New scramble for power starts: Suppliers may bail out as mandate ends

By Dale Kasler, Carrie Peyton and Walt Wiley Bee Staff Writers

(Published Feb. 7, 2001) Facing up to the loss of a federal emergency order that had kept power flowing into California, utilities and state officials conducted an anxious search for electricity and natural gas late Tuesday.

The U.S. Department of Energy was prepared to let midnight pass without extending its order forcing increasingly reluctant electricity wholesalers and natural gas suppliers to keep delivering to California.

Now that they were being freed from the federal order, it was unclear how many companies would continue providing energy starting today, and in what quantities. No blackouts were expected early today, but no one was making any promises beyond that.

And the search for power even spilled into the federal courts.

Pacific Gas and Electric Co., hoping to stave off a serious natural gas crunch, made some headway in obtaining supplies. On the electricity side, state officials hoped wholesale suppliers would keep the power coming because the state Department of Water Resources has stepped in as a creditworthy purchaser, buying power on behalf of nearly bankrupt PG&E and Southern California Edison.

"Our money's good and our credit's good," said water department spokesman Mike Sicilia.

But the issue wasn't that simple. While most wholesalers are willing to do business with the water department, four wholesalers have balked at selling to the state's Independent System Operator, which runs the power grid and buys as many as 2,000 megawatts an hour to cover shortfalls.

The ISO, which is making only partial payments to wholesalers, had to go to Sacramento's U.S. District Court on Tuesday to force some of them to keep supplying the ISO.

Even with that court order, there was no certainty that the state would find enough power.

Several wholesalers said they were still studying their options now that the federal order was expiring. The ISO declared yet another Stage 3 alert, meaning supplies were dangerously low.

While blackouts appeared unlikely early today, Jim Detmers, ISO manager of grid operations, said the situation is "day by day. These things need to be resolved."

Fed up with not getting their bills paid, several small out-of-state wholesalers were planning to refuse further sales into California, said Gary Ackerman of the Western Power Trading Forum, an association of wholesalers.

"Long term, short term, they're not going to sell, even with the state (water department) stepping in," Ackerman said.

The nonpayment "burns the bridges between California and producers outside California who could prospectively help us in the summer," Ackerman said. "Every last megawatt is going to be important."

As for natural gas, PG&E said it was encouraged that five of its suppliers would continue selling to PG&E despite the expiration of the federal order.

But the utility doesn't know yet how much gas they will sell, and "these five could not supply all the gas that we need," said spokeswoman Staci Homrig.

If it can't line up significant additional supplies quickly, PG&E would have to begin drawing on its nine-day supply of stored gas, said spokesman John Nelson.

The five suppliers that agreed to sell are: BP Energy Co., Texaco Natural Gas Inc., Dynegy Marketing and Trade, Texaco Canada Petroleum Inc. and Dynegy Canada Marketing and Trade.

On the other hand, two PG&E suppliers said they planned to cut off deliveries at midnight, PG&E said. The two, which account for a combined 10 percent of PG&E's natural gas supply, are J. Aron & Co., a subsidiary of investment banker Goldman Sachs, and Denver-based Western Gas Resources.

J. Aron wouldn't comment on its decision Tuesday, while Western Gas officials couldn't be reached for comment.

In contrast to its wholesale electric bills, PG&E has kept current on its natural gas payments. But because of its dire financial straits, a few gas companies were demanding cash up front from the utility -- a requirement PG&E said it couldn't meet. That led to the federal order on gas supplies.

Edison doesn't have the same problem; it doesn't supply gas.

Anticipating the end of the federal mandate, PG&E obtained from the state Public Utilities Commission permission to effectively guarantee with customer payments that its gas bills will be paid. That arrangement led to the agreement with the five suppliers and fueled PG&E's hopes that others would commit.

The electricity situation appeared to be clouded by a late-blooming spate of litigation between the ISO and four major electricity wholesalers: Reliant Energy Inc., Dynegy Inc., AES Pacific and Williams.

Terry Winter, ISO chief executive officer, said the ISO wrote to electricity suppliers after hearing "rumblings" that some power plants might be shut down when the federal order expired. "We can't deal with maybes or maybe nots," he said. "We decided we would have to get a restraining order."

When faced with the prospect of the court order, all but Reliant told the ISO they would continue operating. The ISO then obtained a one-day temporary restraining order saying, in effect, that Reliant must continue supply electricity on demand to the ISO.

Although the water department buys most of the power for the state, the ISO still makes small daily purchases, often when there's a surge in demand or a spot shortage of supply. The ISO then calls up suppliers and tells them to correct the imbalance.

But Reliant, Dynegy, AES and Williams balked after ISO told all suppliers it expected them to stick by the arrangement even though it's having trouble paying for the electricity it buys. Reliant even sued the ISO in U.S. District Court in Washington last week.

The ISO, which essentially gets its cash from PG&E and Edison, recently paid wholesalers just 2 cents on the dollar for supplies, said Ackerman of the wholesalers association.

The four wholesalers, appearing in federal court in Sacramento, said they're willing to do business with the state water department. But they objected to being forced to supply the nearly bankrupt utilities by dealing with the ISO, said Reliant attorney Terence Houlihan. "The question is not of supply but of who the buyer is going to be and who's going to pay," Houlihan said.

U.S. District Judge Frank C. Damrell Jr. ordered Reliant to keep feeding the ISO, pending an additional hearing this afternoon.

Appearing on CNN, Gov. Gray Davis called the litigation "a tempest in a teapot" and added that the water department "is paying cash dollars for the power they are providing, so I have every reason to believe the lights will stay on and they will continue to serve the customers of this state."

http://www.capitolalert.com/news/capalert02_20010207.html

-- Martin Thompson (mthom1927@aol.com), February 07, 2001