03/14 12:25

California's Electricity Rescue Faces Threat From Summer Surge

http://www.1stheadlines.com/energy-electric.htm

By David Ward

Sacramento, California, March 14 (Bloomberg) -- California Governor Gray Davis promises a solution for the state's electricity crisis by May. Critics say it may unravel by July.

The state's Energy Commission estimates that without more conservation or new plants this summer, California will be short up to 10 percent of expected demand on peak use days. The state may be forced to institute rolling blackouts that could affect millions of homes and businesses.

Davis believes his plan will stabilize the market and allow policy makers time to further reform the state's deregulation law. Critics say it's more likely to fall on factors as disparate as natural gas and electricity markets, air conditioners, heat in Tucson and rain in Portland.

``Everything's got to break just right for California this summer,'' said Mark Bernstein, a senior energy analyst at RAND, a non-profit consulting firm advising California lawmakers on electricity. ``If it doesn't, if just a few things go wrong, there could be severe blackouts and price spikes.''

Dysfunctional Market

California officials have worked since January to restore order to an electricity market gone awry. The state is close to completing rescue packages for PG&E Corp. and Edison International. Officials are signing long-term electricity contracts to reduce costs. Efforts to conserve energy and boost capacity are under way.

The state is struggling to recover from a dysfunctional market whipsawed by soaring electricity prices last year that left California's two largest utilities with more than $12 billion in debts. Because of flaws in the state's 1996 deregulation law, they were unable to pass those costs to consumers through higher rates.

After PG&E's Pacific Gas & Electric and Edison's Southern California Edison reached the verge of bankruptcy, the state began buying power in place of the utilities. Davis is also negotiating to buy PG&E, Edison and Sempra Energy's 32,000 miles of transmission lines in return for billions for them to pay debts. And the Legislature is working on bills to speed the construction of new power plants.

The success of California's plan depends largely on the ability of the state to secure enough long-term contracts at low- enough prices that it doesn't tap the state's treasury or bond- issuing authority, officials say. ``If we have to do more than $10 billion in bonds this year we could be in trouble,'' State Treasurer Phil Angelides said.

Conservation, Generation

Davis said Californians last month had reduced their demand by 8 percent from a year earlier. Davis has ordered retail businesses to reduce outdoor lighting, and is offering refunds for consumers who reduce consumption by 20 percent.

Meeting Davis's reduction goal, saving about 3,000 megawatts a day by this summer, won't be easy, critics say. ``Most conservation programs save hundreds of megawatts,'' said Steven Rosenstock, manager of electric solutions at Edison Electric Institute, a lobbying group for investor-owned utilities. ``I don't see the numbers evening out.''

Davis also hopes to have 4,000 megawatts of new power on line by this summer, and 20,000 by 2004. Industry experts say that's too optimistic. Building plants takes several years, and power generators are reluctant to commit because they haven't been paid, some since last summer. Davis also wants generators to accept less than full payment, analysts say.

``This plan hinges on the assumption that within the near future, companies will devote significant capital for construction of generation,'' Bear Stearns & Co. analyst Kevin Boone wrote. ``This assumption may be questionable.''

Dynegy Inc., Calpine Corp. and Williams Cos., three of the main electricity providers in the state, have plans for about 1,800 new megawatts of power. Others, such as Duke Energy Corp., have tentative plans to add new power.

``There will be blackouts this summer,'' said Mark Palmer, spokesman for Enron Corp., the largest energy trader. ``I just don't see meaningful supply being added'' in time.

Law and Weather

The rescue package also faces legal and political challenges. Consumer groups are threatening lawsuits and ballot initiatives to overturn the plans. ``If overall the deal is a windfall to utility shareholders and results in big rate increases for small consumers, then we have no choice but oppose it,'' said Matt Freedman, an attorney for the Utility Reform Network.

The weather also needs to cooperate. Without more snowfall, the runoff that powers hydroelectric plants will drop, forcing them to run at less than full capacity. And hotter-than-normal weather will boost consumption as more people run air conditioners. Forecasts say it will be close.

``It's really hard to catch up on snowfall,'' said Steve Anderson, a meteorologist with the National Weather Service. ``We'd have to have a prolonged period of snow.''

Backup Plans

Most investors still expect to be repaid, and aren't filing bankruptcy claims against PG&E or Edison. ``We are expecting a substantial recovery on the debt,'' said Raye Kanzenbah, who helps invest $414 billion at Voyageur Asset Management. Voyageur advises Minneapolis, Minnesota-based Great Hall Money Market Funds, which said this month it held $19.8 million of Pacific Gas & Electric commercial paper.

As the finances are being worked out, the lights are expected to stay on. Analysts, creditors, state officials and even Governor Davis say that if the costs rise, the state will simply have to raise electricity rates.

``If I wanted to raise rates, I could solve this problem in 20 minutes,'' Davis has said.

-- Swissrose (cellier3@mindspring.com), March 14, 2001

Answers

``If I wanted to raise rates, I could solve this problem in 20 minutes,'' Davis has said.

Does that mean you do not want to raise rate? I say you will have to do the unthinkable sooner or later.

-- Martin Thompson (mthom1927@aol.com), March 14, 2001.

Translation: "If I wanted to lose votes, I could solve this problem in 20 minutes". He certainly couldn't ask the inhabitants of the Worker's Paradise of Kalifornia who voted him into office to pay their fair share, now could he?

-- thinkahead (a@a.a), March 14, 2001.