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Wednesday March 28, 4:49 pm Eastern Time

Calif. power grid needs lots of work as summer nears By Leonard Anderson

SAN FRANCISCO, March 28 (Reuters) - A big electric rate increase approved this week by California utility regulators cannot buy time the state desperately needs to beef up its aging electric grid to avoid widespread summer blackouts.

State power officials warn the state faces a gap between supplies and demand this summer of 3,000 to 6,800 megawatts, threatening to plunge millions of Californians into the dark on the hottest days.

Industry officials said Wednesday they are worried that nuts-and-bolts work to upgrade the grid, build new ``peaking'' power plants designed to meet peak summertime demand, and sign up businesses and industries for new conservation programs may not be ready in time.

The 40 percent average rate increase adopted Tuesday by the California Public Utilities Commission, the largest ever in the state, will pump a total $4.8 billion a year into the state's near-bankrupt utilities, but regulators must still set up a ``tiered'' rate system that rewards customers who save electricity and penalizes those who use too much.

California faces other tough financial decisions to fix its energy crisis -- the utilities' $1.5 billion of payments owed to small power generators, the size of an expected state bond issue to finance power purchases, and Gov. Gray Davis's efforts to bail out the utilities by buying their transmission networks and other assets.

California's crisis was caused by skyrocketing wholesale power prices and the state's own 1996 deregulation law that prevented utilities from passing along the spiraling costs to consumers.

As a result, the utilities -- PG&E Corp.'s (NYSE:PCG - news) Pacific Gas & Electric unit and Edison International's (NYSE:EIX - news) Southern California Edison -- are more than $13 billion in debt and the state has become the chief buyer of the power needed to keep the lights on. Despite the emergency effort, power supplies remain critically short.

STATE NEEDS MORE PLANTS

California has not built a large new power plant for more than 10 years, but new plants are now going up and will link to the grid beginning later this year, with most new turbines expected in 2002 and 2003.

``The CPUC can pat themselves on the back for passing a piece of paper that raises the electric rates, but that paper is not going to translate into putting physical assets on the system in time for summer,'' said an industry source.

Davis, for example, touted a report last month by the California Energy Commission identifying 33 potential sites for new peaker power plants to be up and running by July 31.

It turned out, however, that only 14 -- less than half -- of the potential sites had turbines available, but that did not mean the equipment had been acquired. The 14 plants would generate about 1,000 megawatts of electricity.

As of Wednesday, the energy commission was reviewing two projects in Southern California to add 225 megawatts -- enough electricity for about 225,000 homes -- for summer and was looking at proposals for two more, according to a CEC spokeswoman.

Another effort to strengthen the state grid with 31 ``high priority'' projects to add equipment and boost voltage levels -- 27 are targeted to be competed no later than August 1 -- was cleared by the CPUC on Tuesday.

The regulators began their study of the projects last November, after the state legislature passed a law ordering improvements to the transmission network.

A spokesman for PG&E said their major projects were on schedule for summer.

``SUMMER OUTLOOK BLEAK''

Consumer activists said they do not believe the state's power industry can escape grid breakdowns and blackouts when the weather warms up and demand climbs for air conditioning.

``The summer outlook is bleak,'' said Nettie Hoge, executive director of Toward Utility Rate Normalization (TURN), a San Francisco-based consumer group.

``The CPUC can only handle so many things at once. It's moving at regulatory speed and we expect them to respond to the emergencies at a market speed. They just can't do that,'' Hoge said.

The CPUC also is struggling to revive programs for the state's utilities to cut electricity to big industrial customers when supplies are tight.

``Interruptible'' programs pay customers to reduce their electricity use in return for a 20 percent discount off regular rates.

Past programs have cut demand on the grid in summer heat waves by about 2,200 megawatts, but they died in January when the utilities used up all their hours of turn-offs for 2001 in only the first three weeks of the year.

The CPUC is studying new steps to encourage the reductions, but power officials doubt they will be in place by summer.

The California Independent System Operator, which manages most of the state grid, also is working on summer actions by business customers to cut demand.

``We're moving forward to June 1 when we hope to have 500 to 1,000 megawatts signed up that we didn't have last summer,'' said Don Fuller, manager of the reduction programs.

ISO officials said California will need all the energy savings it can muster.

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-- Martin Thompson (mthom1927@aol.com), March 29, 2001