Please see the following articles:

Sac Bee, Mon, 7/9: Energy probe relies on history: A 1929 cement
case offers a map as a Senate panel seeks contempt charges

Sac Bee, Mon, 7/9: Dan Walters: Energy preoccupies politicos, but
school crisis still looms large

SD Union, Mon, 7/9: Estimates start at $50 billion for deregulation cost

SD Union, Sat, 7/7: SDG&E ratepayers lose PUC case

SD Union, Sat, 7/7: Davis totals up his efforts, notes price drop

LA Times, Mon, 7/9: Concern Over Price of Long-Term Power Pactrs Grows
Embedded costs may yield more rate hikes, critics say, and the $43-billion
total could complicate plans to rescue Edison

LA Times, Mon, 7/9: The Nation Deal with Suppliers Not Likely

LA Times, Sun, 7/8: Paying the Energy Bill Crying Foul Over Energy Baselines

LA Times, Sun, 7/8: Power Firms Have Motive to Deal With Davis Energy

SF Chron, Sun, 7/8: Airplane leftovers converted into electricity

Mercury News, Mon, 7/9: FERC judge readying his resolution

OC Register, Mon, 7/9: Energy crisis begets brainstorms

Individual.com (AP), Mon, 7/9: PG&E to Assume Calpine's California QF
Contracts
Calpine to Receive All Past Due Receivables

WSJ, Mon, 7/9: California Officials Justify Their Claims
Of Overcharges Before Federal Mediator

WSJ, Mon, 7/9: Calpine Says PG&E Has Agreed to Pay
$267 Million in Overdue Electricity Charges

Mercury News, Sat, 7/7: REFUND ACCORD UNLIKELY BEFORE DEADLINE; POWER
SUPPLIERS,
STATE REMAIN BILLIONS APART; JUDGE ORDERS MORE TALKS

Mercury News, Sat, 7/7: PG&E TO PAY $265 MILLION IN CALPINE DEAL; TALKS
BETWEEN UTILITY,
GENERATOR MARK TURNING POINT IN BANKRUPTCY NEGOTIATIONS

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Energy probe relies on history: A 1929 cement case offers a map as a Senate
panel seeks contempt charges.
By Emily Bazar
Bee Capitol Bureau
(Published July 9, 2001)
Reports of the day called it one of the most tense and trying legislative
sessions to date.
On March 14, 1929, the state Senate found 10 executives from California
cement companies in contempt and voted to send them to jail.
The Bee's headline screamed the news the following day: "Senate Will Jail
Cement Executives for Defiance."
The executives had refused to answer questions and divulge documents
requested by a special Senate committee trying to determine whether an
illegal "cement trust" had fixed prices at an artificially high level in the
years before 1929.
Such allegations of price manipulation ring eerily familiar these days in the
Capitol, where many lawmakers are embroiled in a frenzied effort to prove
that energy companies have played the power market and gouged billions of
dollars from California ratepayers.
On Wednesday, a special Senate committee investigating electricity price
manipulation is poised to confirm its own recent contempt findings against
two energy companies, if necessary. One week later, it may add others to the
list.
Should the committee agree to finalize any contempt charges, it will forward
a report to the full Senate, which will decide on punishments that could
include jail time or steep fines.
As the committee pursues this rarely used option, members are taking a
careful look at the 1929 cement trust investigation, believed to be the only
time during the past 100 years that the Legislature has found anyone in
contempt.
That case provides modern-day lawmakers with a road map of sorts, confirming
their ability to levy contempt charges and punishments, and identifying
potential legal pitfalls that could hamper their case.
One possible problem, for instance, is the state Supreme Court decision that
voided the 1929 contempt charges and kept the cement executives out of jail.
"We are without reservation ensuring that we cross all of our t's and dot all
of our i's as identified in the (1929) decision," said the committee's
chairman, Sen. Joe Dunn, D-Santa Ana.
Details of the cement case were culled from the history books last year when
the Assembly Insurance Committee began probing former state Insurance
Commissioner Chuck Quackenbush's questionable behavior in office.
As part of the investigation, legislators issued subpoenas. They also studied
precedents, including the cement case, to determine how to respond if
witnesses ignored a subpoena or refused to respond to their questions.
"We had to know what our powers were," said Matthew Jacobs, a former federal
prosecutor who served as special counsel to the committee.
The few years before 1929 were boom times in California.
Houses were sprouting everywhere, businesses were raking in money and state
government went on a building binge, erecting dams, prisons and hospitals.
But lawmakers noticed that cement companies attempting to win state contracts
for public works projects submitted nearly identical bids over a period of
several years. A special Senate committee subpoenaed officials from several
cement companies, peppered them with questions and asked them to release
records, including income tax forms and balance sheets.
But their responses, like their suspicious bids, were nearly identical.
According to the committee's March 8, 1929, report, committee executives --
one after another -- refused to turn over documents and answer questions,
saying they were declining upon the advice of their attorneys.
Here's one example of a typical exchange repeated hundreds of times during
the hearings: Sen. J.M. Inman of Sacramento at one point asked Harry T.
Battelle, secretary of the Pacific Portland Cement Co., to "tell the
committee what it costs to produce cement."
Battelle's answer: "On the advice of counsel, I will have to refuse to
answer."
On March 14, 1929, the Senate voted 22-16 to find the 10 executives from
eight companies in contempt and ordered them "confined in the Sacramento
County Jail until they have purged themselves of contempt," according to the
next day's article in The Sacramento Bee.
(An article in the Sacramento Union on March 15 reported that the Senate's
action marked the third time it had ever found anyone in contempt. The two
previous cases involved newspaper reporters who had refused to divulge
information.)
Though they were ordered to jail, the executives -- eventually numbering nine
because legislative leaders determined that one executive found in contempt
had never even appeared before the committee -- spent little or no time
behind bars.
When eight surrendered themselves to the Senate's sergeant-at-arms on March
25 in San Francisco -- one was sick -- they had with them court orders and
were released later that day "on $1,000 bail each," according to an article
in the Union, pending a full-scale constitutional review of the case by the
state Supreme Court.
The court heard the case in early April. Attorneys for the cement executives
argued that the Senate had exceeded its authority in making the contempt
charges and had no right to their confidential records.
But on May 14, the court found that the Senate had the authority to order the
executives to jail for the contempt charges.
However, the justices also decided that the Senate's findings lacked
specificity. For instance, the court found that the Senate had failed to
adequately justify why it had demanded certain documents and records.
With the contempt findings voided by the court, the executives were free to
go. The headline in The Bee the next day read, "Supreme Court Frees Cement
Heads on Quirk." The committee dropped the investigation.
Fast forward 72 years.
Dunn said he is working to ensure that the committee is very clear about why
its investigation is important, and why the documents and records are
necessary.
As for the companies that already have been found in contempt -- Enron Corp.
and Mirant -- Dunn said he's "cautiously optimistic" that the committee will
expunge the findings against Mirant, which he believes will comply with the
committee's request before Wednesday.
Although Dunn indicated Thursday that he is "cautiously pessimistic" about
Enron, the company later told committee officials that they would produce
some documents today.
A Mirant spokesman said last week that it wanted assurances from the
committee that information in the documents wouldn't end up in a public forum
where it might be misused. Enron questioned whether the committee
investigation encroached on the jurisdiction of the Federal Energy Regulatory
Commission.

The Bee's Emily Bazar can be reached at (916) 326-5540 or ebazar@sacbee.com.

Dan Walters: Energy preoccupies politicos, but school crisis still looms
large

(Published July 9, 2001)
The energy crisis has preoccupied California politicians for the past six
months and is likely to remain on the front burner for many months to come,
perhaps through next year's elections.
Until the energy crisis came along, education was presumed to be the state's
all-consuming issue. Gov. Gray Davis, who made education reform the hallmark
of his first term, once declared it to be his "first, second and third
priority." But a recent poll by the Los Angeles Times revealed that 57
percent of those surveyed now list the energy crisis as the state's top
problem, with education a distant second at 17 percent, which explains why
Davis and other politicians have shifted their focus.
Polls notwithstanding, improving public education remains a more
fundamentally important chore for California and its politicians, albeit one
that includes dozens of important sub-issues. And one of them is the sad
physical condition of the state's schools, in terms of both maintenance and
capacity.
The Legislature's budget office estimates that a third of California's 5.6
million public school students attend schools that are either overcrowded or
in need of upgrading. The files of school organizations are filled with
horrific tales about leaking roofs, overflowing toilets and other signs of
decay and neglect. The budget office pegs the cost of upgrading and expanding
schools to adequate levels at $30 billion -- roughly half of what the state
is now paying for electricity each year.
It's a problem that will only grow worse, since the buildings continue to
age, school authorities continue to cave in to political pressure, mostly
from unions, to spend money on salaries rather than maintenance, and
enrollments continue to grow faster than the population.
California sorely needs a long-range, predictable program of financing its
infrastructure needs, not only K-12 schools but colleges, highways, water
systems and other public facilities. But what it has is a hit-and-miss
process by which the governor and the Legislature, local officials and voters
occasionally offer up bond or tax money to attack a specific infrastructure
need, but no one can predict when it will happen or how effective it will be.
In 1998, voters approved what was then the largest state bond issue in
American history, a $9.2 billion pot of money for elementary, secondary and
higher education facilities. And accompanying legislation specified that the
$6.7 billion in K-12 money be apportioned on a first-come, first-served
basis, as had been the state's practice for years. Districts that had the
foresight and energy to get their projects together, with requisite amounts
of local bond or developer fee money, would receive state money first.
By last September, most of the bond funds had been allocated, but then
someone in Southern California realized many of the region's urban districts,
including the huge Los Angeles Unified, were not taking advantage of the
money, which was flowing mostly to suburban districts. Why? Simply because
officials in those overly politicized districts had been laggard in siting
and designing projects.
The Los Angeles Times worked itself into a virtual lather about Southern
California's lack of bond money, and the Mexican American Legal Defense and
Educational Fund filed suit attacking the allocation system, resulting in a
settlement with the State Allocation Board, which distributes school
construction aid. The board changed its procedures aimed at funneling money
to districts with the greatest needs, not to those most diligent in seeking
funds. But relatively little of the 1998 bond money was left.
Capitol politicians are now talking about putting another school bond issue
on the 2002 ballot. But with the economy beginning to slow and California's
credit rating slipping because of energy purchases, no one knows whether the
bond issue is viable. And no one knows whether suburban voters will be
willing to support a measure that, under the revised rules, will mostly
benefit urban districts. It's another example of our on-again, off-again
approach to infrastructure financing.

The Bee's Dan Walters can be reached at (916) 321-1195 or dwalters@sacbee.com
.

Estimates start at $50 billion for deregulation cost

By Craig D. Rose
UNION-TRIBUNE STAFF WRITER
July 8, 2001
Like survivors emerging from a terrible storm, Californians are beginning to
assess the damage wrought by the state's foray into electrical deregulation.
The first calculations are still back-of-the-envelope, rough estimates of the
toll. But an early consensus has emerged: The nearly $9 billion in refunds
California is seeking in ongoing settlement talks with electricity suppliers
would be just a fraction of what deregulation has cost the state.
A sampling of consultants, consumer advocates, state officials and an
attorney pressing a class-action suit against power suppliers said the damage
to the state has certainly exceeded $50 billion -- and will probably rise far
higher with a fuller accounting.
"I would probably say the $50 billion estimates are low because of the
multiplier effects" from the loss of money in the state's budget surplus,
said Michael Kahn, California's chief negotiator in the talks and head of the
agency that runs the state electricity grid.
Kahn, who emphasized he remains under a judge's gag order surrounding the
negotiations, said the money could have contributed to improving education
and meeting other social needs.
"I don't see the opportunity for another huge budget surplus available to the
public," Kahn said. "The damage has been horrible."
That may be the case, but the power industry argues much of the money spent
was the result of bungled state policy that pushed excessive dependance on
expensive spot power markets.
"From a legal standpoint, I don't believe there are any grounds whatsoever
for refunds," said Gary Ackerman, executive director of the Western Power
Trading Forum, which represents generators and electricity marketers.
"(But) for the generators to continue to do business in California, there is
a persuasive argument that we have to contribute to the solution, both
politically and financially. And I don't believe any of my members would
disagree."
Gov. Gray Davis, other political leaders and private lawyers say there have
been violations of law that entitle the state to recovery and perhaps damage
payments.
The settlement negotiations in Washington, D.C., are under the auspices of an
administrative law judge from the Federal Energy Regulatory Commission. The
judge initially suggested that a settlement for electricity overcharges might
be about $2 billion.
He said California's $9 billion demand for what it says are illegal charges
is too high.
Damages of $50 billion or more would translate to a cost of at least $1,500
for each state resident. The California Manufacturer and Technology
Association, moreover, says blackouts this summer -- which are less likely
now but remain a possibility -- could cost the state an additional $20
billion.
Most analysts begin their overall deregulation damage estimates by noting
that power costs for the state's deregulated electricity market increased by
$20 billion last year and are expected to rise at least $20 billion more this
year, for a total $40 billion increase in two years.
Some of that is attributable to high fuel costs for producing electricity, a
drought that limits hydroelectric production and an overall tight energy
supply. Yet much of the cost cannot be explained by those factors.
Several consumer advocates argue that California's damages include the more
than $20 billion that electricity customers paid to state utilities for what
are called stranded costs.
It was thought that the competitive forces unleashed by deregulation would
render uneconomical many of the generating plants and long-term power
contracts owned by San Diego Gas & Electric, Pacific Gas and Electric and
Southern California Edison. The stranded costs were the investments the
utilities had made in the plants and agreements.
Yet it turned out the soaring prices unleashed by deregulation transformed
the plants and contracts into gold mines.
Some continue to defend the stranded cost payments as appropriate
compensation to the utility companies. Either way, the utilities used the
money they collected for the stranded costs to build and buy new power plants
out of state, as well as to pay dividends to shareholders.
Harvey Rosenfield, president of the Foundation for Taxpayer Rights in Santa
Monica, said that beyond his philosophical objection to stranded costs --
that is, paying for utility assets he argues ratepayers had already paid for
-- the utility's parent companies are now demanding what he characterizes as
another bailout for the weakened companies they left to provide service in
California.
The consumer advocate said other unnecessary costs of deregulation can be
found in long-term electricity purchase contracts the state signed in the
heat of the power crisis last winter and spring.
State officials said the agreements were needed to stabilize power prices.
They say the contracts obligate electricity customers to about $43 billion in
costs but are open to renegotiation. Rosenfield said the contracts as they
stand may include some $30 billion more in costs -- which will translate to
higher rates -- than electricity would have cost in a regulated market.
"The total damage to the state from deregulation is in excess of $80
billion," Rosenfield said. "This will affect California for decades. The only
businesses that benefited from deregulation are the energy companies."
Rosenfield's analysis did not include a recent calculation by state
Controller Kathleen Connell that the true costs of the complicated long-term
power contracts could be more than double the state's first estimate.
An industry consultant agreed that the state contracts can only be assessed
as vastly inflated.
"The state's agreements potentially have us paying $20 billion more than we
should," said Frederick Pickel, a Los Angeles-based vice president of Tabors,
Caramanis & Associates, who based the overcharge estimate on current power
prices.
But Pickel argues that much of the cost attributed to deregulation is
actually the result of a severe region-wide shortage of inexpensive
hydroelectric power.
San Diego lawyer Michael Aguirre places the blame for billions in excessive
costs solely on energy companies, whom he accuses of engaging in violations
of business practices and antitrust laws.
"The starting point is $50 billion and that does not include consequential
damages to the state," said Aguirre, who is pressing a class-action lawsuit
against power suppliers and is representing Lt. Gov. Cruz Bustamente in a
separate energy lawsuit.
Michael Shames, executive director of the San Diego-based Utility Consumers
Action Network, suggests measuring current electricity prices against what
California might have paid for power had the state retained a regulated
electricity market.
Shames said if the state had begun building new plants in 1995, he thinks
electricity prices in California would be akin to prices on the East Coast,
about 4 to 6 cents per kilowatt-hour.
That compares to the 11 cents per kilowatt-hour paid by residents last year,
and costs this year are running far higher. The state's deregulation law
anticipated the competitive market would bring a 20 percent decrease in rates
by 2002.
"The degree of overcharges is not in the $3 billion to $5 billion range,"
Shames said. "Nor is it close to the governor's demand for $9 billion in
refunds. From my point of view, the cost is in the hundreds of billions. For
FERC to talk about $2 billion to $3 billion in refunds is more an insult than
redress."
Kahn, the leader of the state delegation in the FERC settlement talks, said
the state's call for a $9 billion refund relates only to overcharges for the
past year.
He is separately trying to get rid of a 10 percent surcharge federal
regulators have levied on all power sales in California, another cost of the
deregulation debacle. Regulators said the surcharge was appropriate because
of California's precarious finances caused by the deregulation meltdown.
More difficult to assess in financial terms is what Kahn called the lost
opportunity of tapping what was once a hefty state surplus. Electricity costs
exhausted the multibillion surplus in a matter of months. The Davis
administration plans to reimburse the state through a bond issue of up to
$13.4 billion that would be paid off by ratepayers over 15 years.
Ralph Nader, an early and persistent critic of deregulation, said repairing
the damage done by deregulation will take more than civil action.
"Criminal investigations are important both to prevent future collusion and
to get the bottom of what the adequate number of dollars is needed for
refunds," Nader said.

SDG&E ratepayers lose PUC case

Quietly signed deal favors shareholders
By Jeff McDonald
UNION-TRIBUNE STAFF WRITER
July 7, 2001
State energy regulators have reversed position and agreed that lucrative
power contracts signed by San Diego Gas and Electric are not the property of
ratepayers but instead belong to shareholders.
In a deal quietly signed this week by Public Utilities Commission President
Loretta Lynch, the state agreed to no longer dispute ownership of three pacts
that netted the utility about $245 million in one year alone.
The ruling, issued Monday in San Francisco, follows through on a separate
agreement announced last month between Gov. Gray Davis and Sempra Energy, the
SDG&E parent company.
But critics argue that the PUC ruling was reached in private and that
consumers have no idea what the contracts are worth. They also complained
about the timing of the ruling, issued two days before the Fourth of July
holiday.
The settlement calls for SDG&E to write off $219 million of the proceeds --
money to help pay off the so-called balancing account, about $750 million
that the utility claims to have paid for power but could not pass along to
customers.
It also ends several lawsuits the utility is fighting, including an appeals
court case filed by SDG&E challenging the initial PUC decision that profits
from the contracts should go to ratepayers.
Both the city and county of San Diego joined that case to try to protect
residents from losing that money.
Outlined in two pages, the Lynch settlement is scheduled to go into effect
July 16. Though the contracts remain shareholder property, SDG&E will
negotiate with the Department of Water Resources to sell that power to the
state through the remainder of the agreements. Those terms have not been
agreed to.
Because this was a holiday week, no one from the PUC was available to discuss
the settlement Thursday or yesterday.
A Davis spokesman said the commission operates independently of the governor
and declined to comment.
The ruling gives interested parties like the city of San Diego until Tuesday
to weigh in on the ruling. City lawyers said they are not sure how they plan
to respond.
"The numbers don't quite jibe with what we know to be the value of those
contracts, but we haven't finished our analysis," Assistant City Attorney Les
Girard said.
"We're trying to sort out what if anything we'll say by next Tuesday. It's
unfortunate that we haven't been given more time to fully analyze this and
respond."
In announcing the agreement last month to buy the transmission network
operated by SDG&E, Davis pledged that San Diego ratepayers would not have to
repay the $750 million balancing account.
The debt would go away even without the state transmission line purchase, the
governor said.
Davis made it clear that the payoff would not require approval from state
lawmakers, who have held up plans to buy the portion of the grid owned by
another financially troubled utility, Southern California Edison.
In late 1996 and 1997, SDG&E signed contracts with Illinova Power Marketing
Inc., Louisville Gas and Electric Energy Marketing Inc. and PacifiCorp. to
buy electricity through 2001, the PUC said.
The SDG&E contracts are valuable because they allowed the utility to buy
power for less than what it charged customers under deregulation.
Money to pay off the rest of the $750 million already has been identified.
Michael Shames of the Utility Consumers' Action Network criticized both the
timing and secrecy of the Lynch ruling. Without knowing how much the
contracts are worth, consumer advocates cannot measure the appropriateness of
the deal, he said.
"What is the value of these contracts? They're clearly very lucrative,"
Shames said. "This 'settlement' between the PUC and San Diego Gas and
Electric appears to be an abandonment of the commission's (earlier)
decisions."
SDG&E officials defended the ruling signed by Lynch as a good deal for
consumers because it resolves a number of legal disputes and ensures that the
average residential customer is not stuck with a $400 balloon payment.
But company executives continue to refuse to disclose the value of the
contracts, which SDG&E lawyers said in court papers was "in excess of $300
million." Last month, the company appealed a PUC decision that the pacts were
ratepayer property -- one of the cases that will go away under the
settlement.
"We believe we have a strong legal position," SDG&E spokesman Ed Van Herik
said. "We purchased those contracts with shareholder money with the clear
understanding that it was shareholder risk."

Davis totals up his efforts, notes price drop

By Ed Mendel
UNION-TRIBUNE STAFF WRITER and Toby Eckert
COPLEY NEWS SERVICE
July 7, 2001
Gov. Gray Davis, claiming progress in handling the electricity crisis, said
yesterday that the average cost of power purchased by the state last month
was half the average cost in January.
A consumer group and others had feared that this summer could be
"Armageddon," with soaring electricity costs draining the state treasury and
frequent blackouts crippling the economy and threatening public safety.
But there were no blackouts last month, even though it was the hottest June
on record in some areas, and electricity costs dropped below the levels of an
administration forecast that was widely derided when it was issued in April.
"Obviously, we have a long summer ahead of us," Davis said. "We need to be
vigilant. There will be challenges. I expect there will be some outages
before the summer is over. But I do believe we are making good progress."
Davis said the state spent $1 billion on power in June as the average price
dropped to $167 per megawatt-hour, down from an average of $332 in January
when the state began buying power for the customers of troubled utilities.
The governor attributed the drop in prices to more supply, through additional
power plants, and a "heroic" conservation effort by Californians, which cut
use by 11 percent in May and 12 percent in June.
In addition, he said, the state obtained long-term contracts that have helped
lower prices by reducing the amount of power that must be purchased on the
spot market where prices soared earlier this year.
"If you don't lock down a big chunk of the spot market, you are at the mercy
of forces who bragged that they charged you $3,800 a megawatt-hour in
January," said Davis, referring to Duke Energy.
The price information that the governor released reinforces criticism that
the long-term contracts, costing $43 billion over the next decade, are more
costly than current market rates. But he argued that the figures also show
how the long-term contracts pushed down spot-market prices.
Davis said the average cost of power under long-term contracts was $121 per
megawatt-hour in May and $118 in June, well below the administration forecast
of $130 for the period.
At the same time, he said, the average price paid by the state on the
day-ahead portion of the spot market was much lower, falling to $99 per
megawatt-hour in June, down from $243 in May.
Davis contended that the prices fell on the spot market because demand
dropped as the long-term contracts kicked in, allowing the state to purchase
50 percent less power on the spot market in June than in May.
"You can see the value of those long-term contracts dramatically shrinking
those spot prices," Davis said.
An internal e-mail mistakenly sent to reporters by the governor's press
office yesterday said the state paid an average of $132 per megawatt-hour for
power Thursday, costing a total of $37.4 million.
Davis has resisted releasing information about what the state pays on the
spot market, arguing that it would undermine the state's bargaining position.
His administration released edited long-term contracts last month, after
legislators and a coalition of newspapers filed suit.
San Diego County Superior Court Judge Linda Quinn is hearing the case, and if
she orders the release of spot market prices July 16, the Davis
administration will appeal.
The administration plans to release spot-market purchases for the first
quarter of the year Monday. But Ray Hart, head of the power-purchasing unit,
said a "full quarter lag" is needed to prevent the information from being
used to drive up prices.
Davis has been criticized by opponents who say he failed to secure long-term,
cost-saving contracts before wholesale prices soared. A group called the
American Taxpayers Alliance began an attack-ad campaign against Davis last
month. The ads were produced by GOP strategists and paid for by electricity
generators.
Davis responded yesterday. His chief campaign consultant, Garry South, said
the Davis re-election committee is launching a statewide radio advertising
campaign and setting up a campaign Web site.
Meanwhile, talks in Washington between California officials and power
providers appeared to show more promise yesterday, and the mediator backed
off his threat to outline a possible settlement of his own.
"We are making progress. We're swapping offers back and forth and, hopefully,
when the time is up, we'll have a settlement in the case," said Curtis L.
Wagner Jr., the chief administrative law judge for the Federal Energy
Regulatory Commission.
The negotiations over the size of possible refunds for high-priced
electricity and other issues arising from the state's power crisis have
entered a make-or-break phase, with a deadline looming Monday.
"We continue to be ready to discuss all offers with all comers," said Michael
Kahn, who is leading the California delegation.
But he stuck to the position the state took when the talks started June 25.
"We want $8.9 billion and we have justified the numbers," said Kahn, chairman
of the California Independent System Operator, which manages most of the
state's power grid.
On Thursday, Wagner warned the parties that he might issue a settlement
outline of his own unless they made more progress. But as the talks got under
way yesterday, he said he wanted to hear each side's "methodology" for
arriving at their competing proposals before acting.
"I will not make any preliminary assessment until Monday, at the earliest,
and I don't know what that will be," he told reporters during a break in the
closed-door discussions.
The negotiators are planning to meet today and possibly tomorrow. Wagner said
he would not seek an extension of the Monday deadline set by FERC.
If the parties can't reach an agreement, Wagner will have seven days to
recommend a settlement to the five-member FERC.
The Associated Press contributed to this report.

California ; Metro Desk
The State NEWS ANALYSIS Concern Over Price of Long-Term Power Pacts Grows
Embedded costs may yield more rate hikes, critics say, and the $43-billion
total could complicate plans to rescue Edison.
DAN MORAIN
?
07/09/2001
Los Angeles Times
Home Edition
Page B-7
Copyright 2001 / The Times Mirror Company
SACRAMENTO -- Even as the summer progresses without blackouts, and Gov. Gray
Davis prepares for yet another news conference today to symbolically switch
on a new power plant, the work in the Capitol has shifted to the seemingly
more daunting task of balancing the books.
It's a task with potentially far more long-lasting implications for state
coffers, for businesses' bottom lines and for consumers' wallets.
In particular, long-term power contracts trumpeted by the governor's office
as helping to bring stability to California 's out-of-control electricity
market are having the opposite effect politically.
A growing concern about the $43-billion price tag of the contracts is
complicating one of Davis' most ambitious energy initiatives: a proposed
financial rescue of Southern California Edison, which already faces an
uncertain fate in the Legislature. Questions about the contracts come as
California readies a complex $13.4-billion bond sale to reimburse the state's
general fund for other power purchases.
Critics worry that costs embedded in the contracts, on top of the billions
needed to pay for the Edison rescue, could lead to additional electricity
rate hikes for consumers. Key lawmakers, consumer advocates and business
lobbyists are urging that at least some of the pacts be renegotiated.
Citing a recent plunge in wholesale energy costs, these critics say the state
should work to shorten the duration of the contracts and lower some of the
prices. They argue that the state entered into the deals under duress after
California 's utilities neared insolvency and the state Department of Water
Resources took over the purchasing of electricity for more than 25 million
residents.
"They are vulnerable," Senate Energy Committee Chairwoman Debra Bowen
(D-Marina del Rey) said of deals the state struck with independent power
companies when prices were at record highs.
Bowen lauds Davis administration negotiators for signing "the best deals they
could." But she said that in the crisis atmosphere in which the negotiations
took place, "the state had two cards and the generators had 50."
Contracts Open to Challenges
The contracts could be challenged in court or, more immediately, before the
Federal Energy Regulatory Commission in Washington. There, an administrative
law judge could direct that the pacts be reworked as part of a settlement of
allegations by Davis that generators overcharged the state for electricity by
$8.9 billion.
"We ought not to say, 'Fine, the contracts were the best we could do,' "
Bowen said.
For his part, Davis says he is willing to accept partial payment of the $8.9
billion in the form of contracts with terms more favorable to the state. He
attributes the recent sharp drop in wholesale electricity prices to
conservation, the administration's effort to increase power supply and--a
major factor--the long-term contracts, which slashed the state's reliance on
the volatile daily, or spot, market.
"You can see the value of these long-term contracts . . . dramatically
shrinking our overall price, which is what matters to Californians," Davis
said, pointing out that the average cost of power plunged 30% from May to
June.
Davis energy advisor S. David Freeman, who helped negotiate the contracts,
said they may end up costing less than $43 billion, given the recent decline
in prices for natural gas, the main fuel for California 's electricity
-generating plants.
Freeman also compared critics to someone who calls the fire department to
douse a blaze. "After the fire is out," he said, "you complain about the
water damage."
The contracts have other defenders, among them UC Berkeley economics
professor Severin Borenstein, who says the deals helped to tame the volatile
spot market by reducing generators' incentive to drive up prices, while
reducing the state's exposure to wild swings in price.
"The point of signing long-term contracts is not to get a great price; it's
to reduce risk," Borenstein said.
Still, experts have been picking through the pacts ever since a Superior
Court judge in San Diego, ruling in a California Public Records Act lawsuit
by news organizations and Republican lawmakers, ordered last month that Davis
unseal the contracts.
An analysis done for the Assembly by three experts--one each representing
Southern California Edison; the Utility Reform Network, a consumer group; and
large electricity consumers--concluded that the about $43-billion price tag
announced by the administration may not account for all the costs. When other
expenses are factored in--ranging from environmental equipment upgrades to
any new energy-related taxes--the contracts could cost an additional 10% to
20%.
"Once the contracts were made public," Senate Republican leader Jim Brulte of
Rancho Cucamonga said, "just about anyone who can read began calling for
those contracts to be renegotiated."
As buyers' remorse spreads through the Capitol, the contracts increasingly
are seen as a hurdle--or a bargaining chip--as Davis and lawmakers confront
fast-approaching deadlines in their effort to prevent the energy crisis from
morphing into a broader financial crisis.
A bill pushed by Davis to avert bankruptcy for the financially hobbled
Southern California Edison must be approved by Aug. 15. The deadline could be
tighter, because the Legislature is scheduled to adjourn for a monthlong
break July 20.
Davis' rescue plan, along with legislative alternatives, languishes in the
Legislature. The plan, which has little apparent support, would require the
state to buy Edison's system of transmission lines for $2.76 billion and
permit the utility to charge ratepayers for the rest of its back debt of $3.5
billion.
Some lobbyists and lawmakers believe that the electricity rate hike approved
in March by the California Public Utilities Commission--at 3 cents a
kilowatt-hour the largest in state history--may not be enough. The revenue
generated under the new rate structure must cover the costs of the long-term
power contracts and repay the planned $13.4 billion in bonds, which would be
the largest municipal deal ever.
Whether there would be sufficient money left to pay for the Edison rescue
remains to be seen. But some experts say the utility may need to seek a
separate rate hike to cover its costs.
As written, the contracts have few escape clauses; Davis cannot simply walk
away from them if he concludes that prices are too high. Still, criticism
persists and crosses political lines.
Harry Snyder, longtime Sacramento lobbyist for Consumers Union, and Jack
Stewart, president of the California Manufacturers and Technology Assn.,
rarely find themselves on the same side of a debate. But in separate
interviews, they sounded similar themes.
"If there is a way to buy our way out of these contracts, even if we have to
pay damages, we'd be better off in the long run," Snyder said.
Stewart, like other business leaders, does not advocate abrogating the
contracts. But like many familiar with the terms, he hopes that some deals
can be renegotiated.
"They are problematic," he said.
In a move that critics fear could lock in high electricity prices for the
next decade, the Davis administration is pushing the PUC to agree within a
month to limit its authority to question costs incurred by the Department of
Water Resources as it goes about procuring power.
State Treasurer Phil Angelides said the PUC must act so he can complete the
$13.4-billion bond sale. A binding agreement is necessary so that Wall Street
investors can be assured that they will be repaid.
"The state will be out of cash by the end of the year without the bond sale,"
he said. "We will move toward fiscal insolvency."
The so-called rate agreement, a draft of which was obtained by The Times,
would bind customers of the three big regulated utilities to pay more than
just the principal and interest on the $13.4 billion in bonds. Consumers
would have to pay for consultants, lawyers, to pay taxes, fees and other
as-yet-undefined charges that may be incurred by the Department of Water
Resources.
Additionally, the PUC would be obligated to approve payments for programs by
which the state would pay large and small customers to cut electricity use,
although the Legislature has not approved the programs and their details
remain to be worked out. The Department of Water Resources estimates the cost
to be $800 million, spread over this year and next.
"It is loaded up," Senate President Pro Tem John Burton (D-San Francisco)
said of the proposed rate deal, adding that it would require the commission
to "raise rates to cover whatever the Department of Water Resources decides
to do."
"That is giving a blank check to some bureaucratic office," he said.
'Dictatorial Power' Warning
Stewart of the manufacturers group also is alarmed by the plan, saying it
would provide the water agency with "dictatorial power."
"As skeptical as we are of the PUC process, at least there is a process,"
Stewart said, referring to the commission's procedures to set electricity
rates. "There is no process for DWR. DWR just tells the PUC, 'This is what we
need,' and the PUC must approve it."
Others say the rate agreement is a standard piece of work, given the
extraordinary step the Legislature took in January when it authorized the
Department of Water Resources to buy power for utilities that had fallen so
deeply into debt that they could no longer carry out their obligation to
consumers.
In essence, Davis energy advisor Freeman said, lawmakers in January created
"the equivalent of a public power purchasing agency" beyond the jurisdiction
of the PUC.
"There is no public power agency in California that is reviewed by the PUC,"
said Freeman, former head of the Los Angeles Department of Water and Power.
*
Times staff writer Nancy Rivera Brooks in Los Angeles contributed to this
story.

National Desk
THE NATION Deal With Suppliers Not Likely
?
07/09/2001
Los Angeles Times
Home Edition
Page A-9
Copyright 2001 / The Times Mirror Company
WASHINGTON -- Prospects for a deal on the almost $9 billion that California
contends it was overcharged by power suppliers appeared dim Sunday as
settlement talks neared the end with no compromise in sight.
Curtis L. Wagner Jr., the federal mediator in the closed-door negotiations,
told reporters he had begun to write a final report to the Federal Energy
Regulatory Commission, which has said it will impose a settlement if the
parties fail to reach agreement.
However, Wagner, who is also FERC's chief judge, said he would continue to
seek a deal through today, the deadline he had set two weeks ago. Wagner said
he expected the talks, which began two weeks ago, to end by about 1:30 p.m.
PDT today.
"I'm still hoping for a big settlement, but we may just have partial
settlements," Wagner said. "It's still hard to tell."
The participants spent Sunday afternoon listening to technical presentations
on how California calculated its refund estimate.
Wagner said he would release a transcript of the session so that FERC's
governing board could refer to it in its deliberations. "If you need
something to cure insomnia, get the record and read it," he said.
While California has stood firm on its demand for $8.9 billion, a source
familiar with the talks said generators had offered no more than $500
million.

Metro Desk
PAYING THE ENERGY BILL Crying Foul Over Energy Baselines
NANCY RIVERA BROOKS
?
07/08/2001
Los Angeles Times
Home Edition
Page A-1
Copyright 2001 / The Times Mirror Company
Down by the sea in Santa Monica, a month of electricity can cost a mere $2.32
with a bit of determination, a tiny home and energy-efficient appliances.
In landlocked Compton, a somewhat bigger house with a pool also generates an
electricity bill with triple digits--but without the decimal point.
The two homes could not be more different, except in the eyes of state
utility regulators, who are applying the same power-use yardstick to
determine how much their electricity bills will rise this summer because of
the largest rate hike in state history.
Despite their different climates, housing quality and income levels, Santa
Monica and Compton share the same "baseline" allotment, the amount of
electricity that supposedly meets the minimum needs of an average household
in a particular region.
Before California 's energy crisis, consumers had little reason to care about
their baseline allowance. But now, under terms of the rate hike, the further
above baseline a customer gets, the more that customer will pay.
Although residential customers of Southern California Edison and Pacific Gas
& Electric Co. won't get a full taste of the new rates until this month's
bills, which will reflect an entire month of the increase, some are already
complaining that the conservation-inducing setup of the new rate structure is
unfair.
The critics say the baseline regions are too large, creating such improbable
electricity twins as Santa Monica and Compton, and Newport Beach and Orange.
And because baselines are based on simple averages of consumption within a
region, the system takes no account of a home's size or number of occupants.
The baseline allowance "does not address the real needs of consumers," said
Douglas Heller, consumer advocate with the Foundation for Taxpayer and
Consumer Rights, a Santa Monica-based activist group. "We've said, somewhat
tongue in cheek, that this baseline plan is a subsidy of single guys by
families."
State regulators and legislators are considering overhauling the baseline
allowances, but the changes wouldn't come in time for this summer.
When they rip open their latest power bills, nearly 8 million California
customers will find themselves sorted into a new caste system of consumption
tied to their baseline, set by the state Public Utilities Commission, that is
meant to represent 50% to 60% of an average household's electricity use in a
region.
The PUC boosted electricity rates by a record 3 cents a kilowatt-hour on
March 27, and decreed that residential customers will absorb their share of
rate shock according to how much electricity they use. The aim is to raise
more cash to cover stubbornly high wholesale electricity prices while
encouraging customers to use less power.
Residents of Los Angeles and other cities served by municipal utilities are
not affected by the rate increase.
Half of Customers Deemed 'Higher Use'
Under the previous, two-tier system of figuring bills, customers paid less
for electricity used up to baseline levels and more for electricity use above
baseline. That was replaced by a five-step system in which residential
customers pay the old rates in two tiers up to 130% of baseline but fork over
progressively more across three tiers of usage above 130% of baseline.
Those higher-use customers, pegged at 50% of households by the PUC, will see
their monthly bills jump depending on how much electricity they consume over
their baseline allowance.
Average residential bills will go up between $4 and $85 a month. Low-income
customers and those with special medical equipment will see no rate increase.
Business customers, whose rates also are rising, are not billed by baseline
use.
The PUC established the baseline allotments in 1982, using average
residential consumption as a way to encompass differences in home size and
numbers of residents per household.
Critics of the baseline system say the allotments are determined across
regions that are too large and don't accurately account for differences in
climate, household size and income. The baselines were last adjusted in the
early 1990s and have not kept pace with the electricity use of modern homes,
they say.
Edison's 50,000-square-mile territory is divided into six baseline zones.
PG&E has 10 for its 70,000 square miles. San Diego Gas & Electric, which has
not increased rates, has three zones.
Santa Monica and Compton share a baseline zone that skims across such coastal
communities as Malibu, Long Beach and Newport Beach but also stretches inland
to Norwalk, Cerritos, Santa Ana and Orange. For them, known at Edison as
Baseline Zone 10, the cheapest power is meted out at a pace of 9.1
kilowatt-hours a day in summer or 276 kilowatt-hours over 30 days.
Although staying close to baseline is somewhat easier near the coast, Miamon
Miller and Martha Adams are an extreme example of power parsimony. The Santa
Monica couple needs only a little pocket change to pay their latest monthly
Edison bill of $2.32.
"It sounds strange to complain that your bill is too low," Miller said,
noting that the couple usually pays less than $10 a month and their
electricity use is often one-third or less of their baseline allowance.
Miller and Adams manage this feat seemingly without breaking a
sweat--although they do have a lighthearted running dispute over whether the
front porch lamp needs to be on. Their secret weapons are size and location.
Miller and Adams live in a tiny home--about 800 square feet--only half a mile
from the ocean, without an air conditioner, Miller said. "We live in Santa
Monica; we open the doors when we want air-conditioning."
The couple owns the usual assortment of appliances, but they are small and
relatively energy efficient. Their water heater and dryer use gas, and their
lighting is low-wattage.
"A lot of it is the climate," Adams said. "It doesn't get too hot or too cold
here."
Over in Compton, where summer days average 10 to 15 degrees hotter than in
Santa Monica, Marjorie Shipp has expended considerable energy trying to use
less electricity in her 1,800-square-foot home.
Lights Out, Cold Pool, and Bill Still Doubles
The retired teacher has extinguished her driveway lights ("They're pretty and
I miss them."), sharply reduced the number of hours the pool pump runs ("Now
I'm getting algae.") and has unplugged appliances when not in use to minimize
the toll from so-called standby electricity consumption. Most lights in the
home are energy-sipping fluorescents.
Still, electricity usage in her two-adult household was nearly double the
baseline last month, although down more than 40% from recent bills. The tab
was nearly $180.
"I guess I'm going to have to start paying even more attention to it," Shipp
said with a sigh. "I don't know what else I can do."
The five members of the PUC acknowledged that inequities may exist when they
agreed in late May to begin a review of the baseline system that probably
will last until the fall. In fact, PG&E says only 35% of its customers have
been able to keep their electricity consumption at 130% or less of baseline
in the last year. At Edison, about half of customers have done it.
"There are real questions over whether these baselines are fair,"
Commissioner Carl Wood said. "This is not going to be without controversy.
This is not a giveaway program. It's not a matter of jacking up everyone's
baselines to reduce rates."
Chana Perelmuter, a Long Beach mother of six, said baselines are unfair to
families.
"I have never been close to baseline in all my years of having children,"
said Perelmuter, whose offspring range in age from 10 to 20.
"I only run the dishwasher when it is full, but I have six children so it's
full every night," she said. "I do laundry only when I have a full load, but
I have six children so that's at least one load a night."
Bills have been proposed in the Legislature to require adding household size
to the formula that determines baselines and to increase the allowance in the
steamy Coachella Valley.
But fiddling with baselines is sure to make someone unhappy. That's because
the utilities must collect a certain amount of revenue through rates. If one
person's rate goes down, someone else's must go up.
At the Utility Reform Network, a San Francisco consumer activist group that
bitterly fought the rate increase, staffers have mixed feelings about
adjusting baselines.
"We have been hearing a lot from consumers who are concerned about the way
baseline affects them," spokeswoman Mindy Spatt said.
"We are very sympathetic to people who think it isn't a fair system," she
said. "On the other hand, they've raised the rates by X dollars, and someone
is going to have to pay that."
The whole system makes no sense to Dorothy and Walter Harris, retirees who
live in a sliver of the West Los Angeles-area community of Ladera Heights
that is not served by the Los Angeles Department of Water and Power.
For the entire month of March, the couple unplugged nearly every appliance,
put their refrigerator's thermostat on the vacation setting and headed out on
a trip in their recreational vehicle. When they returned, the Harrises found
their electricity use had indeed dropped below baseline, but just barely.
"I've been ranting for months to family and friends about the baselessness of
the baseline," Dorothy Harris said.
Valerie Rodriguez and family have gained entry to the 130% club in recent
weeks through dogged conservation that has cut their electricity use in half.
The Westlake Village family of four has been taking the usual steps around
their 2,000-square-foot home as well as idling a hot tub.
"I'm here to say that conservation works," Rodriguez said.
But with the start of air-conditioner-hugging season, Rodriguez frets that
her rates inevitably will rise with the temperature.
"We're doomed," she said. "Nobody at my house is going to suffer through
those intense heat days."
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Getting to Baseline
Knowing how much electricity appliances use can help you budget your way
closer to baseline levels. Here is the average monthly use of various
appliances, measured in kilowatt-hours.
*
Air conditioner
3.5-ton central forced air, operating 77 to 340 hours a month: 378 to 1,670
*
Air conditioner
one 1,100-watt room model, operating 8 hours a day: 264
*
Pool pump
2-horsepower, operating 5 hours a day: 300
*
Refrigerator
20-cubic-foot 1987 model: 112
*
Computer and color monitor left on around the clock: 115
*
Computer and color monitor left on 10 hours a day: 48
*
Television
27-inch color, 265-watt model operating 4 hours a day: 32
*
Lights
Five 100-watt incandescent bulbs burning 90 hours a month: 48
100-watt incandescent lightbulb burning 10 hours a day (e.g., nighttime porch
light): 30
*
Clothes washer
1/2-horsepower motor, operating 12 hours a month or about 24 loads: 6
*
Electric clothes dryer
3,000 watts, operating 20 hours a month or about 24 loads: 66
*
Standby power loss from an average home's appliances that appear to be off
but actually are consuming energy: 35 to 50
*
Powering Down
Here are some tips on saving energy and the percentage each measure would
save in a 2,000-square-foot home, with air conditioning, in Southern
California . They, and other ideas, are presented on a new Web site,
http://savepower.lbl.gov, by Lawrence Berkeley National Laboratory.
*
No-Cost Measure: Open windows and use fans instead of air conditioner
Savings off Summer Bill: 15%
*
No-Cost Measure: Raise thermostat on air conditioner by 4 degrees
Savings off Summer Bill: 10%
*
No-Cost Measure: Use air conditioner only when house is occupied
Savings off Summer Bill: 8%
*
No-Cost Measure: Close window blinds and drapes to block direct sunlight
Savings off Summer Bill: 6%
*
No-Cost Measure: Dry clothes on line instead of using electric dryer
Savings off Summer Bill: 3%
*
*
Low-Cost Measures: Replace most-used incandescent bulbs with compact
fluorescent bulbs
Savings off Summer Bill: 4%
*
Low-Cost Measures: Fill gaps in attic insulation
Savings off Summer Bill: 3%
*
More Expensive Measures: Buy a new, energy-efficient air conditioner
Savings off Summer Bill: 11%
*
More Expensive Measures: Have air-conditioner ducts professionally sealed to
reduce air leakage
Savings off Summer Bill: 7%
*
More Expensive Measures: Install argon-filled double-pane windows
Savings off Summer Bill: 6%
*
More Expensive Measures: Increase ceiling insulation
Savings off Summer Bill: 5%
*
More Expensive Measures: Add wall insulation
Savings off Summer Bill: 5%
*
More Expensive Measures: Install a programmable thermostat
More Expensive Measures: 4%
*
Sources: Southern California Edison, San Diego Gas & Electric, Utility
Consumers Action Network, Lawrence Berkeley National Laboratory
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Basis of Baseline
The California Public Utilities Commission has established a baseline
allocation of electricity deemed necessary to meet the minimum needs of a
household at affordable rates. The PUC divides the service area of each
utility into broad climate-based regions. Baseline represents 50% to 60% of
the average electricity consumption in each region. Baseline allotment varies
by season, with the summer season in Edison territory running from the first
Sunday in June to the first Sunday in October. Southern California Edison's
service territory is divided into six baseline regions. Below are baseline
allocations for Edison, in kilowatt-hours.
*
Summer Season
Baseline Daily Baseline 130% region baseline for 30 days of baseline 10 9.1
276 359 13* 15.8 474 617 14 14.2 426 554 15** 42.7 1,281 1,665 16 9.2 276 359
17 13.1 393 511 *
Winter Season
Baseline Daily Baseline 130% region baseline for 30 days of baseline 10 9.2
276 359 13* 11.0 330 429 14 10.6 318 414 15** 8.8 264 343 16 10.1 303 394 17
10.5 315 410 *
* Area includes Visalia and Delano, not shown on map
** Area includes Palm Springs and Coachella Valley, not shown on map
Note: Customers with all-electric homes and those who depend on life-support
equipment get additional baseline allowances and low-income customers receive
a discounted rate.
Sources: California Public Utilities Commission and Southern California
Edison

Metro Desk
PAYING THE ENERGY BILL Power Firms Have Motive to Deal With Davis Energy:
Neither side has blinked as negotiation deadline nears. But momentum seems to
be with the governor.
RICARDO ALONSO-ZALDIVAR; DAN MORAIN
?
07/08/2001
Los Angeles Times
Home Edition
Page A-23
Copyright 2001 / The Times Mirror Company
WASHINGTON -- For a year now, Gov. Gray Davis and large power generators have
pounded one another, lobbing accusations of greed and incompetence over the
causes and handling of California 's energy crisis.
Now the governor's representatives and officials of the industry are eye to
eye in a federal office building next to the railroad tracks here, trying to
see if they can settle the most contentious issues between them. They have
been talking for two weeks. The clock will run out at midnight Monday.
At stake are billions of dollars in potential electricity refunds to
California ; lawsuits and investigations over alleged price gouging that
could drag on for years; political and corporate reputations; even the course
of power deregulation, on which a whole industry has bet its future.
So far, nobody has blinked.
But with time running out, observers say it appears that the power companies
have more to gain than Davis does by seeking a peace treaty. The governor
appears to be more dug in. The motivation for the companies to seek a deal
comes down to the long-term health of their businesses.
"Frankly, the continuance of a viable competitive business model is at risk,"
said Jim Hoecker, immediate past chairman of the Federal Energy Regulatory
Commission, which ordered the closed-door settlement talks. "This is
something the companies have a tremendous stake in. I imagine they would not
only want a fair settlement, but some assurance about what the future is
going to look like."
FERC's board set three issues for discussion in the talks: refunds of
overcharges, long-term power contracts, and debts owed to generators. The
companies also want to head off lawsuits and investigations by the state, and
the governor wants to renegotiate pricey long-term power contracts that have
opened him to political criticism.
On Saturday, the talks were "moving very slowly," said FERC Chief Judge
Curtis L. Wagner Jr., who is acting as mediator. An afternoon session was
scheduled for today to once again go over how California has calculated its
refund demand.
"I'm trying to break them loose," Wagner said. "I'm trying to wheel and deal
and see if I can't broker something out of this."
Davis, whose hand has been strengthened in Washington even as his standing in
California public opinion polls has languished, is emerging as the player to
be wooed, even though he is not physically present at the talks.
"If he gets a $5-billion rebate, he looks like King Kong," said a top
Democratic official in California , speaking on condition that he not be
identified.
Others are urging the Democratic governor to stand fast for the $8.9 billion
the state has claimed it is owed.
"The advice is, 'Don't settle,' " said state Sen. Steve Peace (D-El Cajon).
"They broke the law. We'll win the lawsuits. . . . I wouldn't settle for a
penny less than $9 billion."
Davis' only concession so far has been to say he is willing to take some of
the $8.9 billion in other "currencies," such as discounts on long-term power
contracts the state has already negotiated, future power deliveries at
below-market rates or forgiveness of debts that the generators say are owed
by California utilities.
"If we can settle this matter to the satisfaction of all parties . . .
terrific," the governor said at a news conference Friday. "If we can't, FERC
still has the full burden to enforce the law and to ensure that we get the
rebates we're entitled to."
Yet people within the industry and in the federal government have questioned
the accuracy of the $8.9-billion figure, saying it represents an inflated
estimate of what FERC could legally order refunded. California
representatives are just as adamant that the number is valid.
Industry representatives have avoided public comment on the negotiations,
citing a gag order imposed by Judge Wagner.
Privately, however, they have complained bitterly about Davis and questioned
whether he is bargaining in good faith.
"There is no downside at this point to his hanging tough," said one industry
official, who asked not to be identified.
The official said politics appear to be the governor's main motivation at
this point. "He has nothing to lose by continuing to do battle with the
enemy," the official said. "The public perception is that he is leading the
fight, and whether he gets the full amount or not won't change that."
For the industry, a settlement involves balancing short-term pain with the
potential for long-term relief.
"My sense is that FERC intends there to be some major-league refunds if there
is not a settlement," said Kit Konolige, an industry analyst at Morgan
Stanley in New York.
"The smaller the refund, the happier the markets will be, and the bigger, the
more unhappy," added Konolige. "But it's not just the amount of money. What
people like even less is the sense that the rules can change and nobody knows
how they will come out. The uncertainty has been killing people."
If the parties cannot come to an agreement voluntarily, the FERC board will
impose its own settlement. That mandate could be challenged in court, and
agency officials say they would not be surprised if the litigation dragged on
for a decade. Also hanging over the industry are the investigations that
California 's attorney general is pursuing.
"They are looking at endless litigation," said Ed Kahn, a San Francisco
economist who studied California 's power markets and concluded that abusive
prices were charged. "At a certain point, there is a political element for
them to consider. Reputation is also a business asset."
Kahn added: "If the generators really would like it to end, it all comes down
to price. How much do they want it to end?"
Sources close to the California delegation at the talks say the figures
proffered by generators last week come nowhere close to what the state wants.
In Sacramento, Republicans share the industry's skepticism about Davis'
motives.
As they see it, he is winning political points by pursuing the $8.9-billion
refund and continuing to berate generators, the Bush administration and FERC
regulators.
"He needs to divert attention from himself," said state Sen. Bill Morrow
(R-Oceanside). "He needs a punching bag."
Although a Times poll last month found that nearly half of Californians
disapproved of Davis' handling of the energy crisis, the governor's stock has
risen in Washington. The Democratic takeover of the U.S. Senate, a turn
toward more activist regulation at FERC and Bush's low marks for his handling
of energy issues have all helped Davis.
Davis spokesman Steve Maviglio dismissed the notion that the governor wants
to continue the fight simply for political advantage.
"He is fighting for the 34 million Californians who are owed $8.9 billion,"
the aide said, "and it's FERC's job to refund that money. The governor is
open to ways to get to that figure. It's the generators who have come to the
table kicking and screaming, not the California delegation."
$8.9 Billion Called 'a Low Number'
Michael Kahn, the San Francisco lawyer representing Davis in the talks,
defended the $8.9-billion number.
"We have run the numbers. We ran them two different ways. We did not feel
that we could accept less than $8.9 billion," Kahn said.
That figure represents a fraction of the $44 billion in electricity sales in
California between May 2000 and May 2001. It is not, said Kahn, the full
amount the state has been overcharged.
"The $8.9 billion is not the number . . . at the end of a lawsuit," Kahn
said. "It's a low number."
In a lawsuit, the state would gain access to data on the companies' actual
cost of producing power, which so far has been denied. Kahn hypothesized that
with such information a refund on the order of $20 billion might be awarded.
This isn't the first time that the federal government has tried to broker a
deal between Davis and the power companies. In the closing days of the
Clinton administration, the secretaries of treasury and energy and the
president's economic advisor tried to find a compromise between rate
increases and long-term contracts for power.
But Davis refused to deal. "The governor didn't budge once during the whole
process," said a former Clinton administration official who was involved.
"The whole process was very frustrating. We were really trying to make a
good-faith effort, but at the time the governor was not prepared to raise
rates." He has since had to accept rate increases.
Another ex-Clinton administration official, former Energy Secretary Bill
Richardson, declined to comment on the previous talks but said he hopes the
current negotiations succeed.
"I would disagree that a do-nothing strategy is best politically for the
governor," he said. "A one-two punch of getting the [FERC] price caps [last
month] and now concluding a deal with all interested parties serves him best
politically, because it defuses the issue and allows the governor to get back
to developing supply and increasing conservation. I think stability is best
for California ."
*
Alonso-Zaldivar reported from Washington and Morain from Sacramento.

Airplane leftovers converted into electricity

Sunday, July 8, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/08/state0
935EDT0119.DTL
(07-08) 06:35 PDT LOS ANGELES (AP) --
Leftover airline food is now part of a pilot project that turns food waste
into electricity and compost.
The idea was cooked up by Louise Riggen, recycling coordinator at Los Angeles
International Airport, and Gerald Hernandez, a sanitary engineer at the
nearby Hyperion Treatment Plant.
The six-month program processes about 225 pounds of raw fruit and vegetable
leftovers a week from airline caterer Gate Gourmet, which volunteered for the
project.
Riggen hopes eventually to recycle at least 8,000 tons of the airport's food
waste at Hyperion each year.
She has been trying for nearly a decade to find an efficient and inexpensive
way to reuse the tons of food waste generated by a dozen airline catering
kitchens. Trucking the waste to an animal feed processing plant about 50
miles away was too costly and nearby vendors couldn't be found for worm
farming and composting.
The pilot project at the sewage treatment plant across the street from the
airport could eventually handle more than 40 percent of the more than 19,000
tons of food waste collected annually from airport food concessions.
"This is where we want to go with recycling -- toward sustainable systems for
the economy and the environment," Riggen said. "This way we're not ripping
off Mother Nature and throwing it in the dump."
The pilot program, if successful, will cut the amount of waste sent to
landfills, generate needed electricity and help reduce disposal costs for the
airport's catering services.
An enormous garbage disposer nestled among holding tanks at the treatment
plant gobbles up raw fruit and vegetables and turns it into a greenish paste.
The material is then mixed with water in an open vat and then heated in a
holding tank to 130 degrees to help bacteria consume the bits of leftovers.
The process eventually produces methane gas, which is sent to a nearby
generating station where it is burned to generate electricity.
The 30 percent of the food waste that doesn't decompose is hauled away by
truck to be turned into a compost, Hernandez said.
The alternative energy technique, which is known as biomass, accounts for
only 2 percent of the state's electricity. Most of the biomass energy
produced in the state comes from Northern California where sawmill waste is
burned to create electricity.
"This is a new and emerging market as more companies look at various options
to generate electricity from products that formerly would have gone to the
landfill," said Claudia Chandler, assistant executive director of the
California Energy Commission.
,2001 Associated Press ?

FERC judge readying his resolution
Posted at 10:51 p.m. PDT Sunday, July 8, 2001
BY HEATHER PHILLIPS AND BRANDON BAILEY

Mercury News

WASHINGTON -- A federal judge said he may outline his proposal today for
resolving a dispute between the state of California and power suppliers
accused of overcharging billions of dollars for electricity sold during the
last year.
Facing a deadline imposed by the Federal Energy Regulatory Commission,
officials also raised the possibility of an agreement between the state and
some smaller electricity sellers, even if a settlement with the biggest
commercial generators seems unlikely.
But after four hours of testimony by the state's financial experts Sunday,
Administrative Law Judge Curtis Wagner said he is preparing for the
likelihood that none of the parties will reach an agreement before the
commission's deadline of midnight today.
In that case, Wagner has seven more days to make his own recommendation to
the federal commission, which can decide whether to order any refunds.
Wagner said he may present tentative recommendations to the negotiators when
they reconvene for one final round of talks today.
``It's not over until it's over,'' the judge told reporters Sunday evening.
California is seeking refunds for $8.9 billion in alleged overcharges by
wholesale electricity suppliers for power sold to the state's utilities and
other agencies during the past 13 months. Sky-high energy costs have left the
utilities broke and devoured what was once a fat state budget surplus.
But the energy companies say their prices were fair and justified because of
short supplies, high fuel costs and the risks they took in selling to
utilities that haven't paid their bills. Suppliers say they haven't been paid
for more than $3 billion worth of power sold to California utilities last
year.
Attorneys for the state and for dozens of utilities, commercial generators,
public power agencies and energy traders have been meeting in closed-door
sessions with Wagner since June 25, when the federal energy commission asked
the judge to try mediating the dispute.
Wagner said Sunday he would like to see whether the state can at least reach
an agreement with some of the smaller suppliers.
State negotiator Michael Kahn said: ``We've always held out the possibility
of settlements with smaller groups or individuals. If we can come to a
conclusion with them, we'd be delighted to do that. If we can't, it won't be
for want of trying.''

Contact Brandon Bailey at bbailey@sjmercury.com or (408) 920-5022.

Energy crisis begets brainstorms
People with ideas once easily dismissed are getting some attention now.
July 9, 2001
By HANH KIM QUACH
The Orange County Register

Your home is bursting with potential energy. The spoiled carrots. The
carbon-flecked grease. What you flush down the toilet. As California's energy
crisis drags on, some Orange County inventors are hoping to tap that hidden
gold mine. The state has also revived its interest in less-polluting "green"
energy. Gov. Gray Davis this year signed into law a conservation package that
included $15 million to develop alternative energy sources. Inventors hope
the money will help them get their ideas off the ground. Among the inventors
is Jack Cover, above, of San Clemente, developer of the Taser stun gun. Water
is the medium of his invention, called Thermecon, which he says uses
warm-to-hot water swirling in elliptical pipe loops to generate energy.
Photo: Leonard Ortiz / The Register
?

The answer to California's energy shortage could be slopping through the
sewage pipes, frying in the local fast-food grease pit, or rolling in the
waves.
Their ideas may seem zany, but with the state spending billions of dollars to
buy electricity this year, long-ignored inventors are finding some willing
ears.
Consider:
Eighty-one-year-old Jack Cover of San Clemente has an idea in which warm
water would chase itself around a pipe loop, spinning a turbine and producing
energy.
Joe Chavez of Laguna Niguel wants to make energy out of what most people
flush down the toilet.
John Trepl of Dana Point, once pounded by the waves as a surfer, wants to
convert some of that natural power into electrical power.
These inventors are part of a loose-knit group meeting with Assemblywoman Pat
Bates, R-Laguna Niguel, to brainstorm ways to give alternative ideas a boost.
"These are the types of alternatives that can come in and fill the gap," she
said.
Some industry watchers think the current energy crisis, more than the oil
crisis in the 1970s, has the power to spur alternative development.
"There is a sea change happening. There's more pragmatism among the
developers, and the public is more willing to reconsider technology that they
may have overlooked before," said Paul Wuebben, clean-fuels officer at the
South Coast Air Quality Management District, which enforces state air-quality
laws.
Wuebben answers about 20 to 50 calls a week from companies interested in
using alternative fuels or new technologies for energy or other purposes.
Before the crisis hit, he received two to three calls a week.
But Jeremy Bloom, a principal at Primen, a Palo Alto-based company that
analyzes energy markets, says many of the new ideas will fail - and
deservedly so.
"I sympathize with small inventors who have a good idea. There's a lot of
hard work, but you have to prove the technology before you can get capital,"
Bloom said.
Of the big energy companies with their myriad experts, he said, "It's
unlikely they've overlooked something that's a breakthrough in the near
term."
Money, not lack of ideas, is big hurdle
While the California Energy Commission provides $62 million a year for
research and development, inventors can find it hard to move from prototype
to production.
Often, their cost to produce energy is too high to compete with traditional
energy sources, such as natural gas-fired nuclear and hydroelectric power
plants.
Take Arnold Klann, president of Mission Viejo-based Arkenergy.
The company's subsidiary, Arkenol, spent $4 million of its own money to
develop a process for turning rice hulls from Sacramento County fields into
ethanol - a form of alcohol that is added to diesel to reduce emissions.
This would allow small, jet-engine-like "peaking" electricity generators -
the most polluting type - to run longer and pollute less.
Arkenergy also wants to divert organic materials - such as kitchen waste -
before they get to landfills and convert the materials into fuels that can be
used in automobiles or electric generators.
But Arkenol needs financial backing -- up to $100 million -- to build
commercial-scale plants.
"It's going to have to be the (U.S.) Department of Energy or the state,
someone to ante up the cash so we can build something to prove the technology
works," Klann said. "Someone has to take the risk."
In the past couple of decades, solar and wind energy, geothermal energy and
biomass - organic materials such as wood and manure burned to generate energy
- have all flourished to some degree in California because of state laws and
subsidies that encourage their development.
Still, only about 8 percent of the state's electricity-generating capacity
comes from such renewable resources.
Chavez, of Asian Energy Ltd., a Laguna Niguel-based power-plant builder and
manager, says renewables - particularly biomass - are the answer to the
state's crisis.
He wants to take some of the sludge - treated human waste - the Orange County
Sanitation District must schlep to Kern and King counties each day and build
a plant to convert the waste into electricity.
It's an expensive task, about $250 million to build a 100-megawatt plant that
can power 75,000 homes.
But Chavez says it can work if Orange County cities pick up part of the cost
in exchange for a reliable source of power.
DIFFERENT TECHNOLOGY, DIFFERENT HURDLE
Other emerging, so-called "green" technologies face different challenges.
Cover has been pitching his idea for 20 years. The San Clemente man, who is
known for developing the Taser stun gun, says his electricity generator,
called a Thermecon, uses warm-to-hot water swirling in elliptical pipe loops
to generate energy.
Cover sold a variation of his idea to Newport Beach-based U.S. Power, which
has a patent application pending with the U.S. Patent office.
U.S. Power Manager Steven Grecco declined to talk in detail.
Cover's original idea used excess heat from industrial operations to warm the
water in the pipe loop, causing it to swirl around in the pipe, churning a
turbine and generating electricity.
"We've shown it to a bunch of people, and everyone said it's the answer to
energy problems, but we do have political problems," said Cover, a retired
aerospace engineer and nuclear physicist. Energy giants, he said, have
thwarted the development of alternative contraptions to avoid competition.
U.S. Power, however, said it's unclear how much cheaper this device will be
than traditional power plants because there is no prototype yet. But Grecco
says he suspects it can be produced more cheaply because materials, such as
piping, are "simple and straightforward."
Another "clean-burning" idea would be to mix recycled cooking oil with diesel
to make diesel burn cleaner. Many "peaker" generators now use diesel. A
cleaner mix would allow those generators to run longer without producing more
pollution.
But there isn't enough refined cooking oil to fill current demand from other
users, such as trucks. And before it can be used for fuel, burned french
fries, doughnut particles and other debris must be removed.
Former surfer Trepl believes his wave-energy generator, which harnesses the
power of ocean waves, can contribute to a solution. He has patented his idea
in nine countries, including the United States. A prototype built off the
coast of Santa Barbara in 1985 proves it can work, he said. But funding and
permission remain a problem.
Anything contemplated on the California coastline must pass several
environmental challenges.
Trepl, who designed the contraption, says the systems don't need to be
terribly obtrusive.
The actual generator is submerged, and the platform above it can be made to
look like a rock, said Trepl's father, Alan Trepl.
Sara Wan, chairwoman of the California Coastal Commission, said she would
have to learn more about the project before making a decision.
She'd have to examine whether the system would damage the shoreline,
interfere with sand replenishment or disturb sea life, she said.
"I wouldn't say no automatically, but you have to weigh the value of what you
get against the consequences," Wan said. "I don't think there's any form of
energy that doesn't create some kind of an impact. You don't get something
for nothing."

PG&E to Assume Calpine's California QF Contracts Calpine to Receive All Past
Due Receivables

July 9, 2001

Calpine to Receive All Past Due Receivables
SAN JOSE, Calif., July 6 /PRNewswire/ -- Calpine Corporation (NYSE: CPN), the
San Jose, Calif.-based independent power company, announced today that it has
entered into a binding agreement with Pacific Gas and Electric Company (PG&E)
to modify and assume all of Calpine's Qualifying Facility (QF) contracts with
PG&E. Calpine and PG&E today filed a stipulation with the U.S. Bankruptcy
Court for the Northern District of California (Bankruptcy Court) seeking
authorization for PG&E to assume the modified Calpine QF contracts. The
Bankruptcy Court is scheduled to approve the agreement on July 12, 2001.
Under the terms of the agreement, Calpine will continue to receive its
contractual capacity payments plus a five-year fixed energy price component
of approximately 5.37 cents per kilowatt-hour, which is consistent with the
recent California Public Utilities Commission Decision No. 01-06-015. In
addition, all past due receivables under the QF contracts will be elevated to
administrative priority status and paid to Calpine, with interest, upon the
effective date of a confirmed plan of reorganization. Administrative claims
enjoy priority over payments made to the general unsecured creditors. As of
April 6, 2001, Calpine had recorded approximately $267 million in accounts
receivable with PG&E under its QF contracts.
QF facilities are an integral part of California's energy market,
representing more than 20 percent of the state's power supply. Calpine's 11
QF projects provide close to 600 megawatts of electricity to Northern
California customers.
James Macias, Calpine senior vice president, states, "Calpine is the first
power company to modify its QF contracts with PG&E to ensure that Northern
California consumers will continue to benefit from these affordable and
reliable energy resources. As the state's leading developer of modern energy
facilities, we remain committed to California's power industry."
Calpine will host a conference call to discuss the PG&E agreement today at
8:30 a.m. Pacific Daylight Time (11:30 a.m. Eastern Daylight Time). The call
is available in a listen-only mode by dialing 800-370-0906 five minutes prior
to the start of the conference call. International callers should dial
973-872-3100. In addition, Calpine will simulcast the conference call live
via the Internet today. The webcast can be accessed and will be available for
30 days on the investor relations page of Calpine's website at
www.calpine.com.
Based in San Jose, Calif., Calpine Corporation is dedicated to providing
customers with reliable and competitively priced electricity. Calpine is
focused on clean, efficient, natural gas-fired generation and is the world's
largest producer of renewable geothermal energy. Calpine has launched the
largest power development program in North America. To date, the company has
approximately 34,000 megawatts of base load capacity and 7,200 megawatts of
peaking capacity in operation, under construction, pending acquisition and in
announced development in 29 states, the UK and Canada. The company was
founded in 1984 and is publicly traded on the New York Stock Exchange under
the symbol CPN. For more information about Calpine, visit its website at
www.calpine.com.
This news release discusses certain matters that may be considered
"forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the intent,
belief or current expectations of Calpine Corporation ("the Company") and its
management. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties that could materially affect actual results such as,
but not limited to, (i) changes in government regulations, including pending
changes in California, and anticipated deregulation of the electric energy
industry, (ii) commercial operations of new plants that may be delayed or
prevented because of various development and construction risks, such as a
failure to obtain financing and the necessary permits to operate or the
failure of third-party contractors to perform their contractual obligations,
(iii) cost estimates are preliminary and actual cost may be higher than
estimated, (iv) the assurance that the Company will develop additional
plants, (v) a competitor's development of a lower-cost generating gas-fired
power plant, and (vi) the risks associated with marketing and selling power
from power plants in the newly competitive energy market. Prospective
investors are also cautioned that the California energy environment remains
volatile, especially in light of Pacific Gas and Electric Company's Chapter
11 bankruptcy filing, including uncertainties and delays inherent in the
bankruptcy process, where the court sits as a court of equity and must
reconcile the competing interests of multiple parties. The Company's
management is working closely with a number of parties to resolve the current
uncertainty, while protecting the Company's interests. Management believes
that a final resolution will not have a material adverse impact on the
Company. Prospective investors are also referred to the other risks
identified from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission.
MAKE YOUR OPINION COUNT - Click Here
http://tbutton.prnewswire.com/prn/11690X44648475
SOURCE Calpine Corporation
CONTACT: media, Bill Highlander, ext. 1244, or investors, Rick Barraza, ext.
1125, both of Calpine Corporation, 408-995-5115
Web site: http://www.calpine.com (CPN)

California Officials Justify Their Claims
Of Overcharges Before Federal Mediator
By Richard B. Schmitt
?
07/09/2001
The Wall Street Journal
Page A8
(Copyright (c) 2001, Dow Jones & Company, Inc.)
WASHINGTON -- Energy companies and California officials were struggling to
settle billions in disputed electricity charges, with talks set to expire
tonight.
In an effort to jump-start talks, a federal mediator set an unusual daylong
"minitrial" yesterday, in which California officials were to make their case
over $8.9 billion in overcharges they claim since May 2000. When the talks
stalled last week, mediator Curtis L. Wagner threatened to propose his own
solution, but has since adopted a different tack, in a last-ditch effort to
spur a voluntary accord.
"I am trying to break them loose," Mr. Wagner said. "It is a complicated
thing, because so much money is involved."
Mr. Wagner, the chief administrative law judge of the Federal Energy
Regulatory Commission, said, "it is going to be a very hard job" to reach a
settlement, but that "most cases settle on the last hour of the last day."
The FERC-ordered settlement conference began June 25 and expires at midnight.
Mr. Wagner said he doesn't intend to seek additional time. The FERC has
ordered him to report back to the full commission within seven days. Absent
any agreement, the FERC has said it will impose its own solution, which
likely would trigger years of legal appeals.
Mr. Wagner has indicated that any settlement is apt to include cash, new or
renegotiated long-term power contracts for the state, credits to energy
companies for unpaid bills, and possibly releases from further legal
liability. State officials also have said they would be amenable to partial
settlements of the case with individual power generators.
Yet the total amount remains hotly contested. Despite California 's $8.9
billion claim, only about $5.9 billion of that was incurred since October
2000, the earliest date from which FERC officials have said they have the
authority to order refunds. A good piece of the smaller pie, moreover, is
attributable to municipal utilities over which FERC hasn't any jurisdiction.
California officials have insisted the number is justified, and even
conservative, as the state's power bills have soared over the past two years
in the wake of deregulation and what they consider to be profiteering by
energy companies.

Calpine Says PG&E Has Agreed to Pay
$267 Million in Overdue Electricity Charges
By Rebecca Smith and Jonathan Weil
?
07/09/2001
The Wall Street Journal
Page A8
(Copyright (c) 2001, Dow Jones & Company, Inc.)
Calpine Corp., a major California energy producer, said the state's largest
utility, Pacific Gas & Electric Co., agreed to pay $267 million in overdue
electricity charges. The utility still disputes other payments that could
reduce the amount that Calpine ultimately collects.
Under the settlement announced Friday, the utility will make the payment once
a bankruptcy court approves its plan of reorganization, possibly as early as
December. The utility, a unit of San Francisco-based PG&E Corp., sought
bankruptcy-court protection in April after high power costs exhausted its
finances.
Calpine's stock was up 14%, or $5.26, at $42.62 in 4 p.m. New York Stock
Exchange composite trading Friday, after the agreement was announced. Some
investors have feared that Calpine eventually would be forced to write off
the PG&E-unit receivables. Investors on Friday appeared to view the
settlement as validation of Calpine's decision not to establish a reserve for
potentially uncollectable PG&E receivables.
However, Calpine, San Jose, Calif., still faces potential financial exposure
for as much as $212 million related to power sales to the PG&E unit. The
agreement doesn't protect Calpine against a possible refund order by the
California Public Utilities Commission that the utility is seeking. PG&E
asserts it has overpaid Calpine about $212 million because the formula the
state used to price "qualifying facility" or alternative power, fails federal
and state tests that require prices to be reasonable.
If the commission eventually orders a refund, it could largely wipe out the
$267 million payment that Calpine stands to receive. Rick Barraza, Calpine's
head of investor relations, said the company is "adamant that we owe PG&E no
refunds."
The pricing system the utility asserts violates federal and state laws was
set up in 1996 as part of the state's deregulation plan. Energy suppliers
were permitted to switch from a pricing system based on the utility's costs
to a system in which prices were pegged to a state-sponsored energy auction.
Prices on that auction got so high by late 2000 that Pacific Gas & Electric
suspended payments on many of its power-purchase contracts. The state
utilities commission has been asked by Pacific Gas & Electric, among other
utilities, to do a review of costs and order refunds.
The settlement between Calpine and the PG&E unit includes a new pricing
formula for electricity supplied to the utility on a continuing basis. This
is one of many settlements that the utility expected to reach to assure
stable prices from alternative power suppliers, which produce about 20% of
the state's power.
Instead of being paid a fluctuating price, Calpine will receive a fixed
energy payment of $53.70 for each megawatt hour of electricity that's
supplied to the utility.

Front
REFUND ACCORD UNLIKELY BEFORE DEADLINE; POWER SUPPLIERS, STATE REMAIN
BILLIONS APART; JUDGE ORDERS MORE TALKS
BY BRANDON BAILEY AND CHRIS O'BRIEN , Mercury News
?
07/07/2001
San Jose Mercury News
Morning Final
Page 24A
(c) Copyright 2001, San Jose Mercury News. All Rights Reserved.
Power suppliers and state officials remained billions of dollars apart as
refund negotiations headed down to the wire this weekend. Despite some
progress in recent days, prospects for a settlement appeared slim.
Gov. Gray Davis reiterated Friday that the state wouldn't accept anything
less than the $8.9 billion he says suppliers overcharged during the past
year. Sources said the power companies offered between $600 million and $700
million.
A federal judge ordered another round of talks today in hopes of reaching a
settlement before the Monday deadline set by the Federal Energy Regulatory
Commission.
Administrative Law Judge Curtis Wagner, who has expressed frustration at the
slow progress and posturing on both sides, initially indicated he might issue
his own settlement plan this weekend to spur the parties toward an agreement.
But on Friday, he said he probably would wait until Monday.
The outcome of the talks could affect how much consumers pay toward the
billions of dollars in debt that the state's utilities amassed buying
electricity last year. In addition, any settlement could help set California
's energy future, because it could influence how the state buys power in
coming years.
More than 100 representatives from dozens of power suppliers, public agencies
and utilities are participating in the negotiations, which are being held at
FERC headquarters in Washington. The closed-door sessions began June 25.
Settlement options
After days of little movement, sources said the talks gained some momentum
late this week, when discussion turned to the idea of a settlement that would
combine cash refunds with discounted rates on long-term power contracts.
Still, the two sides were far from agreeing on the total value of any
settlement package. If the parties don't reach an agreement, the federal
energy commission could act on Wagner's recommendation.
State officials also showed no eagerness to call off the many investigations
and lawsuits that are pending against power suppliers, even though industry
officials have said they want any settlement to include assurances that they
can move forward without the threat of legal action hanging over their heads.
In an effort to keep the cumbersome negotiations on track, the judge has
imposed a gag rule on participants.
Another source said the judge was also frustrated with generator officials
and their unwillingness to divulge data that would allow him to evaluate
accusations that they manipulated markets. In contrast, the source said the
state's team spent an entire day explaining how it arrived at the $8.9
billion figure.
Davis continued to take a hard line during a news conference Friday, as he
repeated his assertion that out-of-state energy companies ''have taken
advantage of California . They're trying to suck us dry.''
The governor also insisted that federal regulators, having determined that
the California market is ''dysfunctional,'' now have an obligation to order
refunds even if the parties don't agree on a settlement plan. As he has
before, Davis suggested the state would take legal action if the federal
commission doesn't oblige.
''This is not a discretionary act,'' he added later. ''The ball is in FERC's
court to get us $8.9 billion. Will I take less than $8.9 billion? No.''
One industry official said the governor's public stance ''certainly doesn't
help'' the prospects for an agreement.
''Settlements, by their nature, involve no one getting everything they
want,'' said Lynne Church of the Electric Power Supply Association.
Industry representatives also questioned whether Davis wants to reach a
settlement.
''Even before the settlement discussions began, it seemed apparent to many of
us that the state had very little incentive to truly settle -- because then
who would he beat up?'' said Gary Ackerman of the Western Power Trading
Forum, who has complained that Davis is using the power industry as a
scapegoat for the state's problems.
Power industry representatives say their prices were justified by short
supplies, high natural gas costs and questions about the ''creditworthiness''
of the agencies buying power. They have attacked the state's estimates as
flawed and biased.
The state has alleged that Duke Energy, for example, reaped $804 million in
excess revenue. A Duke vice president questioned that figure earlier this
week, noting that his company had only $418 million in pre-tax earnings from
all of its North American operations last year.
Similarly, Reliant Energy said Friday that its operating margin in California
was $127 million for October through May, although the state has said the
company reaped $378 million in excess revenue during that time.
Industry officials also note that the $8.9 billion estimate includes about
$3.4 billion in revenue earned by public power agencies, such as the Los
Angeles Department of Water and Power. These suppliers aren't subject to FERC
jurisdiction.
Suppliers want payment
Power suppliers have another concern in the FERC talks. They say they are
owed at least $3 billion for power sold to the state's utilities last year.
Any refunds would have to be applied against those past-due amounts, Church
said. ''They're intertwined. You couldn't come to a solution on one without
the other.''
Some power industry officials have said the idea of renegotiating long-term
contracts, or signing new ones, may be more attractive than paying refunds
because it would have less impact on their immediate cash flow. But Ackerman
said the idea may not work because not all suppliers have long-term contracts
with the state.
State officials like the idea because it might give them a reduction in the
$43 billion cost of long-term contracts they negotiated a few months ago,
when power prices were much higher than they are now.
Depending on the negotiators' progress today, Wagner said he may schedule
another session Sunday.

California News
PG&E TO PAY $265 MILLION IN CALPINE DEAL; TALKS BETWEEN UTILITY, GENERATOR
MARK TURNING POINT IN BANKRUPTCY NEGOTIATIONS
BY JENNIFER BJORHUS , Mercury News
?
07/07/2001
San Jose Mercury News
Morning Final
Page 23A
(c) Copyright 2001, San Jose Mercury News. All Rights Reserved.
Calpine -- one of about two dozen independent power producers fighting
Pacific Gas & Electric Co. in bankruptcy court -- has signed a five-year deal
with the utility to supply electricity . As part of the deal, PG&E said it
will also pay the estimated $265 million it owes the San Jose company.
The agreement is the first contract to emerge from PG&E's talks with the
small generators that supply it power. This also marks a turning point in the
bankruptcy negotiations.
Many of the small generators supplying Southern California Edison signed
similar deals about 2 1/2 weeks ago, agreeing to put their lawsuits against
that utility on hold.
Model power deal
PG&E said it hopes the Calpine deal for electricity at $53.74 per
megawatt-hour will be a model for agreements with other power suppliers.
Calpine said it was pleased. ''We think it's good for everybody,'' said
Calpine vice president Joe Ronan. ''It levels out the price. That's another
step toward stability in the state.''
Ronan and others noted that the new agreement is strikingly similar to a
proposal for long-term contracts that withered in the California Legislature
earlier this year. ''I just don't know why it took us so long,'' Ronan said.
Calpine's stock rose 14 percent Friday, closing at $42.62 per share on the
New York Stock Exchange.
The new deal covers all 11 of Calpine's so-called qualifying facilities,
including seven gas-fired power plants and four run on geyser steam. The
plants supply PG&E with an average of at least 450 megawatts of power, enough
juice for at least 338,000 homes.
The company has locked in its own long-term contracts for natural gas, said
Calpine spokesman Bill Highlander. Highlander said Calpine expects to get the
$265 million PG&E owes once the utility has filed its reorganization plan in
bankruptcy court.
Status improving
The once-dire situation of many of the state's independent generators has
improved. Although a few plants remain shut, most of the state's
approximately 690 small generators, from wind farms and solar operations to
more conventional plants fired by natural gas, are again supplying power to
the state's electricity grid, according to the California Independent System
Operator. At one point about 3,000 megawatts from small generators were
off-line, threatening the state's fragile supply of electricity . The 690
small generators pump out around one-fourth of the state's electricity .
The retooled arrangements stem from a decision by the California Public
Utilities Commission. The commission directed the utilities to pay the small
suppliers a portion of the estimated $1.5 billion owed them, offered
suggestions on how to alter the contracts and set a fixed five-year price of
$53.74 per megawatt-hour.
The price is lower than what the state is paying for electricity in the
package of long-term contracts recently made public. The average cost for
those deals is estimated at $70 per megawatt-hour over 10 years.
People close to the negotiations say they expect many of PG&E's other small
power suppliers to strike similar deals in the coming weeks. POWER SCORECARD