PG&E Racing to Ensure Supply Source: The San Francisco Chronicle Publication date: 2001-02-06

Neighborhoods in San Francisco, Sacramento, Santa Rosa and other communities distant from PG&E's main pipelines could lose gas for heating and cooking this month unless wary gas companies continue deliveries to debt-ridden PG&E.

To avoid a "doomsday scenario" of widespread cutoffs affecting hundreds of thousands of homes and businesses, PG&E is racing to line up contracts before a deadline at midnight tonight. That's when a federal order requiring gas companies to continue service expires.

Pacific Gas & Electric Co. buys gas from a range of different sources and transmits it through a network of pipelines to individual customers. But gas suppliers threatened to halt deliveries last month after PG&E defaulted on payments for electricity, which it also buys and distributes.

The gas suppliers are now considering new contracts with PG&E that offer guarantees that the utility can pay the rising cost of natural gas.

The sharp nationwide price increases have been attributed to high wintertime demand, heavy reliance on natural gas by power plants, tight supplies due to pipeline failures, and depleted inventories. In California, state regulators and others have accused some companies of manipulating the market to drive up prices.

----------------------------------------------------------------- CHART: GAS 'TRUNKLINE'

PG&E's main gas pipeline runs south from Malin, Ore., to Antioch, has a connector line to Milpitas and then continues southeast to Topock on the Arizona border. PG&E has warned that it may have to interrupt service to communities farthest from this line if its suppliers cut off natural gas deliveries... -- Where Your Gas Bill Goes

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=17967946&ID=cnniw&scategory=Utilities%3AGas

-- Martin Thompson (mthom1927@aol.com), February 06, 2001

Answers

STATE ARRANGES TO BUY POWER FOR UTILITIES Deadline Federal energy support ends tonight

David Lazarus, Chronicle Staff Writer Tuesday, February 6, 2001

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With just hours to go before federal energy assistance ends, Gov. Gray Davis will reveal today that California has clinched deals to purchase electricity on behalf of cash-strapped utilities at prices far below current market rates, sources said yesterday.

The contracts will secure power for between $60 and $65 per megawatt hour, the sources said, compared with more than $300 being charged on the open market.

However, negotiators were still haggling last night over the duration of the contracts. The governor was seeking a shorter time frame, while power generators were pushing for multi-year commitments.

A federal emergency order requiring out-of-state power suppliers to sell excess energy to California expires at midnight tonight.

The contracts represent California's best hope for stability in light of the Bush administration's refusal to provide further help, such as capping wholesale power rates, in remedying the state's failed experiment in deregulation.

The wreckage of California's energy deregulation plan made itself apparent in other ways as well yesterday:

-- The governor seized control of PG&E's long-term electricity contracts before they could be sold off to compensate for the utility failing to pay its power bills.

-- The Independent System Operator, which oversees the state's electricity network, had its credit rating slashed to "default," meaning that, like California's cash-strapped utilities, it, too, may be in need of a bailout from taxpayers.

-- While consumers' power bills go through the roof, Williams Cos., a leading electricity and natural gas supplier, said its profits had almost quadrupled in the latest quarter. The Oklahoma firm cited soaring wholesale prices in California as a key reason for its good fortune.

With federal support ending, the governor will spend up to $10 billion on long-term contracts with power suppliers. He expects to have signed documents in hand by this afternoon.

"They're being tough negotiators, as are we," Steve Maviglio, a spokesman for the governor, said of the talks that began last week with power generators.

The natural gas side of the equation looks trickier. Although PG&E sent sample contracts to its gas suppliers last week, Staci Homrig, a spokeswoman for the utility, said none of the firms had responded by yesterday afternoon.

She said suppliers of as much as two-thirds of the utility's gas needs had either halted shipments or warned they would do so unless PG&E -- or the state

--could provide cash up front.

"If we can't line up enough supplies for February, we'll have to make it up from storage," Homrig said. "If that's not enough, we'll have to start diverting gas from large industrial users, including power plants."

Unusually warm weather throughout much of California helps. "But we don't know what March will bring," Homrig said.

PG&E, which defaulted last week on $726 million in short-term debt and paid only a fraction of more than $1 billion in outstanding power bills, was in danger of having its lucrative contracts with power suppliers sold off by the California Power Exchange as collateral.

The Power Exchange previously ran the state's wholesale electricity market, but now is going out of business as the state takes a central role in securing power on behalf of utilities.

Illustrating that more hands-on role, the governor stepped in yesterday to seize PG&E contracts for 1.5 million megawatts from the exchange. "It is important to protect these contracts for the people of California," he said.

On Friday, Davis seized separate contracts for 3.1 million megawatts belonging to Southern California Edison, which defaulted on $215 million in electricity payments.

Power contracts represent a commitment to acquire electricity at a set price. The contracts can be bought and sold like a commodity.

The state now can use the contracts to purchase electricity at fixed rates varying from $60 to $130 per megawatt hour. It could also profit by selling the contracts on the open market.

There is a dispute over how much the seized contracts are worth. The Power Exchange said the Edison contracts should be valued at $651 million, while the PG&E contracts would fetch $347 million under competitive bidding.

Davis said the issue would have to be settled in court, which is fine by the Power Exchange. It noted that state law requires that it receive "reasonable value" for seized assets.

Meanwhile, uncertainty was swirling yesterday at the ISO in Folsom after the agency's credit rating was dropped to "default" by Standard & Poor's.

S&P said it was making the move, virtually cutting off the ISO from future financing, because the agency "is unable to fully discharge its obligations" in ensuring that power companies are paid for electricity purchased by PG&E and Edison.

After the Power Exchange, the ISO is the second entity created by deregulation that is now gasping for breath.

ANOTHER BILL FOR TAXPAYERS

Patrick Dorinson, a spokesman for the ISO, said taxpayers might end up footing the bill for the agency's expenses when its money runs out in a couple of months.

"Somebody has to operate the grid," he said. "The utilities don't want the job."

Like the Power Exchange, the role of the ISO in California's dysfunctional energy market may soon grow redundant. A proposed statewide energy authority could supersede the ISO in monitoring the flow of juice throughout the system.

Chronicle staff writer Robert Salladay contributed to this report. / E-mail David Lazarus at dlazarus@sfchronicle.com.

http://www.sfgate.com/cgi-bin/article.cgi? f=/chronicle/archive/2001/02/06/MN60330.DTL

-- Martin Thompson (mthom1927@aol.com), February 06, 2001.