediately, before the bonds can be sold.

The first key to how California weathers the next two or three years resides in the Ronald Reagan State Building in downtown Los Angeles, where the Los Angeles Department of Water and Power chief, S. David Freeman, is negotiating long-term contracts for the state with executives of leading energy suppliers.

Officials have portrayed such deals as a way to lock in bearable prices and guarantee the system's stability. But with today's contract-signing deadline looming for some suppliers, many observers doubt that even the wily Freeman can obtain rates as low as the state would like.

Federal regulators have refused to consider caps on wholesale energy prices, leaving him with little leverage. "Freeman has got a tough job and not a lot of bullets to shoot," said Wolak, who believes the Bush administration must reconsider its opposition to price caps.

Even if Freeman works out the prices he seeks, about 15% to 20% of the state's electricity will still be bought on the spot market, where prices can lurch from $20 to $750 a megawatt-hour in the course of a day.

Long-term contracts will partially shield Californians from that sort of volatility, but they also commit the state to a relatively high, if stable, rate for several years. Consumers will absorb that premium, paying off the bond issue through a surcharge imposed on those who use more than their allotted portion of electricity.

Moreover, the contracts may have risky elements sewn into their fine print, particularly if power generators stipulate that the state must pay for pollution permits or increasingly expensive natural gas to run their plants.

"What if natural gas prices are even more volatile this summer?" Prudential Securities analyst Carol Coale said. "Then the state will be on the hook, with the same problem as the utilities have had."

Then, too, money can only buy power; it can't create it. After the financial issues are settled, the problem reverts to one of engineering. The same grid that barely limped through the last two months will have to survive months of peak demand without much added supply.

Two new Northern California plants are scheduled to start churning out electricity, but not until late summer. The DWP will install six small turbine generators by summer, but they will add only 300 megawatts of capacity to the grid, less than 1% of the state's total demand.

Making matters worse, hydroelectric plants in the Pacific Northwest may contribute less than usual to California's summer supply.

"We've used so much this winter and we haven't had enough rainfall--not just here but in the Northwest," said Patrick Dorinson, spokesman for the California Independent System Operator.

Many analysts anticipate chronic Stage 3 emergencies, which bring with them the possibility of rolling blackouts. "I think we shouldn't kid ourselves; the summer is not going to be a happy time," said Ted Gibson, an economist for the state Department of Finance.

He expects to become an early riser this summer, when government offices are likely to open in the dawn coolness and close before midafternoon heat forces them to crank up their air conditioning.

Other Initiatives Aimed at Demand

While the state waits for more supply, it is launching handfuls of initiatives, aiming to curtail demand. Davis has imposed usage limits on retailers, ordering them to reduce outside lighting after business hours by 50% or risk fines, and he has proposed new funding for conservation efforts.

Businesses will be encouraged to install energy management systems, and residents will be urged to trade in old refrigerators and air conditioners for more efficient models.

But the potential effects of incentive programs remain uncertain. And state regulators recently jettisoned a powerful tool to control consumption--the utilities' so-called interruptible programs--and have not yet found a way to replace it.

About 1,700 major power users had received rate breaks in return for agreeing to drop their power consumption drastically when state reserves grew thin. But as the crisis deepened, many endured work stoppages or incurred hefty fines until the California Public Utilities Commission finally halted the programs.

"It just eliminates a tool from the toolbox, one level of protection we had from [imposing blackouts on] other customers," Dorinson said. Interruptible-list customers--mostly businesses and large institutions --are now bound to voluntary cutbacks only.

Though elbowing has already begun between proponents of alternative plans, virtually all the options place more control in the hands of large users to determine when and how much to reduce power use.

"We want to make sure the program is something our members can live with, but still put enough power on the grid to keep the system reliable," said Gino DiCaro, spokesman for the California Manufacturers and Technology Assn.

With at least a partial legislative framework now on the books, serious political fallout from the power crisis may have been averted, but only temporarily.

The governor, criticized by some for inadequate leadership and a slow trigger finger, could come away largely unscathed, especially because much of his Southern California stronghold has been spared the worst problems.

"What he's got to focus on is getting this off the political radar screen as quickly as possible with a minimum of pain," said Sherry Bebitch Jeffe, a political analyst who is senior scholar at USC's School of Policy Planning and Development.

Davis, she said, already has an almost $30-million campaign war chest-- filled in part with contributions from utilities and energy suppliers--and faces what appears to be a weak field of potential challengers in the next gubernatorial election next year.

But if Davis' plan comes undone, or the summer brings more pain, the governor would become a target for a voter backlash--a far more vulnerable target than President Bush, who has resisted most pleas to help California.

"Bush does not have to carry California to remain president. Gray Davis does have to carry California to remain governor," said Republican political consultant Allan Hoffenblum. The extent to which Davis handles the power crisis could also determine whether he emerges as a potential presidential candidate in 2004.

The electricity crunch has created strange political marriages and divorces. It has put a chill in the chummy relationship between U.S. Sen. Dianne Feinstein (D-Calif.) and other Western Democratic senators, while sparking unfamiliar bipartisanship in the state Legislature.

Then again, deregulation was passed by both parties, so there's no sense in finger-pointing, Hoffenblum said. "This is not a Republican-Democratic issue," he said. "It was a bipartisan problem, and it's going to create a bipartisan solution."

Perhaps the most unpredictable political bombshell on the horizon is a potential 2002 ballot initiative favored by a Santa Monica-based consumer group that would shield residential customers from rate increases and create a public power authority.

The measure seems likely to crystallize views on the big question hanging over the state's long-term power picture: Will California continue down the road toward deregulation or not?

Consumers, Analysts Differ on Future

Most consumer groups bitterly oppose further deregulation, saying utilities never made good on promises that competition would produce lower rates. Surveys show that much of the public also blames manipulations by energy producers and sellers, not genuine shortages, for the crisis.

"Any consumer who has faith in deregulation at this point has to be nuts," said Mindy Spatt, spokeswoman for the Utility Reform Network.

Still, many academics and financial analysts are convinced the state has to press forward, but with a deregulation structure that encourages long-term contracts with energy suppliers, simplifies rules for power plant construction and allows the market forces of supply and demand to function without interference--even if that means both rising and falling prices for consumers.

"California's brand of deregulation was a disaster, but it's not the brand working in other states," said William Carlson, general manager of Redding-based Wheelabrator, which operates several California power plants.

He said he would watch to see if the state streamlined the regulatory process to approve new private plants, or instead moved to acquire and operate the ones still owned by utilities. "That would be a signpost."

Many observers hope the crisis acts as a catalyst, intensifying public interest in energy policy, infrastructure and technologies. "We have more intellectual firepower going into this than ever before," said Michael Shames, director of the Utility Consumers' Action Network.

But some wonder if Californians can accept the trade-offs that their Western neighbors have, and that this winter's brinkmanship made achingly clear: Reliable, plentiful electricity comes at the price of accepting more power plants in communities, they insist, and competition's savings are possible only by bearing its risks.

"There has to be a culture change," Coale said. "It's like telling Texans they need a state income tax. That's the biggest challenge, and I don't know if it can be done in two years."

Copyright 2000 Los Angeles Times

-- Swissrose (cellier@azstarnet.com), February 06, 2001


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