Power Strain Eases but Concerns Mount

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Energy: Officials say summer prices will be high, and a state report shows that contracts with generators are far short of goals.

By DAN MORAIN and JENIFER WARREN, Times Staff Writers

SACRAMENTO--California's fragile electricity system stabilized Wednesday, but a Davis administration report suggested troubles ahead because the state could be forced to buy most of its power for the coming summer on the costly and volatile spot market.

After two days of statewide blackouts, power plants that had been shut down were cranked up. Unseasonable heat tapered off. The operators of the statewide power grid relaxed their state of emergency.

But plenty of ominous signs remained. Many small producers remained shut down, skeptical about Gov. Gray Davis' plan for utilities to pay them. State Controller Kathleen Connell issued a sharp warning about the high cost of the state's foray into the power business and announced that she will block an administration request that she transfer $5.6 billion into an account that could be tapped to pay for state purchases of electricity.

And a report from the administration summarizing contracts between Davis and independent power generators showed that the state has signed contracts for only 2,247 megawatts of electricity, significantly less than the 6,000 to 7,000 megawatts previously claimed.

While there are agreements in principle for the full amount, the report notes that generators can back out of the contracts for a variety of reasons, including the state's failure to sell bonds to finance power purchased by July 1. The Legislature has approved plans to sell $10 billion in bonds, but none have yet been issued.

"We are exposed enormously this summer," Senate Energy Committee chairwoman Debra Bowen (D-Marina del Rey) said after looking at the report. "We owe the people the truth about how difficult this summer is going to be. We don't have a power fairy."

Perhaps most significant, the report suggests that the contracts fall significantly short of Davis' stated goal of buying no more than 5% of the state's summer needs on the spot electricity market, where prices can be many times those of long-term contracts.

After reading the report, Frank Wolak, a Stanford University economist who studies the California electricity market, said the numbers suggested that the state's long-term contracts will cover less than half of what the state will need this summer.

"We're definitely short this summer, next summer and the summer of 2003," he said. California was forced to start buying electricity in December--at a cost of $50 million a day--because producers refused to sell to Southern California Edison and Pacific Gas & Electric.The two utilities amassed billions of dollars in debt when prices for wholesale power soared on the spot market.

Vikram Budhraja, a consultant retained by Davis to negotiate deals with generators, said the report represents a "work in progress." He said the state may yet sign new contracts. However, Wolak said the contract figures confirm what he and others have been dreading: that summer is going to be rife with rolling blackouts unless serious steps to cut demand are taken immediately.

Wolak and other experts say large industrial customers must be switched to real-time meters and pricing to persuade them to use the bulk of their energy at times of low demand.

The head of the Energy Foundation, a San Francisco-based nonprofit that promotes sustainable sources of power, made the same proposal to Davis on Wednesday. "The government need not ask customers to swelter in the dark this summer," foundation President Hal Harvey argued in a letter.

He also proposed a crash campaign to boost sales of efficient appliances and lightbulbs. He said the state needs to take over the utilities' contracts with alternative energy providers to ensure they stay in business, and sign new contracts for 1,500 megawatts of new wind power--the cheapest, fastest and cleanest source of new supply.

Davis had proposed a formula Tuesday to force private utilities to pay the alternative producers, some of which have not been paid since November. But some of them warned Wednesday that Davis' plan offers them little incentive to turn on their generators.

Alternative energy producers supply more than a quarter of the electricity consumed in California. Many producers generate electricity from wind, sun and geothermal sources. But most of them generate power using natural gas--and the cost of natural gas has been soaring. Several natural gas users said Davis' plan, which caps rates, won't cover their fuel costs.

Davis assumes that the price of natural gas will fall. But small generators say they don't have sufficient purchasing power or sophistication to gamble on future prices. The Public Utilities Commission is expected to approve Davis' proposal next week. It offers producers two choices: 7.9 cents a kilowatt-hour if they agree to supply power for five years, or 6.9 cents a kilowatt-hour over 10 years.

"The price of natural gas is higher than that," said Marty Quinn, executive vice president and chief operating officer of Ridgewood Power LLC, which owns three natural gas-fired co-generation plants. "If we operate, we'll lose money."

Ridgewood is not operating, having been cut off by gas suppliers. The company sued PG&E last month seeking overdue payments and release from its contracts with the utility. A hearing is scheduled in El Centro today in another lawsuit filed by a small energy producer, an Imperial Valley geothermal producer that sued Edison for refusing to let it break its contract and sell on the open market. CalEnergy says Edison owes it about $140 million for energy sold since November.

A company spokesman, Jay Lawrence, said CalEnergy was going ahead with its suit despite, Davis' proposal. "We've had promises before," he said.

In other developments: * A federal judge in Sacramento on Wednesday ordered Reliant Energy of Houston, a major producer, to continue selling power to California during emergencies, despite the company's argument that it may not be fully reimbursed. The order will remain in effect for 60 days or until the, U.S. Federal Energy Regulatory Commission decides a related case.

* Connell said the state budget surplus has shrunk to $3.2 billion because the state has spent roughly $2.8 billion on electricity. She criticized the administration for withholding basic information about state finances, and said she will begin an audit on Monday of the Department of Water Resources, which is responsible for purchasing power. Davis' aides said Connell took her action because the Democratic governor endorsed one of Connell's foes this week in the race for Los Angeles mayor, former Assembly Speaker Antonio Villaraigosa. A Connell aide scoffed at the notion.

* Sen. Dianne Feinstein (D-Calif.) said she "never has had a response" from President Bush after writing him last month for an appointment to discuss the California energy crisis. In a wide-ranging lunch talk with reporters in Washington, she deplored the fact that "huge, huge profits are being made" in the California crisis, and said "an appropriate federal role" would be to guarantee a reliable source of power until the state can get nine new generators online. Times staff writers Mitchell Landsberg in Los Angeles and Robert L. Jackson in Washington contributed to this report.

Copyright 2001 Los Angeles Times

-- Swissrose (cellier3@mindspring.com), March 22, 2001