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Power Source Ends Direct Flow to California Businesses

By JAMES STERNGOLD with MATT RICHTEL LOS ANGELES, Jan. 31 — In a sign that problems are deepening in California's overburdened energy market, a division of the Enron Corporation that sells power directly to large industrial and commercial concerns has decided to halt such service to dozens of its clients because of the potential for mounting losses.

The decision, which would apparently affect companies like Cisco Systems, Genentech and Clorox, would not stop the flow of electricity. But it would potentially raise the rates these big customers pay, perhaps 35 percent or so, and sharply increase the role of the state government as the major supplier of power in California.

Enron, based in Houston, is one of the largest, if not the largest energy company supplying low-cost energy to such large customers.

As a result of the decision, the customers would be immediately switched from the Enron unit, called Enron Energy Services, to the Pacific Gas and Electric Company. But they would lose the discounts and low rates they had enjoyed.

It was unclear whether Enron would compensate the customers, most of whom arranged five-year contracts with it in 1997 and 1998.

Marty Sunde, chief executive of Enron Energy Services, confirmed late today that his unit was being forced to take the step because of the severe financial turmoil in the power market in the state. But Mr. Sunde emphasized repeatedly that the company would honor in some way its overall contractual obligations.

Enron Energy Services is a unit that seeks to help companies find ways to reduce their overall energy costs. One way is by selling power at reduced rates. To accomplish that, it has sought to buy power on the wholesale market at competitive rates, but just like California's large utilities, it has suffered from the rocketing wholesale costs.

Mr. Sunde said two issues forced his company's hand. One was the enormous losses suffered by California's two major utilities, Pacific Gas and Electric and Southern California Edison, because of the soaring wholesale price of electricity. The other was the recent decision by the California Power Exchange, where Enron and other large energy companies buy and sell power at wholesale rates, to shut down because of the crisis.

"This actually threatened the financial mechanism of how electricity is supplied," Mr. Sunde said.

A person close to Enron said the company had determined that it could lose perhaps $1 billion if it fulfilled all the contracts for the length of their terms. But Mr. Sunde denied that figure.

Perhaps the most important result of Enron's decision was that switching those big customers to the utilities would sharply increase the amount of power that the State of California would be forced to buy on an emergency basis.

With Pacific Gas and Electric and Southern California Edison saying they are on the verge of bankruptcy because of the soaring price of wholesale power, the state government has stepped in, buying huge amounts of power, then selling it to the utilities.

One person with knowledge of Enron's move said that, all told, the customers being cut off — several dozen large corporations — use approximately 3,000 megawatt hours, equal roughly to the output of five major generating plants. That means the state would become financially responsible for covering that, potentially adding millions of dollars a day to its already heavy burden.

Mr. Sunde said he could not confirm that total.

Under law, the large customers that Enron supplies cannot have power service stopped as long as they pay their bills. As a result of being dropped by Enron, the companies would become clients of Pacific Gas and Electric, which already operates the transmission lines to them and charges them for that service.

While Enron's decision does not suggest that another crisis has developed, it shows how quickly the private players in the once-thriving energy business here have been forced to pull out or curtail their involvement, even if it means harming relations with customers.

It also suggests that, though the state government is already playing a major role on an emergency basis, it will probably have to continue that role for many years.

Some of Enron's customers, contacted today, said they had not received any notice from Enron, and they expressed shock and dismay about the decision on withdrawal.

One was Kaiser Permanente, the large managed care organization. Rich A. Seguin, senior energy manager at Kaiser Permanente, said late today that two weeks ago Enron had asked to modify its contract with Kaiser to allow for the switching of power sources. He said Kaiser's lawyers had reviewed the request and found no problem.

"If they stand behind our contract, which is what their stance is," Mr. Seguin said of Enron, Kaiser would not be harmed.

But he said that if Enron was unable to supply power, Kaiser might have to pay $500,000 a month in extra costs, because it would be more expensive to get electricity from utilities at regular rates.

Calvin Yee, an executive at Pacific Gas and Electric who deals with large clients that would revert to his company, said that if Enron withdrew, the impact could be handled by the utility without disruptions.

"It might mean a bubble of work," Mr. Yee said, "but it would not be extraordinary. If it happens, we'll be prepared."

At one time, several large energy companies arranged these contracts directly with large industrial users and other big companies as part of California's ambitious deregulation program. The idea was that these large energy users could shop around among power companies and choose the best deal, much as individuals can now shop among long- distance telephone companies and pick the best plan.

Among Enron's other clients here are GTE, Safeway, I.B.M., McDonald's and International Paper, a person close to the company said.

http://www.nytimes.com/2001/02/01/national/01POWE.html?printpage=yes

-- Martin Thompson (mthom1927@aol.com), February 01, 2001

Answers

This is a pretty good article without all the socialist wailing about a "deregulation" that never happened. However, can someone explain to me how PG&E can handle the impact of a large increase in demand when they sometimes can't handle the current level? (The 3000 megawatt hours cited does't mean much without a time period stated, but the companies mentioned must be BIG users)

-- Warren Ketler (wrkttl@earthlink.net), February 01, 2001.