Published Friday, Aug. 10, 2001, in the San Jose Mercury News

Worsening picture on power sales

STATE LOST MUCH MORE THAN ORIGINALLY REPORTED, SOLD ELECTRICITY ON DAY WITH ROLLING BLACKOUTS BY JOHN WOOLFOLK

Mercury News

California has lost $73 million selling surplus electricity since March -- five times more than indicated before -- according to a report that raises new questions about the Davis administration's management of the energy crisis.

State officials downplayed the new numbers, saying the loss amounts to less than 1 percent of California's power purchases. But the report suggests that state power managers have made some questionable judgments as they ran the massive power-trading operation California created earlier this year. Among the revelations:

The difference in what the state paid for power and what it made by selling it is much greater than the administration acknowledged earlier, with purchases averaging $290 and sales as low as $1 per megawatt-hour on the same day.

The state ended up selling surplus electricity even on eight days when power grid managers declared emergency shortages -- including a March day when a shortfall triggered rolling blackouts to 1 million California customers. In essence, power managers had bought too much power for certain times of the day and too little for others.

State officials initially explained the surplus power sales by saying they were unloading extra electricity from contracts signed months ago to avoid summer shortages. But, in fact, the state began selling surplus electricity in spring, at a time when half or more of its total power was being bought on the daily spot market. ``Every time we get some bits of information it raises more questions,'' said Assemblyman John Campbell, R-Irvine, who received the new report from state power managers as part of his demand for fuller accounting of surplus energy sales.

``I hear what they say that it's 1 percent, but still, it's $70 million,'' Campbell said. ``These people may have paid dramatically too much money for this energy, and the taxpayer or the ratepayer is going to bear the brunt of it.''

State officials say the details confirm they're following standard utility practice of maintaining a small surplus margin to guard against blackouts. Because power can't be stored, it must be sold if it isn't used.

``What we're doing is clearly consistent with what I consider to be good utility practices,'' said Pete Garris, a veteran utility official and now chief of operations at California Energy Resources Scheduling.

The Mercury News revealed three weeks ago that state officials have been selling surplus power at a loss. Officials said then that low demand from cool weather and consumer conservation left them holding more electricity in contracts than needed.

In response to inquiries about the sales, officials last month released figures showing the state had sold 5 percent of the 3.5 million megawatt-hours bought for the first half of July.

Those figures showed the state lost $14.5 million out of $415 million in sales. At the time, Davis spokesman Steve Maviglio denied traders' reports that the state sold power for as little as $1 a megawatt-hour.

But the new details confirm the $1 sales, while showing the state's total loss in July was more than $41 million. Overall, the state purchased a surplus of 6 percent more power than it needed. The state sold a 2.4 percent surplus in June at a $20 million loss.

Surpluses in March, April and May were less than 1 percent. Jim Tracy, planning director at Sacramento Municipal Utility District, said utilities try to keep surpluses under 4 percent and to sell at losses up to 50 percent.

On March 19, the state sold 2,000 megawatts on a day when a 1,000-megawatt shortfall triggered rolling blackouts, for $220 per megawatt-hour. It paid an average of $299 for power that day.

On April 9, a day the state was in a Stage 2 shortage and paid an average of $290 per megawatt-hour, it sold 89 megawatt-hours at $1 per megawatt-hour.

The state began buying electricity in January for Pacific Gas & Electric and other troubled utilities but must rely on the companies to forecast power needs, Garris said. While critics say the losses underscore the state's inexperience, Garris said skills are improving.

http://www0.mercurycenter.com/premium/local/docs/surplus10.htm

-- Martin Thompson (mthom1927@aol.com), August 10, 2001

Answers

Flakes Flakes! Flakes flakes!...

-- James Fitzgerald (jamesjfitz@juno.com), August 10, 2001.

Hey Martin, there was an article in today's AZ Republic about California having to borrow a whole bunch more money to cover the fiasco on top of what they have already borrowed. Its too long for me to type up, can you find it? Its entitled, "Calif. must cover cash shortages". The first paragraph is: CA will need to issue $5.7 billion in short-term debt, in addition to a planned $12.5 billion bond offering, to cover cash shortages from the state's power purchases, state finance officials said.

I predict California will need a bailout just like Argentina.

-- Guy Daley (guydaley1@netzero.net), August 10, 2001.

I couldn't find that in the AZ Republic, which not unusual. Here is one that looks similar.

Short-term note sale planned to pay power costs Stopgap measure until $12.5 billion bond is issued

David Lazarus, Chronicle Staff Writer Thursday, August 9, 2001

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State Controller Kathleen Connell said yesterday that an emergency sale of almost $6 billion in short-term notes would be made to cover California's electricity costs until a multibillion-dollar bond offering is possible.

The so-called revenue anticipation notes are necessary because the state's general fund is running dry from recent power purchases, Connell said in an interview.

The notes, which could be offered to investors as early as next month, will be paid back as the general fund is replenished, she said.

Coupled with the pending $12.5 billion municipal bond offering -- the largest in U.S. history -- California taxpayers and consumers would be saddled with a staggering level of debt.

"There is a cost to this energy crisis," Connell said. "We're only beginning to understand that it will be a historically high level of debt."

Although she and Gov. Gray Davis have feuded bitterly over the years, Connell said the governor accepted the need for short-term notes as a stopgap until the larger bond offering could be made as planned in October.

Steve Maviglio, a spokesman for Davis, said the note sale "is a very normal thing."

If the bonds cannot be sold on schedule, Connell said, an additional sale of short-term notes is likely.

This much at least is clear: The need for California to rush more quickly and more deeply into debt underlines the precariousness of the state's financial footing.

California was done no favors this week by Pacific Gas and Electric Co., which filed suit in federal court demanding that electricity rates be increased so the San Francisco utility could recoup almost $9 billion in outstanding power costs.

Because investors in California's bonds would be paid back with customer revenue, PG&E's lawsuit could delay the bond offering until regulators determine whether further rate increases will be required.

"Clearly we need to borrow money now to handle our cash-flow needs," Connell said.

A short-term note offering could be made within 45 days, she said, with the notes due for repayment by the end of next June.

Although state bonds must be issued by Treasurer Philip Angelides, who was in New York last week drumming up support for the move, Connell said short- term notes fall under her authority.

A spokesman for Angelides said last night that the treasurer was still studying Connell's "demand request" and could not comment on the matter.

Sandy Harrison, a spokesman for the state Department of Finance, said his agency supported the note offering.

But financial analysts are concerned that Connell's short-term notes could confuse investors who may have been eyeing California's long- term bonds, potentially undermining the attractiveness of the bonds.

They also worry that California is taking on too large a debt burden during an economic slowdown.

"You're sacrificing the standing of the state as a whole at a time when flexibility is most important," said Douglas Christopher at Crowell, Weedon & Co. in Los Angeles. "If we go into a recession, this could be a real issue."

For her part, Connell said the notes and bonds would be complementary, and that "people who are in the market for nine-month notes are not in the market for bonds."

However, she said, for California to be borrowing about $18 billion total in debt markets is "troubling." Connell said she hoped investors would take the vast scope of the borrowing as a sign of the state's getting its financial house in order.

If nothing else, the short-term notes make a complex situation even more complicated. State regulators will be required later this month to clear the way for an October bond offering -- and even then, it remains to be seen how investors will receive California's move.

"This is a hard row to hoe," Angelides told The Chronicle last week, after briefing about 250 money managers and financial analysts on the bond plans. "We've still got a lot of work to do."

The state Department of Water Resources already has spent about $10 billion purchasing power on behalf of cash-strapped utilities. However, Connell said, customer revenue has paid off some of those expenses, leaving about $6.2 billion owed to the state's general fund.

"We are borrowing just enough to tide the general fund over," she said.

A recent report by the state Legislative Analyst showed California spending about $3.2 billion a year to pay off various bonds -- or nearly 4 percent of the state general fund budget. This is considered a comfortable margin for Wall Street rating houses, which continue to rank California as a solid investment.

State voters approved $30.1 billion in bonds in the 1990s for improvements to schools, freeways and parks. The amount spent on debt rose to a record- breaking 5.1 percent in 1995 and then started declining.

Connell, who some observers believe is considering a run for governor next year, drew Davis' wrath recently when she refused to pay the salaries of two former Clinton-Gore strategists hired to help manage the energy crisis.

She also went around the governor by releasing secret power contracts Davis negotiated with electricity generators.

Chronicle staff writer Robert Salladay contributed to this story. / E- mail David Lazarus at dlazarus@sfchronicle.com.

http://www.sfgate.com/cgi-bin/article.cgi? file=/chronicle/archive/2001/08/09/MN156908.DTL&type=news

-- Martin Thompson (mthom1927@aol.com), August 10, 2001.

If I were to start up a new utility company the VERY LAST person on earth I ould choose to head it up would be Gray Davis. As a California citizen this whole thing just makes me want to puke.

-- JackW (jpayne@webtv.net), August 10, 2001.

Jack,

What are still doing there?

This really spells MOVE OUT to me.

-- (perry@ofuzzy1.com), August 10, 2001.