Is the San Jose Mercury oversensationalizing or incorrect, with the ultimate conclusion stated at the beginning of this article? Let's hope so, because if not, the Y2K outcome may yet end up being no better than "medium case" --- by Gary North's 1999 standards. Hyperlink: http://www.mercurycenter.com/cgi-bin/edtools/printpage_ba.cgi Copyright, San Jose Mercury, fair use for education and research only Published Friday, March 23, 2001, in the San Jose Mercury News

Hopes dim for quick fix on electricity: TALKS DRAG ON

With no deal soon, the state could find itself unable to stabilize the system

CALIFORNIA'S ENERGY CRISIS BY STEVE JOHNSON, JOHN WOOLFOLK AND DION NISSENBAUM, Mercury News

Like a house of cards nearing collapse, California's highly interconnected electrical system is eluding efforts to shore it up, and it may soon crash if the state's negotiations with utilities drag on.

After initially promising a quick end to the talks, state officials now say it may take months to close a deal to bail out California's nearly bankrupt utilities and stabilize the system. But everywhere they turn, cards are falling -- and this week the pace has quickened. On Monday and Tuesday, the state suffered rolling blackouts in part because small electricity generators shut down after months of missed payments from Southern California Edison and Pacific Gas & Electric. On Thursday, the Legislature rejected Gov. Gray Davis' plan to prop up the small generators, imperiling one-fourth of the energy on which California relies. The problem with the small generators was unexpected and costly, but as negotiations languish, far bigger threats remain. The utilities are at grave risk of bankruptcy; many more power suppliers may either cease operations or begin selling their power out of state; and the state's bills for buying power are threatening to exceed its ability to pay. All in all, despite months of effort, the state has fallen far short of its goal of a reliable, reasonably priced power supply. For a host of reasons, more blackouts and higher power bills look increasingly likely. Davis' plan to restore the system centers on a deal to bail out the utilities by buying their transmission grid. PG&E, Edison and San Diego Gas & Electric Co. say they're more than $13 billion in debt from buying power at prices well above what they're allowed to charge customers. Although details are sketchy, the deal to buy the utilities' wires could cost the state $7 billion. Such a cash infusion would allow the foundering PG&E and Edison to pay off their debts, restoring their credit and their ability to buy power. But so far, the utilities and the state can't agree to terms. When state officials asked PG&E recently for its top four concerns about the sale, according to one source familiar with the talks, the company came back with a list of 24. Davis remains upbeat, but he has cautioned that the details are hugely complex. Davis' spokesman Steve Maviglio recently likened it to corporate mergers, which ``typically take months.'' Assuming the governor and the utilities eventually do reach an agreement, the Legislature could stall it for months. That worries some experts, who fear that any such delay could have unpleasant ramifications. Among them: * Utility company bankruptcy. Even though the state has taken over the purchase of much of California's electricity, the utilities are making only partial payments on their bills. As a result, their creditors -- who range from generators to banks -- could force them into bankruptcy at any moment, a move that could ultimately put the state's power dilemma partly in the hands of a judge. So far, the creditors have held off going to court. But increasingly in recent days, some say they are ready to take that critical step. ``That's clearly what every policy maker and the utilities are working to avoid because of the disastrous consequences,'' said PG&E spokesman John Nelson. * More generator shutdowns. In hopes of persuading the small power companies to turn their plants back on, Davis had proposed paying some of them out of money the utilities collect. But now that the Legislature has quashed that plan, it's unclear what will happen next. Thursday, one small company persuaded a judge to void its contract with Southern California Edison, and immediately sold its power out of state. Experts predicted that more could take such a step in coming days. If the operators can't get paid, they may have to shut down permanently. After all, said Jan Smutny-Jones, executive director of the Independent Energy Producers Association, ``companies have to protect their financial interests.'' * Municipal utility mutiny. There is growing unrest among government-run utilities, including Santa Clara, Palo Alto and Alameda, over their role in helping shore up the state grid. Ordinarily self-sufficient, these utilities say they are tired of being asked to participate in rolling blackouts. Moreover, the state has asked them to provide power to the grid, for which they haven't been compensated. ``There is somewhere close to $300 million that we haven't been paid,'' said Jerry Jordan, executive director of the California Municipal Utilities Association. Because of this, some of these utilities may have to raise their rates, which could prompt them to cut off assistance to the state. * Bleeding state coffers. So far, Davis has set aside more than $4.2 billion in public money to buy power on behalf of the utilities. Until a bailout deal is completed and the utilities can pay their bills again, the amount will continue to rise -- and that's making people nervous. On Wednesday, state Controller Kathleen Connell refused a Davis request to transfer more than $5 billion out of the general fund -- which was being used to pay for power -- to a ``rainy day fund'' for emergencies. While Connell's action doesn't stop the state from purchasing power, she said she hoped it would protect the general fund, the source of funding for most state services. ``It becomes almost impossible to operate in a vacuum of secrecy, and that's what we've been asked to do,'' Connell said. * Electricity rate increases. Because the terms of the transmission sale haven't been finalized, no one knows for sure if it will require a lifting of the freeze on retail electricity rates. Meanwhile, the power the state is buying on behalf of the utilities is costing far more than the utilities are taking in from their customers. To ensure that the state and the utilities have enough money to meet their financial obligations, the Public Utilities Commission may have to consider raising the rate consumers pay. Figuring out how much of an increase -- if any -- is difficult without knowing how the transmission deal will turn out. But if the commission doesn't act soon, some fear it could propel the utilities into bankruptcy or seriously deplete the state's financial reserves. Either way, said Commissioner Richard Bilas, ``it's not a good situation.'' As long as the transmission deal remains in limbo, the state is likely to continue buying power on the highly volatile spot market, especially since its efforts to secure low-cost, long-term power contracts have lagged. These continued spot purchases, in turn, may only push the price of wholesale power higher. Moreover, if the state cannot find enough power to quench its thirst, blackouts could become common. That, in turn, could lead to mounting public unrest, which could prove politically damaging for Davis and other lawmakers. Already, some public officials seem increasingly emboldened to take potshots at the governor. On Wednesday, for example, Secretary of State Bill Jones accused Davis of a ``lack of oversight'' over the state's energy problems. Consumer advocates say a statewide initiative to overhaul the whole electricity system could become more likely, too. ``If I had to go out right now and gather signatures . . . people would sign that,'' said Nettie Hoge, executive director of the Utility Reform Network in San Francisco. ``You've got a powder keg.''

Contact Steve Johnson at sjohnson@sjmercury.com or (408) 920-5043.

-- Robert Riggs (rxr.999@worldnet.att.net), March 24, 2001