San Diego Union-Tribune

11-Jan-2001 Thursday 

Page A-1

CALIFORNIA'S POWER CRISIS
Negotiators close in on deal
    Long-term energy contracts called state's best option 


Toby Eckert 
COPLEY NEWS SERVICE 

WASHINGTON -- Negotiators trying to end California's power crisis focused yesterday on getting the state into the electricity-buying business and finding ways to ease the financial pressure on utilities, said a source
close to the talks.

A day after meeting to set the broad parameters of a solution, top state, federal and power industry officials looked to their technical experts, attorneys and accountants to work out the complex details in closed-door talks at the Treasury Department.

The top officials plan to reconvene this weekend in hopes of ratifying a deal.

Yesterday, as California coped with its second Stage 2 emergency in two days, Gov. Gray Davis said he and legislative leaders hope to sign off on an agreement Saturday or Sunday. Davis said he believes it can be done
without a rate increase for consumers.

"There were a number of other subjects that we talked about," said Davis, who was back in Sacramento yesterday, "but I went back there for one reason -- to tell them that I want long-term contracts, I want them within the next 30 days. And I believe you will see a great deal of progress on that subject."

Pacific Gas & Electric and Southern California Edison have been battered by soaring wholesale power costs in the state's chaotic, deregulated electricity market. The rates that PG&E and Edison can charge customers are frozen under the state's deregulation law, though state regulators recently approved a temporary increase for the companies.

San Diego Gas & Electric rates were capped in September, and the difference between what the company pays for power and what it can charge customers is accumulating in a giant IOU. The state has guaranteed that SDG&E can recover that debt.

Emerging from the seven-hour summit Tuesday, Davis said long-term power purchases would lower the wholesale rates in California, which largely have been pegged to the daily electricity market.

In Sacramento yesterday, Davis continued to express confidence.

He said he believed an agreement could be reached that would guarantee California a sustainable supply of electricity "at a price that's well within the existing rate structure that will not require a rate increase."

Davis said it is critical to keep PG&E and Edison from plunging into bankruptcy because of soaring charges by electricity generators, but he flatly refused to commit state funds to guarantee bonds to prop up the state's two largest utilities.

Yesterday in Washington, one group of experts turned its attention to setting up a framework for state purchases of power, according to a source familiar with the discussions. Among the items under consideration were which state agency would make the purchases and the price of power in long-term contracts.

A second group was dealing with financial issues, the source said, including a proposed moratorium on the payments that the utilities owe to the California Power Exchange and the California Independent System Operator. Most electricity in the state is bought and sold through the Power Exchange, and the ISO has bought power on an emergency basis when supplies were deemed too low.

The group was to explore other ways to relieve the financial pressure that PG&E and Southern California Edison face because they are unable to fully recoup the soaring wholesale power costs from their customers.

PG&E officials said yesterday that it could default on its loans immediately and asked Davis to use state money or loans to buy natural gas for the utility.

Consumer groups and independent energy experts are less enamored of the long-term contract idea, fearing it would simply lock in inflated prices.

"Whether it's good for California ratepayers depends on the duration and price of these contracts," said Steven Stoft, senior research fellow at the University of California's Energy Institute in Berkeley.

Consumer groups have not been involved in the Washington discussions.

"I feel somewhat like the defendant in a trial awaiting a jury verdict. The deliberations that are going on right now are out of our hands and we're not privy to them," said Michael Shames, executive director of the San Diego-based Utility Consumers' Action Network.

Shames said the discussion of how to cover the utilities' huge, uncollected power costs "makes me the most nervous." The issue should not be decided until there is a long-term fix for the California power market, he said.

While talks continued in Washington, power supplies in California dipped dangerously low again, prompting officials at the California Independent System Operator to declare a pair of emergency warnings yesterday.

The ISO, which manages three-quarters of the state's electric grid, declared a Stage 1 emergency beginning at 7 a.m. By 3:30 p.m., electricity reserves dropped beneath 5 percent, forcing ISO managers to declare their second Stage 2 emergency in as many days.

More than 10,000 megawatts of power were off-line because of both planned and unscheduled maintenance at California generators.

To make matters worse, high surf along the central California coast was stirring up kelp and other sea materials that threatened to clog intake valves at the Diablo Canyon nuclear power plant.

Diablo Canyon engineers planned to cut production to 20 percent capacity, costing the grid 1,800 megawatts through today, said Patrick Dorinson of the ISO staff.

The Stage 2 declaration forces distributors like SDG&E to impose mandatory service interruptions for larger-use customers that agree to shut off power during peak-demand hours in exchange for lower rates.

As the ISO issued its Stage 2 warning yesterday, officials announced a new conservation drive beginning today. Residents and commercial users are being asked to curtail consumption wherever possible.

Davis included a $1 billion energy appropriation in his new budget. Part of the money will go to electricity conservation programs he outlined in his State of the State address Monday. The rest, he said, was deliberately not earmarked to give the state some financial flexibility when a final
agreement is reached.

STAGE 2

The California Independent System Operator, manager of the state's power grid, declared a Stage 2 alert yesterday after reserves dropped to less than 5 percent of available energy.