Please see the following articles:

Sac Bee, Mon, 5/18:  Bush may back some price caps

Sac Bee, Mon, 5/18: TV ads to pin blame on Davis for power woes

Sac Bee, Sun, 5/17: Dan Walters: Political war between Sacramento and
Washington is escalating

Sac Bee, Sat, 5/16: Veil is lifted on pacts

SD Union, Mon, 5/18: Deal would let SDG&E clients off the hook

SD Union, Mon, 5/18: State officials to hold hearings on proposed
high-voltage line

SD Union, Sun, 5/17: Power grid operators issue blackout warnings for first
time

SD Union, Sun, 5/17: High energy prices to continue long term, experts say

SD Union, Sun, 5/17: Ad criticizing Davis expected as officials consider
price caps

SD Union, Sat, 5/16: Energy deals rest on unsteady markets

LA Times, Mon, 5/18: Bush Says FERC Plan Is Not Price Controls

LA Times, Mon, 5/18: U.S. May Hike Aid for Poor's Utilities

LA Times, Sat, 5/16: Power Debate Heats Up as Davis Reveals Contracts

LA Times, Sat, 5/16: Ad Will Blame Davis for Crisis

SF Chron, Mon, 5/18: Blackout alert for next 2 days
State's first advance warning puts PG&E's Block 1 on notice

SF Chron, Mon, 5/18: California's path to energy independence  (by Gray Davis)

SF Chron, Mon, 5/18: Developments in California's energy crisis

SF Chron, Mon, 5/18: Federal panel considering ways to rein in Western energy
prices

SF Chron, Mon, 5/18: Tougher price caps prompt controversy
Consumer boon or bane? Experts split

SF Chron, Sun, 5/17:  THE ENERGY CRUNCH
Pacts may give upper hand to gas traders
Clause allows price of electricity to change with production cost

SF Chron, Sun, 5/17:  The zero percent solution

SF Chron, Sat, 5/16:  Davis reveals power contracts
Critics point fingers after forced release of details

Mercury News, Mon, 5/18: California energy market strategy criticized

Mercury News, Mon, 5/18: U.S. energy regulators to vote on power caps for West

Mercury News, Mon, 5/18: Bush: FERC Western power plan not price controls

OC Register, Mon, 5/18: FERC considers new price limits today

OC Register, Mon, 5/18: Atomic generation revisited

OC Register, Mon, 5/18: Blackouts could hit today, Cal-ISO says

OC Register, Mon, 5/18: San Onofre generating power full bore again

OC Register, Mon, 5/18: Opening the contracts   (Commentary)

Individual.com (AP), 5/18: California ISO Unveils Outage Notification Plan;
Meets Deadline for Governor's Executive Order to Roll Out Warnings to Public

Individual.com (AP), 5/18: BPA and California Ink Summer Assistance Plan

Wash Post, Mon, 5/18: California 's Energy Woes (Cont'd)   (Editorial)

Wash Post, Mon, 5/18: Bush to Back FERC Energy Price Limits; Proposed
Restraints Would Affect 11 States

WSJ, Mon, 5/18: California Struggles in Role of a Large Buyer of Power
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Bush may back some price caps

Updated: June 18, 2001 - 6:38 a.m.
WASHINGTON -- President Bush, who has argued against price caps on California
electricity, plans to support less-stringent price limits expected to be set
by the Federal Energy Regulatory Commission today, administration officials
said Sunday.

FERC will meet today to consider new restraints on the wholesale price of
electricity in California. An aide to Gov. Gray Davis said the governor
considers the commission's leading proposal to be "too little, too late" as
the state continues its efforts to stave off the threat of rolling blackouts.

But with summer officially beginning this week, a statewide heat wave
prompted the California Independent System Operator, the agency that manages
much of the state's transmission grid, to report that a Stage 2 power alert
is probable for today and Tuesday and that a Stage 3 alert is possible both
days. In a Stage 2 alert, consumers are urged to reduce their use of
electricity, while rotating blackouts would be instituted between noon and 8
p.m. under Stage 3.

On Sunday, Bush administration officials said they would argue that the
president can support new FERC limits that are based on market factors and
would contend Bush has not changed his position.

Nevertheless, the willingness to embrace new limits should temper the anxiety
of some Capitol Hill Republicans, who fear the Bush administration has
handled the matter callously.

Rep. Anna Eshoo, D-Atherton, said Vice President Dick Cheney had rankled some
members of the California delegation during a meeting last week.

"He lectured us about markets," Eshoo said Sunday during a conference call
organized by Davis' office. "When I reminded him that our market was
dysfunctional and that in a healthy market there's competition, he looked at
his watch."

FERC, an independent agency with the commissioners appointed by the
president, now has limits on wholesale electricity prices in California that
are in effect only during emergency power shortages. FERC sets a target price
based on the costs of the least-efficient producer, and companies have to
explain in writing if they exceed that target.

At its special meeting today to deal with California energy issues, the
commissioners will consider a proposal from congressional Republicans that
would extend those restraints around the clock during the next year and to 10
other Western states.

Two recently appointed members of the commission -- Patrick Wood III, former
chairman of the Texas Public Utility Commission, and Nora Mead Brownell, a
former member of the Pennsylvania Public Utility Commission -- will
participate in their first meeting today.

At their confirmation hearings, Wood and Brownell won praise from Democratic
Sen. Dianne Feinstein, D-Calif., after they said they thought FERC should
move further than it had so far to rein in high wholesale prices and did not
rule out price controls.

Among those most heartened to see the new members was William Massey, a
Democrat and frequent dissenter on the five-member panel who strongly favors
price controls to head off what he's described as a looming economic
catastrophe for the state this summer.

"I never thought I would be so thrilled to see two Republicans coming over
the horizon," Massey said last week.

While FERC renews its focus on California's power problems, Congress also is
feeling heat from constituents over rising energy costs and is seeking ways
to help. Lawmakers may vote as early as this week on a big budget increase
for a once-obscure federal program that helps the poor pay their utility
bills.

The House measure would appropriate $300 million in current-year emergency
funding -- twice as much as requested by Bush -- for the Low-Income Home
Energy Assistance Program. The Senate is talking about doubling the figure
again, to $600 million.

Even bigger increases appear probable for 2002. Bush is seeking $1.7 billion
for the program, up from $1.4 billion this year. In the Senate, there's talk
of a $3.4 billion budget.

"There's been a change in mood," said Rep. Bernard Sanders, a Vermont
independent who has joined Democrat Barbara Lee of Oakland and Republican
John M. McHugh of New York in a campaign to boost the emergency funding bill
to $800 million

"People in California, among others, are now concerned about this issue in a
way that had not been the case. ... Plus the fact that oil prices are going
up all over this country," Sanders said.

Passage of the emergency appropriation may be Congress' first direct response
to the energy price spikes and supply shortages that have bedeviled
California and states.

The assistance program, which arose from the 1970s energy crises, works
directly with utilities to help lower low-income households' air-conditioning
and heating bills and avoid utility cutoffs for nonpayment.

The surge of support in Congress for the program is broad and bipartisan,
even though the program offers nothing to more-affluent Americans who also
would like relief from higher energy expenses.

Those eligible for assistance include a large number of senior citizens, an
important political constituency for Republicans and Democrats. And the
program is endorsed by utility companies because it helps people pay their
heating and cooling bills.

Compiled from Washington Post and Los Angeles Times. David Whitney of The Bee
Washington Bureau contributed to this report.

TV ads to pin blame on Davis for power woes
By Amy Chance
Bee Political Editor
(Published June 18, 2001)
An interest group calling itself the American Taxpayers Alliance is set to
begin airing television ads in California today aimed at Gov. Gray Davis,
saying he "ignored all the warning signals" about the state's energy troubles
and "turned the problem into a crisis."
The ads, featuring grainy footage of Davis, also maintain that he has done
too little to boost energy generation and thwarted utilities' efforts last
year to buy electricity under long-term contracts.
Aides to Davis said Sunday they believe Republican political strategists and
at least one energy generator are behind the spots, which were delivered to
television stations late last week.
"The governor believes strongly that Californians will see right through the
smokescreen," said Davis spokesman Steve Maviglio, who said in a conference
call with reporters that "the generators that have robbed billions from us"
are now "trying to con us into believing what they're doing is a good idea."
He cited a newly released Time magazine article which alleges that Reliant
Energy is one of "hundreds of corporations" providing funding for the ad.
A consultant for Reliant, however, said while the company is considering a
broader informational campaign on the energy crisis, it is not political in
nature.
"I doubt very much that hundreds of corporations have funded any given ad
campaign. They may have funded the sponsoring organization," said Darry
Sragow, a Democratic political consultant to Reliant. "Whether Reliant Energy
is one of them or not, I have no idea."
He said he would not doubt, however, that Republicans are behind the effort.
"Gray Davis is not terminally damaged, but he's in a tough spot, and he has
not had any significant resources directed against him in ... some kind of
political message that reaches voters," Sragow said. "It doesn't take a
political rocket scientist to figure out that's a tempting situation for the
Republicans."
The television campaign against Davis will begin as the Federal Energy
Regulatory Commission meets to once again address the Democratic governor's
call for federal price caps on wholesale electricity prices.
The commission is widely expected to expand an earlier price control plan
effective only during California power emergencies, making it apply to all 13
Western states and around the clock.
Democrats said they appreciated the effort, but said the effort is simply too
little, too late.
"This puts into place the highest price from the dirtiest generators. If
that's price relief, I'll eat my hat," said Rep. Anna
Eshoo, D-Atherton. She said while her delegation has been calling for "real
PR -- price relief," the FERC and the Bush administration have resisted
serious attempts at price control.
"And yet the gouging that is taking place, the dollars that have been creamed
off the top of our constituents are now being poured into a campaign to blur
the issue," Eshoo said.
Democrats in Congress have weighed in recently with political messages of
their own, releasing radio ads on Memorial Day weekend blaming President Bush
and congressional Republicans for higher gas and electricity prices.

The Bee's Amy Chance can be reached at (916) 326-5535 or achance@sacbee.com.
Bee metro staff contributed to this report.

Bee Column
Dan Walters: Political war between Sacramento and Washington is escalating

(Published June 17, 2001)

A U.S. diplomat negotiated at least a temporary cease-fire last week in the
months-long violent conflict between Israelis and Palestinians, which
threatened to become a wider Mideast war.
Having achieved the near-impossible, perhaps the envoy, CIA Director George
Tenet, should now take on another escalating conflict: the political war
between President Bush and Gov. Gray Davis.
Davis is simultaneously attempting to manage a severe energy crisis, burnish
his own image for a re-election campaign next year, and position himself as a
potential Democratic challenger to Bush in 2004. With advice from veterans of
the Clinton-Gore political operation, Davis has been dispatching increasingly
sharp political salvoes accusing Bush of neglecting California while serving
the interests of Texas-based energy companies.
The more partisan, even personalized, tone of the Davis attacks has been
working from a purely political standpoint, gaining Davis face time on
national television and, according to his own pollsters, arresting the
decline in his approval ratings in California.
The turning point came during a Bush visit to California a couple of weeks
ago, which included a brief personal meeting with Davis. The governor and his
political advisers orchestrated the event to his advantage while Bush
demonstrated little empathy for California's travails.
The visit bolstered Davis' efforts to shift the onus for California's energy
woes from himself to the Federal Energy Regulatory Commission. And while
Davis aides crowed about the salutatory effects on their boss's image,
Republicans -- especially those in California -- began worrying that the
White House was exposing them to political fallout. The Democrats'
congressional campaign organization began broadcasting ads in the districts
of potentially vulnerable GOP congressmen in California, portraying them as
lackeys of the Bush White House and Texas energy firms.
Those targeted congressmen -- such as Sacramento's Doug Ose -- have been
demanding that FERC step into the California crisis by imposing some form of
price controls. And FERC last week began emitting signals that it's planning
some price-control step that would implicitly provide Bush and Republican
congressmen with political cover. A Democratic takeover of the U.S. Senate
adds still another dimension to the politics of the feud -- Senate hearings
on the crisis, with Davis as a star witness, being one example.
Bush doesn't appear to be particularly concerned about his own image in
California. He lost the state by more than a million votes last November
while amassing enough electoral votes to win the presidency in other states
-- a feat that validated an oft-voiced theory among GOP strategists that
California was not as important in presidential politics as most analysts
assumed. And presumably, his strategy for 2004 assumes that he won't have
California's votes.
That said, the very narrow GOP margin of control in the House could vanish if
Democrats take away enough seats from Republicans in California through a
combination of redistricting and using the Bush administration as a whipping
boy on energy.
The war took still another turn last week when the White House dismissed a
California plea to lift the federal requirement that "oxygenates" be added to
gasoline sold in the state to fight air pollution. Davis had already decreed
that MTBE be removed from gasoline because it pollutes water, leaving only
ethanol as a replacement. But adding huge quantities of the alcohol distilled
from agricultural wastes would add substantially to California gasoline
prices. The Bush decree may irritate Californians and their politicians, but
it shores up Bush's environmental credentials and his position in the
Midwest, where ethanol is a major product. And it will benefit
Archer-Daniels-Midland, the nation's leading ethanol producer and a major
source of campaign funds.
One can only wonder where the next skirmish in the war will break out, but
there are plenty of potential battlegrounds -- offshore oil drilling,
perhaps, or timber harvesting, or water.
The Bee's Dan Walters can be reached at (916) 321-1195 or dwalters@sacbee.com
.

Veil is lifted on pacts
The scrutiny begins, but one thing is certain -- prices can go either way
By Carrie Peyton, Dale Kasler and John Hill
Bee Staff Writers
(Published June 16, 2001)

The $43 billion California is spending on long-term power contracts is only
an estimate, state officials acknowledged Friday, and the amount could easily
go higher or lower because about half the supply is tied to fluctuating
natural gas prices.
The disclosure came as the state released edited versions of the 38
electricity contracts it has signed so far, many at prices that exceed the
newly deflated spot and futures markets.
It also unveiled the most detailed portrait yet of $7.6 billion in state
spending since January, when California stepped in to buy power on behalf of
battered utilities which said they could no longer afford to pay their
suppliers. For the first time, the state provided a day-by-day list of money
spent and power bought through March 31, and it promised similar tallies will
be released each quarter.
The power contracts came in for immediate criticism from those who said
California picked the worst time to try to lock in long-term deals and now
will be stuck for a decade or more with above-market electricity costs.
But Gov. Gray Davis and his energy advisers contend the recent dip in
last-minute or "spot" prices simply proves that their long-term deals have
helped cool an overheated wholesale market, robbing sellers of some of their
clout.
While people can "nit pick" if they choose, Davis said, "On May 10, the state
spent $110 million for power, total cost. Two days ago we spent $29 million
for total power. So clearly our strategy is beginning to work."
The state contracts provide for a dizzying array of deals to purchase power
-- on-peak, off-peak, around the clock, and even swaps -- many of them
intricately priced. They cover about half the power the state will need to
buy and will cost an average of $69 per megawatt-hour over the next 10 years,
state officials have said.
Up to 70 percent of the electricity will come from new plants yet to come
online, said Ray Hart, deputy director of the state Department of Water
Resources, which handles the state's power buying.
That was one of the few bright spots seen by consumer advocates, who said
such deals might help finance the building of newer, cleaner power plants.
It will take analysts days to read through the hundreds of pages of contracts
to determine how good or bad the newly unveiled deals are for California --
and even then it might be hard to tell, experts said.
A contract with power trader Dynegy, for example, "looks to me like an
extremely high fixed price," said Robert Michaels, an economics professor at
California State University, Fullerton, and a consultant to generators and
traders.
The $119.50 a megawatt-hour for power in 2002 through 2004 is close to twice
what it would cost today for delivery in Southern California, but that's not
enough information to truly evaluate the contract, he said.
The state edited out all references to which plants will supply the power,
where it will be delivered and what transmission will be used, and without
that, Michaels said, "essentially you can't see whether the state got rooked
really badly or not."
State officials, who balked for months at releasing the contracts because
they said it would tip their negotiating hand, changed their stance just
before a hearing in a lawsuit by several news organizations to force the
release. A further hearing is scheduled into whether the state will be
permitted to keep some details private.
Overall, "we're very proud of these contracts," said S. David Freeman, a key
energy adviser to Davis who helped negotiate some of the deals. He said the
state has no interest in turning its back on any of the contracts, even
though they were signed when the state was frantic to escape a blistering
spot market.
Legislators and consumer advocates have already begun talking about whether
the state can find escape clauses from buying power that now sounds too
pricey.
But generators said the state got a better deal than the critics realize.
"It's a lot of fun to pick on the governor, but spot prices go down and spot
prices go up," said Pete Cartwright, president and chief executive of San
Jose-based generator Calpine Corp., which signed billions of dollars worth of
contracts ranging from $58 to $115 a megawatt-hour.
"(Davis) has stabilized prices for a long time, and that's good," he said.
Among the sellers are affiliates of two of the utilities for which the water
department is buying the electricity: Sempra Energy Resources, whose parent
company owns San Diego Gas & Electric; and PG&E Energy Trading, whose parent
owns Pacific Gas and Electric Co.
The Sempra contract pays the seller $189 a megawatt-hour this summer, even
though summer power was selling for more than $320 back when the contract was
signed in early May.
"We're trying to be part of the solution," said Michael Niggli, president of
Sempra Energy.
However, the contract would revert to the May market prices -- $320 and up --
if the state doesn't complete its multibillion-dollar bond offering by Sept.
30, and if Sempra backs out of the deal. The bond offering is to raise money
for the power purchases and to spread their cost over many years.
The PG&E Energy Trading contract, calling for 66.6 megawatts of capacity
through September 2011, will cost the state $58.50 a megawatt-hour.
The costliest contract -- in terms of dollars per megawatt -- appears to be
with Alliance Colton of Littleton, Colo., which has begun delivering power
from two "peaker plants" that generally operate only during high-demand
periods. Alliance will be paid $258 a megawatt-hour beginning Aug. 1 and $278
next summer, although the price will vary from year to year. The contract
runs out in 2010.
"It's a peaker, which is usually more expensive," said water department
spokesman Oscar Hidalgo.
Some of the cheapest power, at about $58 per megawatt-hour, comes from PG&E
Energy and Calpine.
Now that prices have fallen, Assembly Speaker Pro Tem Fred Keeley said he
wants to examine the contracts to see if the state can bail out. Seven
Assembly staffers began going through the contracts immediately, and Assembly
leaders plan to get together Sunday night to discuss what they've found, he
said.
The information comes just in time, Keeley said, giving lawmakers the kind of
detail they'll need to decide on Davis' plan to keep Southern California
Edison out of bankruptcy, as well as options for letting some consumers
choose their power suppliers.
Sen. Debra Bowen, D-Marina del Rey, said she also has had discussions about
possible bailout provisions, saying it will be "real, real tempting to
second-guess" the administration's contracts.
"But none of the second-guessers have more experience negotiating contracts
than David Freeman," she said.
Assembly Republicans were among the first second-guessers.
Republican leader Dave Cox of Fair Oaks questioned several provisions,
including ones that appeared to allow some generators to pass along tax
increases in their prices, make the state liable for some emission credit
payments for exceeding pollution standards, and prevent the Public Utilities
Commission from cutting electric rates unless the state can prove it won't
jeopardize its contract payments.
"These contracts are sweetheart deals for the generators Gray Davis is so
busy trying to demonize," Cox said in a press release.
Other critics included Mirant California, which owns Bay Area power plants
and bristled at the state unveiling the terms of its deal, which pays it $148
per megawatt-hour from June 1 through the end of 2002.
However, energy economist Severin Borenstein, defending the contracts on the
governor's behalf, said that just because the spot price has fallen, "that
... is not evidence the contract was a mistake."
"When you sign long-term contracts you're buying an insurance contract," he
said. "If your house didn't burn down at the end of the year, you don't scold
yourself."
The Bee's Carrie Peyton can be reached at (916) 321-1086 or
cpeyton@sacbee.com.
Bee Staff Writer Stuart Leavenworth contributed to this report.

Deal would let SDG&E clients off the hook

Tentative pact has state paying $1 billion for lines
By Ed Mendel
UNION-TRIBUNE STAFF WRITER
June 18, 2001
SACRAMENTO -- San Diego Gas & Electric ratepayers would not have to pay off
any of the utility's $750 million debt for power purchases under a tentative
agreement that would have the state buy SDG&E's transmission system for $1
billion.
The apparent deal was reached by Gov. Gray Davis and SDG&E after months of
closed-door negotiations, according to sources close to the talks.
Davis wants the state to purchase the transmission systems of California's
three major utilities to help them pay off huge debts caused by soaring
wholesale electricity costs.

It was widely believed that SDG&E's customers would have to pay off the
utility's debt, often referred to as a "balancing account" or
"undercollection." Some San Diego legislators and lobbyists were enthusiastic
last week about the possibility that the pending agreement might eliminate
SDG&E's debt without burdening ratepayers.
With control over the transmission systems, the state could use low-interest
government financing to remove bottlenecks and could gain leverage over power
generators, whom state officials accuse of price-gouging.
In exchange for relieving ratepayers of the debt, SDG&E would get most of the
controversial profit -- reportedly more than $200 million -- from two
power-purchasing agreements made several years ago.
Spokesmen for the governor and SDG&E yesterday were optimistic, but guarded.
"Negotiations are continuing, and progress is being made," said Steve
Maviglio, Davis' press secretary.
"We have made substantial progress in the negotiations," said Doug Kline, an
SDG&E spokesman. "At this point we don't have anything to announce."
If the agreement is completed as expected, it is not clear how it will be
received by the Legislature. Some key legislators who once supported the idea
of the state purchasing the utility transmission systems are now cool to the
plan.
The $1 billion that the state would pay for the 1,800-mile SDG&E transmission
system is said to be comparable to the governor's stalled proposal to buy the
Southern California Edison transmission system.
Fear that SDG&E ratepayers eventually would be stuck with a "balloon payment"
was one of the criticisms of legislation that capped rates for residences and
many small businesses last September.
SDG&E's cost for power as wholesale electricity prices soared was far above
the capped rate it could collect from customers. The difference came to $750
million earlier this year.
The debt stopped growing in February after the state began buying a large
amount of electricity for SDG&E customers.
SDG&E says the state purchases have ranged from 40 to 70 percent of the total
amount of power used by its customers. SDG&E serves about 3 million people
and has 1.2 million metered customers, including 100,000 in southern Orange
County.
Other parts of the tentative agreement would require SDG&E to provide
low-cost power for a decade from its share of the San Onofre nuclear power
plant, which is about 20 percent of the plant's capacity, or 440 megawatts.
Sempra, SDG&E's parent firm, would be required to spend "billions" to improve
the electricity and natural gas distribution systems, an investment that
presumably would be recovered from ratepayers over time, according to
sources.
The agreement also would give the state the right to purchase environmentally
sensitive land owned by SDG&E in the Colorado River area. And SDG&E would
drop any lawsuits that could affect the agreement.
The profits SDG&E has made from two previous power agreements, and would
largely keep under the tentative agreement, had been in dispute.
Last week, officials in San Diego complained that the governor's negotiations
appeared to be giving SDG&E, rather than ratepayers, more than $300 million
in profits from those two long-term power contracts.
After deregulation was enacted in 1996, SDG&E obtained the two contracts for
250 megawatts from Pacific Corp. and Louisville Gas & Electric.
Those long-term contracts were said to be a hedge to make sure SDG&E would
recover all of its "stranded costs" -- the power plant investments and other
power-purchase contracts thought to be uneconomical in a deregulated market.
SDG&E argued that the two contracts in question were financed by
shareholders, at no risk to ratepayers, and the power was sold on the open
market, which produced big profits last year when wholesale power prices
skyrocketed.
The state Public Utilities Commission ruled that the profits should be given
to ratepayers, but SDG&E contested the ruling and filed an appeal with an
appellate court.
The tentative agreement allows SDG&E to keep most of the contract profits, an
amount which is said to be less than a third of the utility's $750 million
undercollection debt.
The agreement apparently gives SDG&E other things in exchange for absorbing
all of that debt instead of passing it on to ratepayers. But sources close to
the negotiations said they were not aware of all of the provisions of the
tentative deal.
Whether the state would be overpaying for the SDG&E transmission system may
be another issue. Davis wants to buy the larger Edison transmission system
for $2.76 billion, or 2.3 times book value.
The $1 billion offered for the SDG&E system is a roughly similar deal. SDG&E
says the book value of its transmission system is $430 million.
Book value is a standard accounting device that reflects depreciation from
the original price and other factors. But the market value is much higher
because of the current cost of building a similar system. For the SDG&E deal
to go through, the governor will need support from state legislators. The
state Public Utilities Commission could enact most of the agreement, but the
Legislature would have to approve the purchase of the transmission system.
The governor's proposal to buy the Edison transmission system, part of a
sweeping rescue plan for that more-troubled utility, has been stalled in the
Legislature for two months. Critics say it is an overly generous bailout for
Edison.
The state purchase of the major utilities' transmission systems was suggested
in early February by a San Diego consumer group, the Utility Consumers Action
Network.
Senate President Pro Tempore John Burton, D-San Francisco, among others, was
an early supporter of purchasing utility transmission systems.
But the situation has changed since then. Pacific Gas and Electric filed for
bankruptcy in early April, and Davis would now have to persuade PG&E
creditors to approve the sale of the transmission system.
Burton said last week that he is no longer focusing on the purchase of the
transmission systems, but on a controversial new plan that would have the
large businesses that pushed for deregulation pay off most of the utility
debt.

State officials to hold hearings on proposed high-voltage line

ASSOCIATED PRESS
June 18, 2001
TEMECULA ) State officials will travel to Southern California this week to
hear from local residents about a proposed high voltage transmission line
that would crisscross area subdivisions and vineyards.
The $271 million Valley-Rainbow Project would connect San Diego Gas &
Electric Co.'s grid to that of Southern California Edison, helping link the
southern portion of the state to power plants being built elsewhere in the
Southwest and Mexico.
The Public Utilities Commission will collect comments during a series of
public hearings scheduled for Monday through Wednesday, and plans to hold a
prehearing conference Thursday.
"Right now, we are one of the weakest links," said James Avery, SDG&E's
senior vice president for fuel and power operations. "If there's a break in
the line at one point, everything else is in trouble."
The California Independent System Operator, which manages the state's power
grid, has already signed off on the project to string the 500,000-volt
transmission lines across the Temecula area.
That move sparked an outcry among local officials and residents concerned
about the project, which would force property owners to give up their land.
"All along this route, people are calling their real estate agents asking,
'What is going to happen?'" said Loma Bosinger, co-chairwoman of the
grassroots-group Save Southwest Riverside County.
SDG&E officials said the project is required to bring more power to the San
Diego area by 2004.
"I have an obligation and responsibility to maintain reliability and power to
our customers," Avery said. "This line is the only way I can do that."
But increased local generation of power ) perhaps two dozen new plants by
2004 in San Diego County alone ) could make that a moot point, activists
claim.
"In order to keep a balanced grid, you need to disperse the power ... or
build more lines. You don't have to do both," said Michael Shames, executive
director of Utility Consumers Action Network, a San Diego watchdog group.

Power grid operators issue blackout warnings for first time

ASSOCIATED PRESS
June 17, 2001
SAN FRANCISCO ) Blackout warnings were issued Sunday by the agency that runs
California's power grid.
The California Independent System Operator said potential blackouts could
occur Monday and Tuesday afternoons between noon and 8 p.m. both days.
The early word marked the first time the ISO issued warnings under the new
early warning system, which lets customers know of possible outages 24 to 48
hours in advance.
Temperatures in the mid-90s to triple digits are expected Monday and Tuesday
in many areas served by Pacific Gas and Electric Co. beyond the San Francisco
and Humboldt Bay regions, from Redding to Bakersfield. As a result, an
increased energy demand is forecast. The ISO expects Monday's load to peak at
37,735 megawatts.
Pacific Gas and Electric Co. officials said if rolling blackouts are ordered,
they will begin in block one, which is the next scheduled rotating outage
block.

High energy prices to continue long term, experts say

Contracts' provisions leave state ratepayers vulneralble
By Craig D. Rose?
UNION-TRIBUNE STAFF WRITER
June 17, 2001
The 600 pages of contracts that commit California to $43 billion in
electricity purchases over the next decade contain a host of potential
surprises -- and few may be pleasant for state residents, experts say.
Among the details in the deals with 18 suppliers:
?Should electricity prices rise, some providers could reduce their
deliveries, leaving the state little recourse but to return to spot power
markets for expensive purchases.

Attempts to impose windfall profit taxes on generators -- an idea being
considered by the Legislature -- will be complicated by at least one
agreement, which promises reimbursement for such taxes.
?California will pay all new emission costs -- a potentially expensive outlay
-- under agreements with several large suppliers.
And there is one pleasant possibility: Natural gas prices might fall and
provide cheaper-than-expected electricity under some of the deals. Then
again, gas prices might rise.
Roger Bohn, an associate professor of management at UCSD and a former member
of the California Power Exchange's market monitoring unit, said the state did
not have a strong hand going into negotiations with electricity suppliers.
And, he added, the results reflect that weakness.
"The state negotiators have locked in high prices in the years beyond 2004,
and they haven't solved the short-term problem," said Bohn, who was retained
by The San Diego Union-Tribune to examine the contracts.
"To a large extent, we're still at the mercy of generators who have lots of
market power and still want to stick it to us."
Bohn said energy experts he has consulted calculate that the contracts will
cause the state to pay 33 percent above market rates over the next five
years.
"Compared to the panic situation we experienced in March, we did as well as
can be expected," Bohn said. "Compared to what we'll be thinking in two
years, there is a high chance we'll be regretting a lot of these contracts."
The documents were released Friday at the order of a San Diego Superior Court
judge. The Copley Press, which publishes the Union-Tribune, and several other
news organizations sought the order after Gov. Gray Davis refused to reveal
specific details from the contracts.
California turned to long-term contracts as a refuge from spot market prices
for electricity that soared under deregulation to an average $275 per
megawatt-hour for the first five months this year, or about nine times higher
than last year's levels.
Energy companies and others insisted the high prices were largely a result of
the state's excessive dependence on day-ahead power purchases. Others warned
that turning to long-term contracts at the height of the crisis was akin to
buying flood insurance in the midst of a deluge.
Spot prices have plummeted in recent weeks to trade between $40 and $70 for
most hours of the day.
S. David Freeman and Vikram Budhraja, leaders of the state's bargaining team
for the deals, say the long-term contracts are largely responsible for the
decline in spot prices. And they insist they have taken a big step toward
resolving the crisis with agreements that secure nearly half the state's key
power purchases for 10 years.
Budhraja hailed average prices of $80 per megawatt-hour for the first five
years and $69 for a decade as a victory given the market conditions earlier
this year.
"You can't let the perfect solution be the enemy of the good solution," said
Budhraja, who helped draft the contracts while on retainer as a consultant to
Southern California Edison.
But as examination of the agreements continues, it's clear the state has
again paid a steep price for deregulation, which promised to lower prices for
power customers.
Michael Shames, executive director of the Utility Consumers' Action Network,
noted that some of the agreements will have the state pay more than $180 for
power in the years 2003 and 2004, the same years traders report power is
available for about $50 per megawatt-hour.
"What we're seeing now is prices that were extorted out of the state when it
had no bargaining leverage," Shames said. He added that if an array of legal
investigations against electricity suppliers result in successful
prosecutions, he would expect many of these agreements to be nullified.
In the meantime, the state could find itself confronting an array of
troubling contractual aspects.
Under an agreement with Williams Cos., for example, the Tulsa company has a
contractual obligation to provide 1,000 megawatts. But the generator could
reduce the amount far below that level with little penalty, Bohn said.
"So basically Williams can sell or not sell to the state depending on price,"
he said.
The state's contract with Dynegy has a similar weakness, Bohn added.
California's agreement with Calpine will have the state shouldering increases
in costs from windfall profit taxes or any other source. Bohn said the
state's contract with Calpine appears to include what he characterized as a
very high subsidy for new plant construction.
The state's new portfolio of contracts also puts the parent company of San
Diego Gas and Electric in a curious position. Sempra Energy Resources, a
sister company of the local utility, now becomes one of the state's key power
suppliers, providing up to 1,900 megawatts of electricity.
Bohn said there was an inherent conflict between Sempra's power selling
business -- which seeks the highest prices -- and SDG&E, which is charged
with seeking the lowest prices for consumers.
A spokesman for Sempra Energy said the company avoids the conflict because it
sells its power to the state, not SDG&E.
For nearly half the contracted power, meanwhile, information about natural
gas costs -- the prime fuel for generating electricity -- remains secret.
Industry experts forecast tightening supplies of natural gas as new gas-fired
generating plants are built across the country.
Bohn said he fails to understand the state's continued secrecy surrounding
those prices. Budhraja yesterday declined to disclose what assumptions were
made about gas prices in estimating future electricity costs.
The secrecy creates concern.
"We're hitching the future of the California economy to the volatility of
natural gas prices," said Matt Freeman, attorney for Toward Utility Rate
Normalization, a San Francisco consumer group.
But Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer
Rights, said there is a larger concern: "We've just locked in a long-term
energy crisis for the next decade. Clearly, they made things worse by
agreeing to terms of 10 years or more."
Staff writer Dean Calbreath and library researcher Cecilia Iniguez
contributed to this report.

Ad criticizing Davis expected as officials consider price caps

By Andrew Bridges
ASSOCIATED PRESS
June 17, 2001
LOS ANGELES ) Power company profits gained in California's electricity crunch
are funding a new ad campaign blaming Gov. Gray Davis for rising costs, state
Democratic officials said Sunday.
The television advertisement is set to begin airing Monday, the same day
federal officials are expected to slap new limits on wholesale electricity
prices in the state.
The ad campaign, credited to a group called American Taxpayers Alliance but
produced by GOP strategists, features grainy footage of Davis and attacks him
for failing to secure long-term, cost-saving contracts before the wholesale
price of electricity soared.
Democrats said Sunday in a conference call with reporters that they expect
the group will spend $5 million on the ad campaign. Time magazine reported
that Reliant Energy, one of the companies state officials have accused of
price-gouging, is among hundreds of corporations providing money for the
campaign.
"The dollars that have been creamed off the top of our constituents are now
being poured into a campaign to blur the issue," said Rep. Anna Eshoo,
D-Calif.
S. David Freeman, Davis' chief energy adviser, said California has been
overcharged anywhere from $8 billion to $15 billion for the electricity it
uses.
But some relief for California may come as early as Monday at a special
meeting of the Federal Energy Regulatory Commission. The commission, which
regulates wholesale electricity transactions, is expected to slap 24-hour
caps on the price of power in the West, The Washington Post reported Sunday.
FERC approved a limited price "mitigation" program in April to rein in the
wholesale price of power. California officials said Sunday the move had
accomplished little, and asked for more direct action.
"If FERC does not intervene and help us we are subject again to the whims and
caprices of the generators," said Michael Kahn, chairman of the California
Independent System Operator, which manages the state's power grid.
California officials maintain that long-term contracts secured by the state
and an aggressive conservation program have led to a recent softening of
electricity prices. The state has signed $43 billion in long-term power
contracts, but still buys about half of its electricity on the volatile spot
market.
"The reason the spot market prices are lower is we have added to supply and
subtracted from demand," Freeman said.
The expected FERC action would control the wholesale price of power around
the clock, expanding on the current order that reins in prices only during
the most drastic shortages. The move comes as House Democrats ) and some
Republicans ) have pushed for legislation that would force FERC to impose
some sort of price caps.
Freeman said he favors cost-based price caps, which make allowances for
"reasonable" profits.
Kahn said if the new limits do nothing more than extend the previous
mitigation plan, they will accomplish little.
"We would have to say that is too little, too late and simply not enough,"
Kahn said.
Davis will take up the issue himself on Wednesday, when he is expected to
testify before the Senate Governmental Affairs Committee.
The committee, whose new chairman is Sen. Joseph Lieberman, D-Conn., will
examine how the federal government regulates energy.

Energy deals rest on unsteady markets

Predictions tough; many power plants yet to be constructed
By James P. Sweeney and Michael Gardner
COPLEY NEWS SERVICE and Ed Mendel and Craig D. Rose
UNION-TRIBUNE STAFF WRITERS
June 16, 2001
SACRAMENTO -- Long-term electricity contracts that were expected to lead
California out of its energy crisis depend heavily on unpredictable natural
gas prices and power plants yet to be built.
Of nearly $43 billion worth of power secured for the next decade, the price
of half will fluctuate with the natural gas market, said S. David Freeman,
Gov. Gray Davis' chief energy adviser.
Seventy percent of the contracted energy has been promised from power plants
that don't yet exist.

But Freeman and other state officials said they believe the electricity will
be delivered at an average price of $69 per megawatt-hour.
That price, which is 6.9 cents per kilowatt-hour in consumer terms, is about
what most utility customers pay now.
An energy industry analyst, however, said that predicting electricity prices
from these deals is problematic because of the link to natural gas costs,
which can fluctuate almost as wildly as electricity costs.
Natural gas prices, which earlier had been below $3 per million British
thermal units, stayed above $10 for weeks this winter and spiked to $60 in
December.
"Has the state locked in electricity prices? Probably not," said Andrew
Safir, president of Recon Research Corp. in Los Angeles.
Harry Snyder, a senior advocate for Consumers Union in San Francisco, blasted
the contracts as a bad deal for customers, even if they can deliver power at
$69 a megawatt-hour.
"The price of power from all these generators is going down, with the market
predicting a lot of power plants coming online," Snyder said. "And now they
are locked in at $69."
The long-term deals, intended to wring some of the windfall profits out of
the deregulated energy market, stretch from a few months for some contractors
to 20 years for a San Jose-based generator, Calpine Energy Services.
The contracts should cover 45 percent of the state's peak power needs in the
immediate future, and all of its projected demand in 2004, before scaling
back in later years, state officials said.
The threat of rolling blackouts, however, has not been lifted.
"No one is declaring victory. No one is saying the crisis is over, but we are
very proud of the role long-term contracts are playing," Freeman said.
The state released the details of 38 electricity contracts with 18 suppliers
to comply with an order issued by a San Diego Superior Court judge.
Several news organizations, including The Copley Press, which publishes The
San Diego Union-Tribune, sought the order after Davis refused to make the
contracts public.
The complex contracts, which cover more than 600 pages, promise nearly 600
million megawatt hours over the next decade. Contract sections considered
sensitive or proprietary were blacked out, making comparisons and analyses
difficult.
A spot check late yesterday raised questions about some aspects of the
contracts for one expert.
Could be trouble
"There appear to be a lot of little 'gotcha' clauses here that if the seller
wanted to push them could be troublesome to the state," said Roger Bohn, a
professor of management at UCSD and co-author of the book "Spot Pricing of
Electricity." He is a former member of the market monitoring committee of the
California Power Exchange.
Such provisions might allow a supplier to alter the quantity of electricity
it provided to the state in response to spot market prices in a way that
would be a disadvantage to California, Bohn said. The Union-Tribune? retained
Bohn to examine the agreements.
The state has struck tentative deals on an additional 23 contracts that could
be signed in the coming weeks or months.
The 6.9 cent average, if it holds up, is more than double what power cost
before prices spiked last summer. Advocates had predicted that deregulation
would lower electricity prices 20 percent by 2002.
"Some of these contracts are very expensive deals," said Michael Shames,
executive director of Utility Consumers' Action Network of San Diego.
He criticized a deal that will pay Dynegy $140 per megawatt-hour -- 14 cents
per kilowatt-hour -- through 2004. Power likely will drop to $50 per
megawatt-hour by 2003, he said.
But the governor and Freeman said the long-term contracts, some of which have
already kicked in, have punctured an inflated market.
"The reason the spot market is down where it is, is we've reduced the volume
we have to buy in that market," Freeman argued.
Conservation effort
California businesses and households also have responded to the governor's
call for a conservation effort.
While contracts for half the energy allow generators to pass along natural
gas prices, Freeman and Raymond Hart, a deputy director of the state
Department of Water Resources, said they expect natural gas rates to continue
to decline.
Natural gas accounts for about 80 percent of the cost of electricity in
gas-fired plants, Freeman said. As a safeguard, the state reserved the right
to purchase gas supplies directly for power plants.
Hart suggested that the state also will attempt to line up a share of its
projected natural gas needs at fixed rates.
Michael Aguirre, an attorney pressing a class action suit against generators,
said consumer attention should now be on natural gas prices.
"We shifted from one volatile commodity to another," Aguirre said. "This is a
ruse. It does not give the people of California the protection we thought it
gave us."
While some of the anticipated new power plants could be delayed or might
never be built, Hart said, the generators who want to build the plants would
not even be able to get financing without the long-term contracts.
"That means we're going to have more competition in the future," he said.
Mike Niggli, president of Sempra Energy Resources of San Diego, suggested
that the lengthy agreements may calm the market.
'Service to customers'
"Not only does it minimize price spikes, there's less to be purchased and
sold on the spot market," Niggli said. "The state, having locked up long-term
energy, has done a service to customers."
At least one power supplier, however, apparently sought to safeguard itself
against tough state action that could occur if volatility returns. A contract
with Allegheny Energy Supply Co. includes provisions for special payments to
the company in the event California seizes its plants using powers of eminent
domain.
UCSD's Bohn called the feature an unusual inclusion in an electricity power
supply contract.
Not much in any of the contracts appealed to Assembly Republican Leader Dave
Cox, who dismissed the agreements as "sweetheart deals for the generators
Gray Davis is so busy trying to demonize."
"The most frightening aspect of these contracts is that Gov. Davis'
mismanagement has saddled this state with high rates and an uncompetitive
economy for years to come," said Cox of Sacramento.
But Democratic state Sen. Debra Bowen, one of the Legislature's utility
experts, said the state simply traded lower costs today for higher prices
later.
"There weren't a lot of choices. They didn't hold many cards," she said of
state negotiators.
Steve Stengel, a spokesman for Dynegy, a Houston-based generator, agreed that
the contracts "have the potential to take some of the volatility out of the
market."
Supply and demand
But Reliant spokeswoman Pat Hammond cautioned that "supply and demand remain
the driving force behind price spikes." Houston-based Reliant and the state
have been negotiating a multiyear contract to no avail.
Much of the relatively cheap power that the state will purchase during peak
periods this summer comes from long-term contracts seized from the defunct
Power Exchange, a step taken by the governor earlier this year under his
emergency powers.
The seized contracts provided 1,150 megawatts during February through March
for prices ranging from $46 to $91.50 per megawatt-hour. In the second
quarter, April through June, the contracts are providing 775 megawatts for
$53 to $78.50 per megawatt-hour.
In July through September, the contracts will provide 1,425 megawatts at
prices from $71.20 to $146 per megawatt-hour. Most of the contracts seized by
the state from the Power Exchange are with Duke, Mirant, Enron and
Constellation.
Among the contracts negotiated by the state Department of Water Resources, a
Houston firm, Coral Power, receives some of the highest prices for power
delivered during peak periods this year, $249 per megawatt-hour. Coral agreed
to provide 100 megawatts during peak hours this month, 150 megawatts in July,
250 megawatts in August, and 325 megawatts in September.

Bush Says FERC Plan Is Not Price Controls

From Times Wire Services

?????President Bush said today he did not consider an electricity
price-relief plan for the Western region that the Federal Energy Regulatory
Commission was expected to approve to be a form of price controls.
?????Bush said he remained opposed to electricity price controls. But he said
the plan that FERC was expected to approve for limited wholesale price curbs
in the West was different.
?????"I'm interested to see what FERC comes up with. They're not talking
about firm price controls, they're talking about a mechanism to mitigate any
severe price spike that may occur, which is completely different from price
controls," Bush told reporters.
?????Amid mounting congressional pressure for action, FERC was to hold a
special meeting to address the chronic electricity problems affecting
California and the rest of the West.
?????FERC, which oversees interstate power sales, was widely expected to vote
for a compromise approach to limit prices on wholesale electricity sold in
the West, according to congressional sources.
?????That approach would mean expanding a monitoring plan rolled out last
month that only applied to California after state officials declared a power
emergency.
?????Under the agency's existing "price mitigation" plan, the California
price limits are based on the amount that generators can charge to produce
power at the least efficient plant. Generators may charge higher prices if
they can justify them to the agency.
?????Expanding the plan to the entire Western region would fall short of the
strict price caps sought by California Gov. Gray Davis and many Democrats but
would still amount to a significant change in policy for FERC.
?????The stricter price caps sought by Democrats would allow a generator to
sell wholesale power based on a formula covering actual production costs,
plus a moderate profit. That approach would be similar to the way U.S.
utilities were regulated for decades.
?????FERC's Republican chairman, Curtis Hebert, has repeatedly rejected the
idea of price caps, saying market forces should set power prices.
?????However, Republican lawmakers fear they may take a political hit for the
Bush administration's decision to oppose strict price caps and therefore
pushed for the compromise that calls on FERC to expand its limited price
curbs.
?????The White House says it is worried that price caps would discourage
investment in new power plants and fail to encourage consumers to cut home
energy use.
?????Today's meeting, due to begin at 1 p.m. EDT, would also mark the first
time that FERC has been fully staffed with five commissioners since the
California energy crisis began last year.
?????Republican commissioners Pat Wood of Texas and Nora Brownell of
Pennsylvania were nominated to the agency by President Bush. Wood is viewed
as a Bush confidant, having led the Texas Public Utilities Commission while
Bush was governor of the state.
?????FERC has been under growing pressure from Democrats and Republicans to
help find a solution to California's power deregulation fiasco.
?????Agency officials say that their measures are working. Since the FERC
plan for California price relief went into effect on May 29, wholesale power
prices in the state have dropped under $100 a megawatt from more than $300
earlier in May.

Copyright 2001 Los Angeles Times

U.S. May Hike Aid for Poor's Utilities
Energy: Congress is likely to boost funds for program that arose from 1970s
crises. It could be the first direct response to price spikes and supply
shortages.

By RICHARD SIMON, Times Staff Writer

?????WASHINGTON--Members of Congress, feeling heat from constituents over
rising energy costs, are preparing to approve a big budget increase for a
once-obscure federal program that helps the poor pay their utility bills.
?????California, where an estimated 2.1 million low-income households are
eligible for assistance, would receive a proportionately larger share of the
money than ever before.
?????The House may vote as early as this week to appropriate $300 million in
current-year emergency funding--twice as much as requested by President
Bush--for the Low-Income Home Energy Assistance Program. The Senate is
talking about doubling the figure again, to $600 million.
?????Even bigger increases appear likely for 2002. The president is seeking
$1.7 billion, up from $1.4 billion this year. In the Senate, there's talk of
a $3.4-billion budget.
?????"There's been a change in mood," said Rep. Bernard Sanders, a Vermont
independent who has joined Democrat Barbara Lee of Oakland and Republican
John M. McHugh of New York in a campaign to boost the emergency funding bill
to $800 million. "People in California, among others, are now concerned about
this issue in a way that had not been the case. . . . Plus the fact that oil
prices are going up all over this country."
?????Passage of the emergency appropriation may be Congress' first direct
response to the energy price spikes and supply shortages that have bedeviled
California and other parts of the country.
?????The assistance program, which arose from the 1970s energy crises, works
directly with utilities to help lower low-income households' air-conditioning
and heating bills and avoid utility cutoffs for nonpayment.
?????To be eligible for this assistance in California, a family of four must
earn less than $33,125 a year. Priority is given to low-income families whose
fuel bills consume a large proportion of their incomes, and to the elderly,
the disabled and families with young children. The average benefit is $326
per year.
?????California officials also use about a fourth of the program funds to
offer free home weatherization services to low-income families, as well as
providing more energy-efficient appliances.
?????Supporters acknowledge that LIHEAP's surging popularity represents a
remarkable comeback: Several years ago, lawmakers were talking about killing
the program.
?????One Senate Democrat, John D. "Jay" Rockefeller IV of West Virginia, even
wants to expand the concept by creating a federal program to help poor people
buy gasoline for long drives to work, school or medical appointments.
?????Rockefeller has proposed initial funding of $500 million to provide gas
subsidies of $25 to $75 a month to low-income workers who must commute more
than 30 miles a day or 150 miles a week.
?????While Rockefeller's gasoline subsidy appears to be a longshot for now,
more money is clearly headed toward LIHEAP.
?????"We finally have the attention of the administration on the need for
some additional funds," said Sen. Jeff Bingaman of New Mexico, the new
Democratic chairman of the Senate Energy Committee. Bingaman wants to
disentangle the assistance program from the array of other energy policy
issues that Congress will be debating this year, so it can boost funding
sooner rather than later.
?????Sen. John F. Kerry (D-Mass.) said there is "far greater support" for a
funding increase now than ever before. But he cautioned that more work lies
ahead "with the fiscal straitjacket imposed by President Bush's
budget-busting tax bill."
?????The surge of support for the program is broad and bipartisan, even
though the program offers nothing to more affluent Americans who also would
like relief from higher energy expenses.
?????That sentiment appears to be particularly strong in California, where
big rate hikes approved in response to the power crisis are showing up in
electricity bills. Southern California Edison's residential customers, for
example, will pay 21% more on average, with some increases topping 40%.
?????California regulators provided a rate-hike exemption to low-income
households that sign up for a state-approved discount program, but so far
only about 60% of those qualified have done so. And the exemptions have no
bearing on high natural gas prices, which increased bills in Southern
California by an average of 60% last winter.

?????An Inexpensive Way to Show Action on Crisis
?????For members of Congress who find themselves on the hot seat, the federal
program is a comparatively cheap way to counter the perception that they are
doing little to help people cope with the energy crisis. Those eligible for
assistance include a large number of senior citizens, an important political
constituency for Republicans and Democrats alike. And the program is endorsed
by utility companies because it helps people pay their heating and cooling
bills.
?????Still, some California Democrats assert that more money for low-income
energy assistance is no substitute for broad price controls on wholesale
electricity, which the Bush administration and many Republican lawmakers have
opposed.
?????"The problem is if the LIHEAP money is used to pay energy rates that are
3,000% higher than they should be, the [money] isn't going to go very far,"
said Rep. Jane Harman (D-Redondo Beach).
?????Nationally, 29 million households are eligible for this assistance. But
only about 5 million will receive subsidies this year, said Mark Wolfe,
executive director of the National Energy Assistance Directors' Assn. Many
eligible households never apply for assistance, and some states run out of
money long before they run out of potential recipients.
?????In California, fewer than 10% of the 2.1 million eligible households
will receive program assistance unless funding is increased, state officials
say.
?????From the late 1970s through most of the 1990s, the share of the average
family budget devoted to energy gradually declined. Then, suddenly, the trend
reversed: From 1998 through 2000, average family spending on energy rose from
3.8% to 4.8% of after-tax income, according to federal officials.
?????In California, state officials assisted as many families during the
first five months of this year as they did in all of 2000.
?????Although the program has enjoyed bipartisan support, it received a
political boost when Sen. James M. Jeffords of Vermont abandoned the
Republican Party and became an independent, handing the Democrats control of
the Senate and Bingaman the chairmanship of the energy committee.
?????Sen. Frank H. Murkowski (R-Alaska), the former energy committee
chairman, already had called for increasing its annual budget from $1.4
billion this year to $3 billion next year. But Bingaman immediately raised
the stakes, calling for a $3.4-billion budget and identifying the assistance
program as a priority.
?????Supporters are attempting to build support for the program outside the
Northeast and Midwest by showing lawmakers from other regions that their
constituents stand to benefit if funding is increased.
?????Once funding reaches $2 billion, a new outlay formula will take into
account population changes since 1980 and give more consideration to hot
weather.

?????State's Share Would More Than Triple
?????If Congress approves a $3.4-billion budget, California's share would
jump from $63 million to $201 million, said Jim Benfield, executive director
of the Campaign for Home Energy Assistance. The funding formula gives the
state 4.6% of the available assistance, even though the state is home to
14.6% of the nation's poor and pays among the highest natural gas prices in
the country.
?????"It seems like the program is in play more than ever before," said
Wolfe, of the National Energy Assistance Directors' Assn. "What they're
talking about now is taking LIHEAP from a regional program that primarily
serves the Northeast and Midwest and making it into a national program. It's
because caseloads are increasing."
?????Although the funding increases under consideration could be affected by
growing concern about the possibility of future budget shortfalls, there's no
question that the assistance program has come a long way: Several years ago,
there was talk in Congress of killing it.
?????"No longer are we debating the survival of the program," said Dana
Johnson, deputy chief of staff for McHugh. "Now it's to make sure there are
adequate funds."
?????And new sources of revenue are being discussed. The administration's
comprehensive energy plan calls for diverting to the assistance program an
unspecified portion of government royalties from wells drilled on federal
land if energy prices rise beyond a certain level.
?????But some critics worry that linking funding to new drilling on public
land could pit environmentalists against advocates for the poor.
---
?????For more information about California's LIHEAP program, phone (800)
433-4327 or check the state's Web site:
?????www.csd.ca.gov/LIHEAP.htm

Copyright 2001 Los Angeles Times

Power Debate Heats Up as Davis Reveals Contracts

By RICH CONNELL,NANCY RIVERA BROOKS and DAN MORAIN, Times Staff Writers

?????SACRAMENTO--After months of resisting disclosure, Gov. Gray Davis on
Friday released 38 long-term power contracts that aides said show the
administration is deftly managing the energy crisis, but that critics warn
contain clauses and costs that may burden consumers with unpredictably high
prices for years.
?????Provisions in some of the contracts protect generators from new state
taxes, shield them from potential action by federal regulators and give them
a break on environmental costs. At the same time, the documents are so
heavily censored in crucial areas that it is impossible to fully assess their
impact on the state and its residents.
?????State officials insist that the complex agreements, extending as much as
20 years and costing an estimated $43 billion, already have slowed the
hemorrhaging of state spending on power and sheltered consumers from wild
electricity price swings in the future.
?????"These provide a major building block for lifting this energy crisis,"
Davis' top energy advisor, S. David Freeman, said as a 600-page stack of
agreements was made public in response to a court order. "That was our
longer-term strategy. We implemented it, and it's worked."
?????The governor, questioned after a public appearance at Mather Air Force
Base, echoed his advisor's optimism, but added: "I'm under no illusions. I
think the summer is going to be hot and the peak prices will spike up."
?????For months, Davis has publicly vilified the generators with whom his
administration has now become contractually bound. Asked whether his nemeses
negotiated in good faith, the governor said: "I do not think the generators
have our best interests at heart. . . . They're laughing all the way to the
bank. My job is to fight back."
?????Davis has a heavy political investment in the pacts, which the state
began negotiating in January as blackouts hit, power prices soared and the
state's large utilities slipped toward insolvency.
?????Crediting the contracts, Davis aides noted the state was paying an
average of $332 a megawatt hour for power in January, but only $179 this
month. The contracts call for an average price of about $85 per megawatt hour
over the next five years and about $69 over the next 10 years.
?????Critics have noted that the state's current average costs under the
contracts exceed those now available on the daily market. But Davis contends
the current reduced prices are largely a result of his contracting strategy.
?????Partly because of the secrecy Davis imposed on the deals, they have
become a focal point of suspicion over his handling of the crisis. News
organizations--including The Times--and Republican officeholders sued to get
them. Consumer groups, meanwhile, complained about being hit with historic
utility rate increases for deals no one could examine.
?????The controversy seemed to intensify Friday, despite efforts by the
governor's team to portray the agreements as a major tactical victory against
out-of-state power marketers who exploited the state's flawed deregulation
scheme.

?????GOP Leader Attacks 'Sweetheart Deals'
?????Assembly Republican Leader Dave Cox of Fair Oaks, whose staff pored over
the documents, attacked the governor for brokering "sweetheart deals for the
generators."
?????Even a key Democrat, state Sen. Joe Dunn (D-Garden Grove), expressed
serious concerns about a number of provisions in the deals that seem to offer
special relief to generators.
?????Some lawmakers and consumer groups pointed to provisions that would
allow generators to shift the cost of new taxes to the state and possibly
exempt the firms from a windfall profits tax.
?????"It ups the ante as far as the ultimate burden that the contracts will
place on the shoulders of California ratepayers and taxpayers," said Dunn,
who is heading a special committee investigating alleged manipulation of the
state's energy market.
?????The senator said he also is concerned about provisions such as one
negotiated with GWF Energy, which prevents the state from pressing any future
claims with federal regulators regarding the company's profits.
?????"It is very disconcerting that we would willingly give up the right to
challenge any of these [prices]," Dunn said.
?????Consumer advocate Harvey Rosenfield called some of the contract terms
outrageous. Rosenfield, who heads the Foundation for Taxpayer and Consumer
Rights in Santa Monica, said it was "bad enough" that the long-term contracts
resulted in "high rates for Californians for a decade." He said Friday's
disclosures pointed to other "giveaway" perks.
?????Freeman, who formerly headed Los Angeles' Department of Water and Power,
insisted that generators won no special windfall profit protections. The only
tax increases generators can pass along to the state, he said, are those
directly tied to production of the power in the contracts, such as new taxes
on natural gas.
?????"I'm not going to say some lawyer won't argue" that the generators will
not claim they are exempt from a windfall profits tax. "But the contract is
very clear and the law is very clear."
?????Some of the pacts lock in specific prices, such as $58 a megawatt hour
for around-the-clock power from Baltimore-based Constellation Energy Group.
The Davis administration said those guard against price spikes in future
years.
?????Other contracts, officials said, balance the portfolio. They include
deals such as those with Dynegy Inc., which tie prices to the cost of fuel in
future years.
?????A number of energy insiders found reason to praise the contracts.
?????"The point of signing long-term contracts is not to get a great deal,
it's to reduce risk" from the volatility of spot markets, said Severin
Borenstein, director of the Energy Institute at UC Berkeley.

?????Edison Cites Hedge Against Price Spike
?????The long-term power contracts will be an important factor in limiting
the state's exposure to future price spikes, said Bob Foster, senior vice
president of public affairs for Rosemead-based Edison International, the
corporate parent of Southern California Edison.
?????"This was California's problem to begin with," Foster said. "You don't
want to be buying a lot of power traded on the spot market. What we really
need is a portfolio of contracts that range from one to seven years and that
take out the volatility from a large percentage of the market."
?????Davis advisors stressed that most of the contracted power also is linked
to development of new California generating plants, a key part of the
governor's drive to free the state from reliance on out-of-state power
trading companies.
?????About 60% to 70% of all the power that will be purchased in future years
under the contracts will be from new plants. The agreements, Freeman said,
helped developers obtain bank financing for their proposed plants.
?????By nurturing new plants, the state is signaling energy companies that
"this gravy train of high [prices] is not going to last forever," said Vikram
Budhraja, California's lead consultant in the bargaining.
?????But as analysts pored over the details, some challenged the governor's
basic premise that the long-term deals were largely responsible for recent
falling prices. They attribute the softening market to a host of other
factors, including cooler weather, falling natural gas prices and more plants
completing spring maintenance.
?????In fact, some scholars say that the current prices simply prove that the
state committed to paying the power companies too much for too long.
?????"The governor's spin doctors claim that not entering into the contracts
would have been gambling," said UC Irvine economist Peter Navarro. He said
that in the years ahead, odds are are heavily against the contracts being a
bargain. "That makes those contracts a long shot," he said, "which is
gambling in the worst sense of the word."

?????Analyst Sees Too Much Uncertainty in Contracts
?????Reviewing contracts Friday, energy economist Robert Michaels of Cal
State Fullerton said he was also troubled by the financial risks the state
appears to be assuming in some contracts for power plant pollution control
expenses. In some cases, he said, the state could be charged for costly
emission control upgrades.
?????"There's such uncertainty about what future state policy is going to be
in terms of cost of permits, retrofit requirements and new technology," said
Michaels, who reviewed the contracts at The Times' request. "I am not
familiar with any power contracts where I've seen that. It strikes me as
unusual."
?????Assemblyman Tony Strickland (R-Thousand Oaks), who independently sued
Davis to reveal the power contracts, said the public would not have been able
to weigh such trade-offs if the governor had continued the secrecy.
?????Davis relented Tuesday, a day before a San Diego Superior Court judge
was to hear the public records challenge.
?????Some complained the administration is still withholding key information.
Attorneys for the news organizations who sued the administration will return
to court later this month to argue for release of the redacted material.
?????The released contracts blacked out the indexes used to set natural gas
prices, the amount of natural gas needed to fire specific generators and
which pipelines are being used to ship the gas. That's important because gas
shipped into Southern California is more costly than gas shipped into
Northern California.
?????Additionally, the state is withholding information on whether the state
or the generators should pay when there are breakdowns or congestion on the
transmission system, resulting in a failure to deliver power.

?????Documents' Release Doesn't Stop Dispute
?????Experts said transmission-related provisions can be crucial to such
contracts final costs.
?????In arguing for continuing confidentiality, Davis maintained that the
disclosure of detailed contract information would undercut the state's
negotiators by tipping off competing generators. On Friday, however, some
critics attributed to the move to politics.
?????"If they were great contracts, they would have been released months
ago," said Navarro of UC Irvine.
?????But Davis' defenders, including Assemblyman Roderick Wright (D-Los
Angeles), chairman of the Utilities and Commerce Committee, said the
contracts accomplished exactly what they were intended to do: stabilize the
price and supply of electricity.
?????"If all of a sudden you dump all these contracts, and all this power
went back into the spot market, guess what? We'd be in the same damn position
we were in last year."

* * *
?????Times staff writers Robert J. Lopez, Miguel Bustillo, Julie Tamaki,
Virginia Ellis in Sacramento and Jerry Hirsch and Doug Smith in Los Angeles
contributed to this story.

Copyright 2001 Los Angeles Times

Ad Will Blame Davis for Crisis
Politics: GOP-linked TV spot says governor and PUC could have saved the state
from soaring prices. Its funding is murky because of campaign law.
By MARK Z. BARABAK, Times Political Writer
?????Acting under cover of a taxpayer group, Republicans are preparing a
statewide ad blitz blaming Gov. Gray Davis for California's energy crunch, a
move certain to escalate partisan tensions.
?????The commercial is credited to an organization called the American
Taxpayers Alliance, but it was placed by a GOP consulting firm and apparently
produced by Alex Castellanos, a Republican strategist renown for his attack
advertising.
?????The campaign-style TV ad is set to air Monday, more than 16 months
before Davis faces reelection. The spot does not promote a rival candidate.
Rather, it assails Davis and his appointees on the Public Utilities
Commission for failing to sign "long-term, cost-saving contracts" before
wholesale prices soared.
?????"That's why newspapers say Davis ignored all the warning signals and
turned the problem into a crisis," the advertisement states.
?????The source of the ad and its funding have been shielded under the murky
laws that govern so-called independent expenditure campaigns. The American
Taxpayers Alliance paid roughly $350,000 for the first wave of ads.
?????Castellanos has close ties to the White House. Last year he created
negative spots that Republicans ran against Vice President Al Gore, including
a controversial one that flashed the word "RATS" on screen for a split second.
?????But Republican officials from the Bush administration on down denied any
connection to the anti-Davis spots, scheduled to air in Los Angeles, San
Diego, Fresno, San Francisco and Sacramento.
?????Castellanos declined to comment.
?????"Unlike Gov. Davis, the RNC is not using slick political consultants to
spin our way out of this problem," Trent Duffy, a spokesman for the
Republican National Committee, said Friday.
?????Representatives of several major out-of-state generators, who have been
warring with Davis for months, also denied any connection to the ads. "We're
not participating in that," said Richard Wheatley, spokesman for power
supplier Reliant Energy Inc. of Houston.
?????"We're completely out of the loop on these ads," said Jim Owen,
spokesman for Edison Electric Institute, an industry umbrella group in
Washington.
?????However, the generators have done extensive public opinion research in
California over the past several months. Their surveys have found that
Californians give Davis poor marks for his handling of the crisis but
generally do not blame him for causing the problem.
?????The ad shipped this week to TV stations around California appear
designed to convince people that Davis, indeed, is at fault. "He's pointing
fingers and blaming others," the commercial states. ". . . But who runs the
PUC? The people Gray Davis appointed."
?????Last year the state's major utilities repeatedly asked for permission to
enter long-term contracts that could have helped control wholesale prices.
Regulators turned them away before finally allowing them to negotiate
longer-term contracts at rates that ended up higher.
?????However, while Loretta Lynch--who is named in the ad--was head of the
PUC at the time, Davis had not yet appointed a majority of the commission.
?????The ad campaign comes as the two major parties are moving closer in
Washington toward a consensus on wholesale price relief for California and
other Western states, which face high summer electricity bills and fears of
spot shortages.
?????Even so, Republicans on Capitol Hill have fretted that Democrats--led by
Davis and their new Senate majority--are winning the public relations and
political battles.
?????Last month, senior aides to House Speaker Dennis Hastert (R-Ill.) and
others voiced their concerns to lobbyists from conservative groups and major
power firms.
?????"We basically said, 'Are you planning on doing anything to promote your
side?' " said one senior House aide involved in the talks.
?????While disavowing any connection, House Republicans said Friday they
welcomed news of the impending ad campaign. "It's been a tough communications
battle," said Brian Kennedy, press secretary for Republican Rep. George P.
Radanovich of Mariposa. "Largely because Democrats have been going out
saying, 'Give us price caps.' And to this point we've just said 'No.' "
?????Democrats, predictably, were outraged. Ignoring White House denials,
Rep. Anna G. Eshoo (D-Atherton) rounded up more than two dozen colleagues who
dispatched an angry letter to Vice President Dick Cheney.
?????"While the administration repeatedly has rejected enforcing the law and
allowing price relief for Californians, it now seems to be coming together
with the [energy] industry . . . to run a campaign telling Californians that
'gouging is good,' " Eshoo wrote. "California needs real P.R. . . . price
relief."
cen
* * *
?????Times staff writers Nancy Rivera Brooks, Robin Fields and Greg Miller
contributed to this story.

Copyright 2001 Los Angeles Times

Blackout alert for next 2 days
State's first advance warning puts PG&E's Block 1 on notice
Erin Hallissy, Chronicle Staff Writer
Monday, June 18, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2001/06/18/MN199044.DTL
Expecting no relief from hot weather across much of California, the state's
power grid operators yesterday issued their first long-term warnings for
possible rolling blackouts today and tomorrow.
California's Independent System Operator was acting under a new policy by
Gov. Gray Davis to alert people up to 48 hours in advance -- instead of just
one hour -- of the possibility of rolling blackouts. Unless enough power is
found to keep all those lights and air conditioners running at homes and
offices throughout the state, outages would be most likely to happen between
noon and 8 p.m. Peak demand on both days is expected at 4 p.m.
Although parts of the Bay Area should be relatively cool, with highs today in
the 60s along the coast to upper 90s inland, the heat is expected to reach
triple digits in many other parts of the state. The Central Valley from
Stockton to Bakersfield should hit 100 today and tomorrow, as should
Riverside and desert areas around Palm Springs, according to the National
Weather Service.
If rolling blackouts happen, Pacific Gas and Electric Co. will begin with
customers in Rotating Block 1.
"Any additional conservation that people can put into effect during those
hours would be very helpful," said ISO spokeswoman Lorie O'Donley.
So far this year, there have been six days of rolling blackouts affecting
about 3 million customers in California. State officials have lauded
residents and businesses for keeping demand for power low by cutting use by
11 percent since last year, adjusted for temperature and population.
State officials pointed out the conservation efforts during a press
conference called by Davis' office yesterday to put the heat on the Federal
Energy Regulatory Commission to implement stricter price controls on power
companies.
FERC is expected to extend an emergency price cap, but Democratic leaders and
state energy officials said yesterday it doesn't go far enough. They urged
the commission to "take a stand for consumers" by implementing real price
relief and giving refunds to Californians who have been gouged by power
companies.
"We want the generators to be stopped right now from overcharging us," said
ISO Chairman Michael Kahn. "There's been a lot of talk about refunds . . .
but we haven't seen any action."
Under the FERC price mitigation program, which is expected to be extended
from emergencies to 24 hours a day, the state would buy power at prices
determined by the least efficient generator.
Kahn said the mitigation program "is simply an invitation to years of
litigation."
U.S. Rep. Anna Eshoo, D-Atherton, said the program does not give any break to
consumers.
"What has been touted is under the guise of price relief," Eshoo said. "This
puts into place the highest price for the dirtiest generators. If that's
price relief, I'll eat my hat."
AD CAMPAIGN
Eshoo also complained about a new $5 million advertising campaign financed in
part by energy companies that have been accused of price-gouging.
The ads, which are supposed to start airing today, blame Davis for causing
the energy crisis.
"The dollars that have been creamed off the top of our constituents are now
being poured into a campaign to try to blur the issue," Eshoo said.
Eshoo said she doesn't know what formal action, if any, Democrats will take
to counter the ad.
"We've been responding in writing and verbally, which may not be powered by
millions and millions of dollars," she said.
Steve Maviglio, a spokesman for Davis, said he believes Californians will
"see right through this smoke screen."
FERC IS URGED TO ACT
Meanwhile, Davis' chief energy adviser, S. David Freeman, said FERC should do
more to help bring down the cost of power from generators. He said
Californians have done their part in the energy crisis by conserving, and
Davis has done his part by approving new power plants in the state.
"We have reduced demand and increased supply. It's Economics 101," Freeman
said. "All we're asking is that the federal government join us in this
battle. Thus far, it's been too little, too late."
Blackouts
A warning has been issued for possible rolling blackouts today and tomorrow.
-- Where:
PG&E Rotating Outage Block No. 1 is next up for rolling blackouts. Customers
can determine which block they occupy by looking for the words "Rotating
Outage Block" on their bills followed by a number. If those words do not
appear, the customer shares an electrical circuit with an "essential service"
that is exempt from blackouts.
TIPS
-- Have a flashlight and radio with fresh batteries available.
-- In a blackout, unplug or turn off all appliances, TVs and computers. Leave
one light on to warn you when the power comes back.
-- When the power returns, turn one appliance on at a time to prevent power
surges.
-- Don't plug a generator into the wall; when power returns, it can send a
high-voltage current through the system that can electrocute power workers.
-- Tell children who are home alone to remain calm, turn off TV and computers
and not to use candles.
Tell us what you think -- What are your suggestions for saving energy? Send
your best tips to Energy Desk, San Francisco Chronicle, 901 Mission St., San
Francisco, CA 94103; or put your ideas in an energy-efficient e-mail to
energysaver@sfchronicle.com.
E-mail Erin Hallissy at ehallissy@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 1

California's path to energy independence
Gray Davis
Monday, June 18, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/18/E
D372.DTL
WE ARE still a long way from being out of the woods in this energy crisis.
Yet, we are on a path toward taming a problem that just a few months ago
seemed insurmountable.
My administration has licensed 16 major new power plants, and we have more
than 4,000 megawatts of new power generation coming on line this summer.
Nearly 40 new contracts for electricity worked out by my negotiators already
are putting strong downward pressure on the prices the state is paying for
electricity. Some 43 percent of the power we're buying to keep the lights on
is now under long-term contract.
In addition, conservation is playing a big part in this turnaround.
In January, I called the state Legislature into special session to work out
solutions to our power problems. One result was legislation appropriating
more than $850 million for conservation projects - the largest such
conservation program ever offered by California or any other state. Among its
features are home weatherization assistance, residential air conditioning and
appliance rebates, and peak-load reduction incentives for agriculture and
industry.
In response to these measures and to my call for conservation, Californians
are dramatically reducing their electricity use, especially during peak hours
when electricity is the most expensive and hardest to come by.
Some might believe that we are just sweating in the dark in order to produce
these savings. But that is simply not true. Conservation goes hand in hand
with energy efficiency, and in this regard we in California are a world
leader.
For instance, we are pioneering the use of light-emitting diodes (LED) in
traffic signals that use 75 percent less power than conventional traffic
lights.
Through our Powerwalk program, members of the California Conservation Corps
are distributing 1.5 million compact fluorescent lightbulbs that use a
fraction of the power of similar-sized incandescent bulbs, saving enough
electricity to power 100,000 homes.
Use of other new technology such as variable-speed motors, high-efficiency
air conditioners and real-time metering also will produce results.
State government also has been at the forefront of this conservation effort.
On average, state agencies this year have reduced energy consumption in state
office buildings by approximately 20 percent.
They are shutting off unnecessary lights, regulating indoor temperatures and
turning off computers when they aren't needed. In one simple but effective
strategy, state building managers have instructed janitors to clean buildings
one floor at a time, allowing the rest of the building to remain dark, and
thereby cutting lighting use significantly.
The state also has adopted the country's most energy-efficient building
standards for residential and commercial structures. This effort has won the
support of the building industry, and will save California an estimated 200
megawatts or more a year.
One state building project alone - the Capitol Area East End project in
Sacramento - will save taxpayers an estimated $400,000 a year in energy
costs.
Expanding this effort to local government, we've entered into energy
conservation partnerships with 225 California counties, cities and special
districts. And partnerships with businesses and private organizations have
been central to the state's conservation efforts. Just last week, for
example, I issued an executive order offering incentives for businesses that
voluntarily cut their electricity use during peak periods.
Businesses are cooperating in other ways, too.
McDonald's, for example, has agreed to place energy conservation messages on
4 million tray liners in their 1,100 restaurants statewide. Through the
California Grocers Association, supermarkets such as Safeway have placed
energy conservation tips on grocery bags and in stores.
A unique partnership between the state, the Building Owners and Managers
Association and the Service Employees International Union has produced a
five- point plan to reduce energy use by 10 percent or more in some 300
million square feet of commercial office space.
Moreover, we know that the cheapest megawatt of power is the one we don't
have to buy. That is why I have instituted the 20/20 program for customers of
Pacific Gas and Electric Co., Southern California Edison and a similar 15/20
program for customers of San Diego Gas & Electric.
Those who reduce their summer 2001 use by 20 percent over what they used last
summer (a 15 percent reduction for SDG&E customers) will receive a rebate of
20 percent on their electric bills. This program has the potential to reduce
power use by thousands of megawatt-hours over the summer.
Finally, I have reached an agreement with 137 California companies, including
major banks, manufacturers and technology companies, to reduce their energy
consumption by 20 percent between June 1 and Sept. 30. I am tremendously
encouraged by how enthusiastically Californians have pursued energy
conservation.
In the long run, there are two truly essential pieces to the solution to our
energy crisis: We must continue to build more power supply and we must
continue to dampen demand through improved energy efficiency.
Together, these measures will ensure that there is enough power available to
keep prices reasonable and our economy strong and stable long into the
future.
Gray Davis is the governor of California.
,2001 San Francisco Chronicle ? Page?A - 17

Developments in California's energy crisis
The Associated Press
Monday, June 18, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/06/18/state2
131EDT0193.DTL
(06-18) 07:48 PDT (AP) --
Developments in California's energy crisis:
MONDAY:
* A heat wave may mark the return of rolling blackouts to California, with
the ISO forecasting the possibility of Stage 3 alerts for Monday and Tuesday.
SUNDAY:
* In a conference call, state Democrats said power company profits gained
during the electricity crisis will go toward a new ad campaign blaming Gov.
Gray Davis for the rising costs. The advertisement is set to begin airing
Monday on television. Democrats said they expect the American Taxpayers
Alliance will spend $5 million on the campaign. The ad is produced by GOP
strategists.
SATURDAY:
* At a town hall meeting, a panel of state officials offered few answers to
San Francisco residents who wanted to know how the $43 billion in long-term
contracts released by Gov. Gray Davis Friday would affect their energy costs.
Ambassador Richard Sklar said he had not read the contracts yet, but hoped
they made sense. Sklar is the chair of Davis' Generation and Implementation
Task Force. For the 100 people that gathered at the meeting, the contracts
appear to have added to confusion over the energy crisis.
WHAT'S NEXT:
* A heat wave may mark the return of rolling blackouts to California this
week, with the ISO forecasting the possibility of Stage 3 alerts for Monday
and Tuesday.
* Federal officials are expected Monday to slap new limits on wholesale
electricity prices. The Federal Energy Regulatory Commission, which regulates
wholesale electricity transactions, is expected to put 24-hour caps on the
price of power in the West.
* The Senate Energy Committee begins hearings Tuesday on variations of Gov.
Gray Davis' proposal to aid financially strapped Southern California Edison.
Senate Judiciary and Senate Natural Resources committees also plan hearings
in advance of the Aug. 15 deadline for action.
* Davis' representatives continue negotiating with Sempra, the parent company
of San Diego Gas and Electric Co., to buy the utility's transmission lines.
* The Senate Governmental Affairs Committee, chaired by U.S. Sen. Joseph
Lieberman, D-Conn., holds hearing Wednesday on the power crisis.
THE PROBLEM:
High demand, high wholesale energy costs, transmission glitches and a tight
supply worsened by scarce hydroelectric power in the Northwest and
maintenance at aging California power plants are all factors in California's
electricity crisis.
Southern California Edison and Pacific Gas and Electric say they've lost
nearly $14 billion since June to high wholesale prices the state's
electricity deregulation law bars them from passing on to consumers. PG&E,
saying it hasn't received the help it needs from regulators or state
lawmakers, filed for federal bankruptcy protection April 6.
Electricity and natural gas suppliers, scared off by the companies' poor
credit ratings, are refusing to sell to them, leading the state in January to
start buying power for the utilities' nearly 9 million residential and
business customers. The state is also buying power for a third investor-owned
utility, San Diego Gas and Electric, which is in better financial shape than
much larger Edison and PG&E but also struggling with high wholesale power
costs.
The Public Utilities Commission has approved average rate increases of 37
percent for the heaviest residential customers and 38 percent for commercial
customers, and hikes of up to 49 percent for industrial customers and 15
percent or 20 percent for agricultural customers to help finance the state's
multibillion-dollar power buys.
,2001 Associated Press ?

Federal panel considering ways to rein in Western energy prices
H. JOSEF HEBERT, Associated Press Writer
Monday, June 18, 2001
,2001 Associated Press
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/06/18/nation
al1008EDT0498.DTL
(06-18) 07:08 PDT WASHINGTON (AP) --
As a federal energy commission -- with two new Bush appointees on board --
prepared Monday to take up proposals to ease Western electricity prices,
President Bush emphasized his opposition to price controls.
The Federal Energy Regulatory Commission, at a meeting later in the day, was
expected to expand electricity price limits in California to include 10 other
Western states and to cover sales outside of periods of power emergencies.
"I want to see what they have to say," Bush told reporters at the White House
Monday. "Although I've had the opportunity of naming two members to the FERC,
they are independent. They know full well my administration's belief that
price controls will not solve the problem."
Other Republicans hoped action by FERC would stem growing pressure in
Congress for the federal government to impose broader cost-based price
controls on Western electricity sales.
Democrats, newly in control of the Senate, made clear last week that they
intend to make energy costs a key issue in the coming weeks. They already
have launched a series of hearings on the California power problems and
called for price caps on Western electricity sales.
Western power markets "are out of whack" and the federal government is
obligated under the law to assure prices are just and reasonable, Senate
Majority Leader Tom Daschle, D-S.D., said on "Fox News Sunday."
Bush has strongly opposed price controls in energy markets, including
California's electricity sales, which for much of the year have been 10 times
what they were in 1999 before dropping in recent weeks.
However, The Washington Post quoted unidentified administration officials as
saying the president would endorse less stringent price limits imposed by
FERC.
GOP congressional leaders, meanwhile, stayed firm in their opposition to
price controls.
"When Democrats say price caps, I believe that's the problem, not the
solution," said Senate Minority Leader Trent Lott, R-Miss. He promised to
fight price cap legislation and urged Bush to veto any such bill should it
pass.
But a growing number of GOP lawmakers also have become worried that if
Republicans are viewed as obstructionist in the face of soaring Western
electricity costs and high gasoline prices nationwide, they could lose
control of the House in the 2002 midterm elections.
In a letter last week, more than a dozen House Republicans urged the
commission to broaden the electricity "price mitigation plan" it approved in
April and extend price limits to all sales and to 10 other Western states.
Currently, the order is confined to whenever California's energy reserve drop
below 7.5 percent, triggering an emergency.
California Gov. Gray Davis, a Democrat, claims FERC's earlier action has done
little to ease his state's power problems because it sets limits too high and
includes loopholes that allow power providers to easily avoid them
altogether.
"If they plug some of the loopholes ... then they will have begun to do their
job," Davis said.
The commissioners have refused to discuss their plans, but FERC Chairman
Curtis Hebert is said to view an expansion of the April order favorably. The
April plan passed 2-1 with Commissioner William Massey, one of two Democrats,
opposing it on grounds it did not go far enough to stop price gouging.
Since then, the commission has gained two more members: Pat Wood, a Bush
confidant and former head of the Texas utility commission; and Nora Mead
Brownell, a former Pennsylvania utility regulator. Although both are Bush
appointees, they are viewed as more receptive to price intervention than is
Hebert, a staunch defender of the free-market system.
Whatever action the five-member FERC may take, it is viewed pivotal by
lawmakers of both parties.
Sen. Jeff Bingaman, D-N.M., the new chairman of the Senate Energy and Natural
Resources Committee, warned that unless the commission takes more steps to
curtail profiteering, he will push legislation within the next two weeks
requiring further federal measures.
In the House, Democrats likewise believe they have a politically potent
issue.
Last week, when a House committee rejected by a party-line vote a spending
bill rider on price caps, an angry Rep. Nancy Pelosi, D-Calif., the measure's
sponsor, snapped: "I think Republicans don't know how much damage they did to
themselves today. They voted in favor of the gougers."
It's the kind of rhetoric that is making GOP members nervous.
"We hope FERC will do its job," said Rep. Randy Cunningham, R-Calif., who has
had to explain the high power costs and blackouts to his constituents. "If
they find unreasonable charges they should act."
,2001 Associated Press ?

Tougher price caps prompt controversy
Consumer boon or bane? Experts split
Carolyn Lochhead, Chronicle Washington Bureau
Monday, June 18, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/18/M
N118354.DTL
As a petri dish for electricity deregulation, California has had a rough time
of it. Now the state and the rest of the West stand poised to undergo another
big experiment to fix the first one: imposing price caps on wholesale
electricity.
The potential consequences will be no less far-reaching. But unlike the
obscure mid-1990s debate over deregulation, the price-cap decision is being
made in a supercharged political climate where expert opinion is fiercely
divided.
Some of the nation's leading economists contend price caps are essential to
protect consumers from price gouging this summer. Others insist they are a
recipe for further chaos.
One leading expert said price-cap proposals are based on the same arguments
that created the worst fuel shortage in U.S. history. Another called fears
that intervention will create havoc like the 1970s gasoline lines "silly."
For consumers in California and throughout the West, it matters a great deal
who's right.
The Federal Energy Regulatory Commission is expected today to extend the
price-cap order now limited to power emergencies to all times of the day and
to the entire Western region. Such action falls short of the cost-based price
caps advocated by California's Democratic Sen. Dianne Feinstein and Gov. Gray
Davis, which essentially would return the state to its old regulatory regime
before the ill-fated 1996 restructuring.
But the new price cap plan goes much further than anything regulators have
attempted so far under deregulation, and would come close to the price caps
many have advocated.
Price caps have become the flash point of the entire debate over California's
electricity crisis. The Bush administration argues that caps will create more
blackouts by discouraging suppliers from providing more power. Democrats
contend they will prevent blackouts because price-gouging generators are
deliberately withholding power to drive up prices.
Alfred Kahn, the Cornell University economist who crafted the successful
deregulation of the airline and trucking industries during the Carter
administration, led 10 economists who wrote President Bush to express "deep
concern" about the federal failure to intervene.
Paul Joskow, a leading expert on electricity deregulation at the
Massachusetts Institute of Technology, Severin Borenstein, director of the
Energy Institute at the University of California at Berkeley, and Frank
Wolack,
a Stanford University economist who headed California's electricity market
monitoring committee, all signed the letter and testified at a Senate panel
Wednesday.
They contend conditions are ripe in California to allow power generators to
drive up electricity prices to outlandish levels by strategically withholding
supply.
In their view, Californians are trapped in a classic monopoly vise created by
a deeply flawed deregulation scheme, drought-induced hydropower shortages,
high natural gas prices, a shortage of capacity and over-reliance on spot
markets.
Electricity is unique, they say, because it is impossible to store, so there
are no inventories to smooth out demand and supply. And because the vast
majority of consumers do not have meters that reflect minute-by-minute price
changes, and power plants take years to build, short-term demand and supply
are unresponsive to prices. As a result, even a tiny reduction in supply can
send prices soaring.
These economists insist it is the responsibility of federal regulators to
intervene to prevent a huge transfer of wealth this summer from California
consumers to power-generating companies.
If price caps are temporary, exempt new power plants and allow sufficient
profits, Kahn told the Senate Governmental Affairs Committee, "there will be
no shortage of people interested and willing to build new power plants."
Added Borenstein: "To dismiss price controls because they were used badly in
the 1970s is as silly as dismissing deregulation because California did it
badly."
But other economists view the political momentum for price caps with alarm.
Paul MacAvoy, a Yale University economist and the nation's leading authority
on the deregulation of natural gas, said Kahn is basing his arguments on
those he made in the 1960s when urging Congress to control natural gas
prices.
By 1974, MacAvoy said, Kahn's ideas had become "the prime, if not the only,
cause of the most massive shortage of a fuel in the history of America,"
which he called "the Kahn natural gas crisis of the mid-1970s.
"Most of urban and rural America from Iowa to Pennsylvania was shut down for
months at a time in the cold winter of '76-'77," MacAvoy said. "People had to
go and sleep on the floor of schoolhouses because there was no gas."
MacAvoy and other economists contend that price spikes are a symptom of
California's capacity shortages. Controlling prices will aggravate the
underlying problem, they say. If prices are not allowed to ration
electricity, then it will be rationed through blackouts -- just as price
controls on oil in the 1970s created lines at the gas pump.
Wayne Angell, a former Federal Reserve Board member, bluntly called price
controls "a recipe for disaster," in a letter to Sen. Fred Thompson, R-Tenn.
Angell said California has already proven that point by keeping a cap on
retail rates that officials only recently and partially raised, but which
helped bankrupt one of the state's two investor-owned utilities.
MacAvoy said none of the studies done by Joskow, Borenstein and others
alleging that generators can exercise power over the market in California are
convincing -- much less the dramatic charts of power plant outages and price
spikes that are a regular feature of Capitol Hill press conferences.
Even the best of these studies, MacAvoy said, find that market power might be
exercised 0.5 percent of the time in California.
Whether electricity price caps succeed or fail could hinge on critical
details that have been obscured by politicians, such as the exact level of
any price cap and how it would be administered and monitored. Even the
staunchest proponents say any cap must be temporary and must remain above
production costs -- even though political forces often drive caps below cost
and keep them on for decades.
"Listening to some of the testimony this morning reminds me of the dangers of
price controls," Borenstein said Wednesday. "Once we go down this road, we
are going to have to be careful. . . . In the 1970s we tried to control the
transfer of wealth in a very competitive market, and we ended up completely
screwing up the market and causing shortages."
Mitch Wilk, a former head of the California Public Utilities Commission who
favors temporary price caps, also warns that they are no easy fix.
"The very same government that got us into this mess," Wilk warned, "is the
same group that we're going to be looking to, whether it's federal or state,
to fit a price cap regime to particular market conditions that could exist
today but be completely different in a week or a month from now."
Price regulation of electricity is very complex and "implies government
knowledge and skill and precision that I think . . . this crisis has shown
does not exist," Wilk said.
Energy Secretary Spencer Abraham warned in an interview that Canadian
suppliers, who provide 13 percent of the power to the Western grid, could
pull out of the market if prices are set too low.
"Prices are a problem, we don't deny that," Abraham said, "but they're not
nearly the kind of problem that a blackout creates, whether it's an economic
impact or a health and safety impact."
E-mail Carolyn Lochhead at clochhead@sfchronicle.com
,2001 San Francisco Chronicle ? Page?A - 1

THE ENERGY CRUNCH
Pacts may give upper hand to gas traders
Clause allows price of electricity to change with production cost
Bernadette Tansey, Chronicle Staff Writer
Sunday, June 17, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/17/M
N93079.DTL
When Gov. Gray Davis showed his hand last week by releasing details of the
state's long-term electricity contracts, he claimed California now had
leverage in the high-stakes power game that has nearly cost the state its
shirt.
But the state's hand contains a wild card. Some contracts have provisions
that allow the price of electricity to rise or fall with the price of natural
gas, the fuel that runs most electricity generating plants.
Those "fuel adjustment" clauses raised alarms for some energy analysts, who
say the state's promise to cover generator costs if fuel prices rise could be
an open invitation for gas traders -- some of whom also sell electricity to
the state -- to hike their rates.
Disclosure of the provisions also means that the $43 billion figure that
state officials attached to the long-term contracts only represents an
estimate of what the state will pay.
Davis' chief energy adviser, S. David Freeman, said the price of natural gas
can fall just as easily as it can rise -- yielding savings for California
under the electricity agreements. And the state, he said, has a strategy
ready if suppliers claim unreasonable gas costs: Under the contracts, the
state can serve as a backup buyer if it can deliver natural gas at cheaper
rates.
"The state can go and get our own gas if we don't like producers' prices,"
Freeman said Friday, signaling for the first time that California is prepared
to greatly expand its controversial role as an energy trader.
But the state could be getting into the natural gas game just as critics say
it may have been outplayed by energy giants in the electricity deals.
"They're basically playing chess, and the governor is playing checkers," said
University of California at Irvine economist Peter Navarro. "They're really
out of their league."
Freeman said the state can maintain its own portfolio of natural gas
contracts at better-than-market rates. That's a complex task that can involve
out-of-state gas purchases, pipeline transportation contracts and storage
strategies that would put the state in the same league as Enron Corp.,
Dynegy, El Paso Corp. and other masters of global energy markets.
Navarro, an expert on energy regulation, said generators had the state over a
barrel when they locked in the adjustment clauses, because they forced the
state to bear the risks of the notoriously volatile natural gas market.
Prices for natural gas peaked last winter at 10 times the nationwide average
at the Southern California border.
And that market, controlled by a small number of sophisticated players, is
rife with opportunities for gaming, he said. Natural gas companies could send
all their high-priced gas to California, manage pipeline contracts to
maximize gas prices or sell gas to their own power affiliates at favorable
rates.
"The governor negotiated those contracts in a panic, bargaining from
weakness," Navarro said.
In about half of the 38 long-term contracts, payments for electricity depend
on the rise or fall in the price of natural gas, the fuel for the new power
plants that will contribute 70 percent of the juice lined up by the state.
Most details of the fuel arrangements were blacked out in the contracts
released by the governor, along with other undisclosed provisions that
experts say make it impossible to fully assess what the state will pay in
future months and years.
A crucial question is what number the generators can use to claim increased
gas costs, said energy consultant Tom Beach of Cross Border Energy in
Berkeley. Will they have to demonstrate their actual cost by producing their
signed gas contracts, Beach wonders, or do the state deals peg electricity
payments to a commonly used market index -- the spot price of gas at the
Southern California border?
"That particular price has caused a lot of problems in the past," said Beach.
Beach and other analysts say California has already been through an expensive
exercise with power contracts pegged to the spot cost of gas when it arrives
in the state on interstate pipelines from gas producing basins in the
Southwest, Canada and elsewhere.
A host of state and federal investigators are still trying to determine why
natural gas spot prices went through the roof when the fuel passed over the
California border -- particularly near Topock, Ariz. The state Public
Utilities Commission has accused El Paso Corp. of restricting the flow of gas
in its pipeline through Topock, making gas scarcer in California and thus
more expensive on the spot market.
Whatever the cause of the spot price spikes, investor-owned utilities were on
the hook for millions more in payments to small generators who had negotiated
electricity prices with the utilities pegged to the natural gas border price.
Some of those generators were owned or controlled by El Paso -- the same
company accused of engineering the border price hike.
The Federal Energy Regulatory Commission this month expanded its probe of the
allegations of market manipulation against El Paso. Freeman said recent
regulatory commission actions have raised hopes that federal regulators will
monitor California's gas market more closely to ensure competition that could
control prices.
The risk of market gaming could apply to any new state contracts with "fuel
adjustment" clauses, Beach said.
"That can be a problem," he said. "(The cost of gas) is just a complete
pass-through."
Navarro said the danger is heightened in an energy economy like California's,
where the same firms that sell electricity to the state may also be the gas
suppliers for their own generating plants. The natural gas affiliates could
make "sweetheart deals" to sell gas to their sister power plants at prices
higher than market rates. The power affiliate would bear no risk from the
high-priced sale, because its gas costs could be covered by the state, he
said.
Companies like Enron, El Paso and Williams, which control both pipelines and
power generated for the state, could also work together to prop up gas
prices, Navarro said.
"The general concern here is when you have fuel adjustment clauses you need
to worry about the possibility of manipulation of the gas price," Navarro
said.
Representatives of Dynegy, which has state contracts pegged to gas costs, did
not respond to requests for comment.
Tom Murnane, a spokesman for Sempra Energy Resources, said the "fuel
adjustment" provisions for Sempra and other companies will not lead to gas
price manipulation.
"It's highly unlikely," Murnane said.
To have an impact on gas prices, he said, a company would have to control
very large volumes of gas.
El Paso now shares with other gas shippers the huge block of capacity on its
pipeline to Southern California that used to be controlled by an El Paso
marketing affiliate. El Paso has one of the new state power contracts, but it
only covers 100 megawatts, said El Paso spokeswoman Norma Dunn.
Murnane said state utility regulations would prevent Sempra Energy Resources
from making anti-competitive deals with its affiliate Southern California
Gas, a regulated utility.
Larry Foster, a natural gas expert for Platts energy news services, said the
state contracts are unlikely to become a driver boosting natural gas costs.
He said ordinary market forces such as the balance of supply and demand are
the main factors that will set the rates.
Foster said state officials hold a lot of power to improve gas supplies
flowing into California by encouraging the construction of badly needed
pipeline capacity. Doing that could actually drop gas prices, and lead to
lower power prices under the state electricity contracts.
"I think it's pretty clear to a number of officials in California that the
state (pipeline) system needs to be expanded," Foster said.
But Foster agreed with other experts that great uncertainty remains in the
cost of the power contracts linked to fuel costs. And he said a case could be
made that powerful energy firms dealing in both gas and electricity could
prop up gas prices in California.
"The consequences of that argument are that the state did a really horrible
job of writing those contracts," Foster said.
E-mail Bernadette Tansey at btansey@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 1

The zero percent solution
Gary Ackerman
Sunday, June 17, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/17/I
N122295.DTL
The "solution" to California's energy crisis proposed by so many -- including
Gov. Davis, members of the California Legislature, and Democratic as well as
some Republican lawmakers in Washington -- has a success rate of precisely
zero.
The object of their affection is popularly called "price caps." They hope
that, perhaps as early as tomorrow, the feds will impose caps, or something
like them, on wholesale electricity rates in the West.
But price caps have never worked, and they never will.
So why are politicians and a healthy proportion of our citizenry jazzed about
a blunt policy tool that, if anything, will make matters worse?
Because people are frustrated. They are tired of feeling victimized by a
deregulation law, passed in 1996, that was fatally flawed. They are angry
about footing the bill. They are fed up with endless legislative "fixes" that
don't really fix a thing.
So, as in any desperate situation, people are tempted to turn to ideas that
have no chance -- like victims stranded on an open sea with nothing but sea
water to slake their thirst.
Previous attempts to impose price caps didn't work either.
In the 1950s, the federal government chose to regulate natural gas prices
based on "cost." As natural gas usage increased for home heating and
industrial processes, the scheme proved impossible to administer. Prices were
set too low to prompt energy entrepreneurs to explore and produce more. The
result two decades later was a natural gas shortage so severe that, by
February 1977, some 4,000 manufacturing plants were idled, 1 million workers
laid off and hundreds of schools closed for lack of heating.
Congress responded in 1978 with the Natural Gas Policy Act, establishing a
program for phased deregulation of natural gas. Since then, natural gas
shortages have never reappeared.
It happened again in 1979. Crude oil prices were surging while the nation was
saddled with a system of oil price controls inherited from the Nixon
administration. Despite the urging of Energy Secretary James Schlesinger,
President Jimmy Carter refused to eliminate federal price controls on
domestic petroleum. The result: long lines at the gas pump.
The current energy crisis in California can be laid directly at the door of
the misguided belief that price caps not only work but benefit consumers.
While freeing up wholesale prices, the 1996 deregulation act (AB 1890) froze
retail electric rates. The result: the bankruptcy of Pacific Gas & Electric
and the near financial ruin of Southern California Edison.
Perhaps the strongest impetus for price caps on wholesale prices is the fear
of rolling blackouts this summer. But caps won't keep the lights on. Capping
prices reduces both the incentive to produce and the urge to conserve, making
blackouts even more likely.
Responding to prevailing political winds, however, federal regulators, --
according to press reports -- are set to announce some sort of "price
mitigation" program, beyond the current scheme that imposes limits when power
reserves fall below 7.5 percent.
Various plans have been reported, including one that would peg the price to a
previous day's price -- presumably the highest -- charged by the "least
efficient" generator. That sounds simple, but in practice would be
unworkable. "Least efficient" and highest price don't always go hand in hand.
Especially in a region that spans 13 western states, and where fuel prices
vary all over the regional map.
Such a scheme sounds similar to the natural gas price caps of the 1950s. It
won't work any better now than it did then, and for the same reasons:
Producing and bringing electricity to market has more variations and
complexities than almost any other commodity.
And supporters of price caps are in for big disappointment: Many of the
largest producers in the region's power sector -- municipal utilities,
irrigation districts, public utility districts and Canadian producers -- are
not regulated by the feds and will not be subject to these new rules.
A final irony: The power market has demonstrated over the last few weeks that
price caps are unnecessary. Thanks to market forces that increased supply and
mild weather that lessened demand, wholesale prices have fallen dramatically.
We aren't out of the woods. This is probably a temporary break. But the
wholesale electricity market is working, which must be something of a
disappointment to politicians looking to crucify the power industry on the
crosses of "price-manipulation," "gouging" and "collusion."
If things were only so simple. How nice to wave a magic price-cap wand and
instantly reduce your electricity bill. But there is no such wand. Never has
been. Never will be.
Gary Ackerman is executive director of the Western Power Trading Forum in San
Jose. E-mail: gackerman@wptf.org
,2001 San Francisco Chronicle ? Page?D - 5

Davis reveals power contracts
Critics point fingers after forced release of details
Lynda Gledhill, Christian Berthelsen, David Parris, Chronicle staff writers
Saturday, June 16, 2001
,2001 San Francisco Chronicle
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/16/M
N114282.DTL

Sacramento -- Under court order, Gov. Gray Davis released details yesterday
of long-term power contracts that lock in $43 billion in power for California
over the next 20 years, most of it coming from plants now under development.
The average price of $69 per megawatt hour is much cheaper than the price the
state has been paying in the spot market. Critics warned, however, that it
may leave the state paying far too much for power in just a few years. The
price is also twice the average cost charged just a year ago.
But S. David Freeman, Davis' chief negotiator on the contracts, said the
state got a good deal despite being in a weak bargaining position when it was
suddenly plunged into the power-buying business as rolling blackouts swept
the state in January. Nailing down the long-term contracts, he said, forced
down the price of electricity on the spot market.
"These are a major building block for licking this energy crisis," he said.
This month, energy prices dropped to their lowest in nearly a year. Critics
of the long-term contracts say they believe generators took advantage of the
state, and they say other factors -- including milder weather and changing
political winds that may force federal regulators to rein in wholesale prices
-- led to price drops.
"The problem with the contracts is that the governor adopted a long-run
strategy for a short-term crisis," said Peter Navarro, a University of
California at Irvine economics professor. "The generators wanted these --
they locked in lucrative long-term contracts knowing full well that the price
will drop."
Davis -- who released portions of the 38 contracts only after Republican
lawmakers and media organizations, including The Chronicle, sued to make them
public -- defended his energy-buying strategy.
"What matters is the total price of power, and on May 10 the state had to pay
$110 million for power. Two days ago we spent $29 million," Davis said. ". .
. The combination of building new plants, record conservation, long-term
contracts are all working to bring the total price of power down in
California."
Davis officials say the contracts for 600 million megawatt hours help ensure
that supply will increase over the next several years because 70 percent of
the electricity is contracted to come from plants either under construction
or on the drawing board in California.
Some of the agreements contain several clauses, however, that allow prices to
fluctuate with the price of natural gas and require that the state pay for
new taxes levied on power producers.
Generators also can walk away from the contracts if the state does not issue
$12.5 billion in revenue bonds to cover the cost buying electricity on behalf
of California's cash-strapped utilities by July 1.
Although the state treasurer does not expect to issue the bonds until early
September, state power negotiators say they are working with generators to
revise those parts of the contracts. They say generators now have little
incentive to abandon the contracts in light of lower wholesale costs.
The average price of power on the day-ahead market has dropped from $275 per
megawatt hour in January to just $121 for the first part of June. One
megawatt is enough electricity to power 1,000 homes for one hour.
The contracts are all of different lengths, prices and conditions. They total
about 50 percent of the state's needs over the next decade. The state still
has 23 agreements with generators that have not been turned into signed
contracts.
Freeman said generators drove a hard bargain. Asked if any of them requested
that various state investigations into allegations of price gouging be
dropped as part of the deals, he responded, "People attempted everything, but
we resisted."
Although ratepayers will ultimately foot the bill for the power, Freeman said
he doesn't believe any new rate increases will be needed as a result of the
contracts.
Nettie Hoge, director of The Utility Reform Network, said her staff attorneys
are still analyzing the contracts, but, so far, they seem to offer a mixed
bag.
"These are fairly steep contracts," Hoge said. "They're costly. I think we
paid too much for stability. But to put that all on the governor would be a
mistake. Had FERC acted more rapidly (to cap prices), this wouldn't be
necessary."
One contract with Dynegy is fixed at $119.50 per megawatt hour for 1200
megawatts through the end of this year. The contract then extends through the
end of 2004 for 800 megawatts of peak and off-peak power.
One of the highest prices paid is $249 per megawatt hour for a contract with
Coral Power, L.L.C. of Houston. The contract for 100 to 325 megawatt hours
runs from June 1 to Oct 31 of this year.
Vikram Budhraja of the Electric Power Group, a consultant to the state
Department of Water Resources, said many new power plants in the works would
not have been built without the contracts.
"These contracts fundamentally alter the supply and demand balance," he said.
Mike Wilczek, a senior energy market analyst for the energy industry
publication Platts, reviewed the contracts yesterday and said they seemed
appropriate for the time they were written.
"They were basically negotiating a lot of these deals at the peak of the
market," he said, "when the fears were the worst and when nobody knew what
was going to happen and when everyone was holding onto the power they had."
Wilczek said the state ultimately may have made the right decisions.
"It was a risk to wait," he said. "The smart thing was to lock in something,
and a lot of people did just that, not just the state. The utilities
throughout the West were buying on the forward market."
Freeman also defended the contracts that include a clause that allows the
price to fluctuate with the price of natural gas. Some of the companies under
contract also have natural gas divisions. Natural gas costs account for about
80 percent of electricity costs, Freeman said.
Consultant Tom Beach of Cross Border Energy in Berkeley said the state may
have traded one set of problems for another with contracts that hinge power
prices on the volatile rates in the natural gas market.
"Your electricity price is then pegged to the gas spot market rather than the
electricity spot market," Beach said.
The state said that it would supply its own natural gas if the prices charged
by the generators are too high.
The contracts are with companies such as Mirant, Dynegy and El Paso, the same
companies that Davis has spent months lambasting for gouging the state.
That has led some to consider instituting a windfall profits tax on the
generators, but Freeman said the contracts would not be subject to the tax
because the prices are reasonable.
At least one generator expressed concern about the release, citing
confidential information.
Anne M. Cleary, president of Mirant California, said releasing the contracts
will jeopardize the price of future contracts. She said the contracts cannot
be put into proper context without, among other things, the price of natural
gas at the time the deal was negotiated; that information was blacked out of
the contracts.
Nevertheless, she said, "It matters to us because we believe that if everyone
in the market has access to this information, then the DWR will not be able
to be as competitive in their procurement ability."
Key details of the contracts were blacked out, including data that could
identify the plants under contract. Davis insisted on keeping the contracts
secret until this week, saying the details would weaken the state's
bargaining position. Critics said the deletions make a thorough analysis of
the deals impossible.
"They've taken out most of the stuff we're interested in," said attorney Al
Wickers, who represented The Chronicle and others in the fight to release the
contracts. The missing material is "essential to the public understanding of
the true costs and risks of these contracts," he added.
Key parts of the deal
-- About 70 percent of the electricity would come from plants that are
planned or under construction.
-- The power represents 50 to 60 percent of California's long-term needs.
-- Some contracts allow the price of electricity to go up or down based on
the price of natural gas or pollution credits.
-- A few contracts contain allow the generator to pass along to the state the
cost of any new taxes imposed.
-- Some key details were omitted, including data that could identify plants
under contracts.
Chronicle staff writers Robert Salladay, Bernadette Tansey and Chuck
Squatriglia contributed to this report. / E-mail Lynda Gledhill at
lgledhill@sfchronicle.com.
,2001 San Francisco Chronicle ? Page?A - 1

California energy market strategy criticized
Posted at 11:19 p.m. PDT Sunday, June 17, 2001
BY BRANDON BAILEY

Mercury News

As temperatures climbed in California last July, one power generator offered
to sell electricity at $500 per megawatt hour -- almost five times what state
officials believe it cost to produce.
When the state's power demand rose to peak levels on five consecutive days,
utilities couldn't find enough electricity for sale at a lower cost. On each
day, officials who manage the power grid reluctantly accepted the company's
offer and paid what they considered an excessive price.
Today, the Federal Energy Regulatory Commission meets to consider limits on
the wholesale price of electricity. As they seek Washington's help in fixing
the energy market, state officials say that what happened last July is
evidence that federal regulators were mistaken when they concluded that
competitive forces in California would keep power companies from setting
their prices too high.
In order to sell electricity in California's newly deregulated market, each
of the state's power suppliers had to win permission from FERC to charge
whatever price the market would bear. To do that, each company had to
demonstrate it would not have ``market power'' -- the ability to drive up
prices and keep them high.
State officials now contend that FERC used a faulty economic premise to
evaluate those claims: The commission assumed that if a company controlled
less than 20 percent of the electricity supply, it would be unable to
exercise significant market power.
``This was a really bad rule of thumb,'' said Severin Borenstein of the
University of California Energy Institute. ``The FERC has been using
antiquated methods that really don't help in diagnosing market power in
electricity markets.''
Each of the state's five big commercial power suppliers controls between 5
and 10 percent of California's electrical generating capacity. But critics
say that gives the companies more than enough leverage to charge excessive
rates.
``If demand is high, even a 5 percent market share could be pivotal in
setting the price,'' said Anjali Sheffrin, an economist for the California
Independent System Operator, the state's grid manager.
The ISO has formally petitioned FERC to revoke the big generators' permission
to charge unregulated rates, essentially returning to a system where rates
are based on the cost of production plus a reasonable profit.
A complex market
Suppliers insist they aren't manipulating prices. But one industry consultant
agreed that FERC's 20 percent rule fails to recognize the complexity of the
market.
The stakes are high: The grid operator has charged that power suppliers
reaped nearly $7 billion in excess revenues last year. And the argument may
ultimately determine how energy is bought and sold in California.
Other state agencies are investigating whether power suppliers illegally
manipulated power supplies or prices. But experts say that's hard to prove.
The ISO petitions simply argue that the companies should no longer be allowed
to set their own rates, because the market isn't competitive.
Indications are that FERC, which meets today to consider limits on the
wholesale price of electricity, will impose new controls. The Washington Post
reported Sunday that administration officials said President Bush plans to
support less stringent price controls, provided they are based on market
factors.
Still, most experts are predicting the commission will stop short of the
sweeping changes that state officials want. They said it's likely the state
will continue challenging FERC's standard.
FERC officials declined comment, but a spokeswoman provided documents
confirming the commission has used the 20 percent rule in deciding to let
companies charge unregulated rates.
The rule's origin
The rule is derived from a more complicated formula originally adopted by the
U.S. Department of Justice to use in gauging whether corporate mergers in
other industries would violate anti-trust law, according to economists
familiar with the standard.
But critics say it makes no sense to apply this rule to electricity.
Unlike other products, electricity can't be stored in large volumes, so
consumers can't buy power when prices are low and use it later when prices
get high.
Conservation can help cut demand, but electricity is so essential that the
state has kept buying even when the cost has soared.
On a hot day when the state needs plenty of power, for example, demand might
reach 38,000 megawatts.
If there are only 40,000 megawatts available, and one company controls 3,000
megawatts, the state will be forced to buy at least 1,000 megawatts from that
company. Because the company knows that, the ISO has argued to FERC, the firm
can effectively set the price.
The ISO estimated what prices the companies should be able to charge under
competitive conditions, based on such factors as fuel prices, operating costs
and a reasonable profit. If one company charges higher rates, the theory
goes, there should be competing suppliers who will sell for less.
No fear of underbids
Sheffrin said her studies show the major power suppliers have been able to
charge essentially whatever price they wanted, without fear that competitors
would underbid them. The studies are based on detailed analyses of power
sales by the five major companies and other suppliers.
Industry spokesmen say the ISO's economists used flawed assumptions to make
normal behavior seem sinister.
``We stand by the fact that we've operated ethically and legally,'' said
Richard Wheatley of Reliant Energy Inc. He said the ISO failed to consider
all the costs of producing power, including the need to recover long-term
investments in buying or building plants.
Without seeing the ISO's confidential data, University of Southern California
economics Professor Charles Cicchetti said he's not convinced the power
companies are doing anything wrong.
But Cicchetti, who advised Duke Energy when it won FERC's permission to
charge market-based rates in 1999, agreed that the commission's 20 percent
rule was overly simplistic.
FERC didn't recognize that California really isn't a single open market, he
said.
Power produced in Northern California isn't always available for consumers in
Southern California, because of grid congestion. Electricity sold on a
long-term contract may not be available in the spot market.
And until this year, buyers and sellers could choose between transacting
business through the now-defunct California Power Exchange, or the ISO.
Feeling the heat
By asking FERC to revoke the suppliers' right to charge market rates,
Cicchetti says, the state is effectively trying to end deregulation. Instead,
he believes authorities should concentrate on fixing the flaws in the system.
ISO officials have said they will consider legal action if FERC doesn't
respond by the end of this month.
Democratic leaders in the state Legislature have already raised a similar
challenge in a federal lawsuit.
Though a court declined to issue an emergency ruling last month, attorney
Joseph Cotchett said he is continuing to press the case before the Ninth U.S.
Circuit Court of Appeals.
Courts are often reluctant to second-guess a regulatory agency. Still, Frank
Wolak, a Stanford economist who advises the ISO, said he raised the issue in
congressional testimony last week.
``The truth is going to come out,'' he vowed. ``FERC is going to feel the
heat.''

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

U.S. energy regulators to vote on power caps for West
Posted at 6:40 a.m. PDT Monday, June 18, 2001
WASHINGTON (Reuters) - Federal energy regulators were expected Monday to
expand a form of price relief for wholesale electricity sold in California to
prevent power costs in the Western region from soaring this summer.
Amid mounting congressional pressure for action, the Federal Energy
Regulatory Commission (FERC) was to hold a special meeting to address the
chronic electricity problems affecting California and the rest of the West.
FERC, which oversees interstate power sales, was widely expected to vote for
a compromise approach to limit prices on wholesale electricity sold in the
West, according to congressional sources.
That approach would mean expanding a monitoring plan rolled out last month
that only applied to California after state officials declared a power
emergency.
Under the agency's existing ``price mitigation'' plan, the California price
limits are based on the amount that generators can charge to produce power at
the least efficient plant. Generators may charge higher prices if they can
justify them to the agency.
Expanding the plan to the entire Western region would fall short of the
strict price caps sought by California Gov. Gray Davis and many Democrats but
would still amount to a significant change in policy for FERC.
ECONOMIC, POLITICAL CONSIDERATION
The stricter price caps sought by Democrats would allow a generator to sell
wholesale power based on a formula covering actual production costs, plus a
moderate profit. That approach would be similar to the way U.S. utilities
were regulated for decades.
FERC's Republican chairman, Curtis Hebert, has repeatedly rejected the idea
of price caps, saying market forces should set power prices.
However, Republican lawmakers fear they may take a political hit for the Bush
administration's decision to oppose strict price caps and therefore pushed
for the compromise that calls on FERC to expand its limited price curbs.
The White House says it is worried that price caps would discourage
investment in new power plants and fail to encourage consumers to cut home
energy use.
Monday's meeting, due to begin at 1 p.m. EDT, would also mark the first time
that FERC has been fully staffed with five commissioners since the California
energy crisis began last year.
Republican commissioners Pat Wood of Texas and Nora Brownell of Pennsylvania
were nominated to the agency by President Bush. Wood is viewed as a Bush
confidant, having led the Texas Public Utilities Commission while Bush was
governor of the state.
FERC has been under growing pressure from Democrats and Republicans to help
find a solution to California's power deregulation fiasco.
Agency officials say that their measures are working. Since the FERC plan for
California price relief went into effect on May 29, wholesale power prices in
the state have dropped under $100 a megawatt from more than $300 earlier in
May.

Bush: FERC Western power plan not price controls
WASHINGTON (Reuters) - President Bush said Monday he did not consider an
electricity price-relief plan for the Western region that the Federal Energy
Regulatory Commission was expected to approve to be a form of price controls.
Bush said he remained opposed to electricity price controls. But he said the
plan that FERC was expected to approve Monday for limited wholesale price
curbs in the West was different.
``I'm interested to see what FERC comes up with. They're not talking about
firm price controls, they're talking about a mechanism to mitigate any severe
price spike that may occur, which is completely different from price
controls,'' Bush told reporters.

FERC considers new price limits today
State officials say a plan by federal regulators for 24-hour control of
wholesale power is 'too little, too late.'
June 18, 2001
By KATE BERRY
The Orange County Register
Federal energy regulators will meet today to consider imposing 24-hour
controls on wholesale electricity prices in California and the West, but
state officials criticized the plan as "too little, too late.''
The Federal Energy Regulatory Commission might adopt around-the-clock
controls that would require power suppliers to justify prices above a certain
level. The controls would expand a FERC order that took effect May 29, but
only applied during emergency alerts.
State energy officials said the price controls would not help California much
because they are based on the cost of running the least-efficient power plant
in the state, typically at high prices.
"What has been touted under the guise of price relief puts into place the
highest price,'' said Rep. Anna Eschoo, D-Atherton.
Michael Kahn, chairman of the California Independent System Operator, which
manages 75 percent of the electric grid, said FERC must impose price caps or
cost-based pricing.
He dismissed the ability of FERC to order refunds from power suppliers if
prices are deemed excessive. Generators are contesting the $124 million in
refunds - out of a potential $6.8 billion - that FERC has ordered so far.
"This is simply an invitation for years of litigation,'' Kahn said of
extending the price controls. "We want the generators to be stopped right now
from overcharging us.''
Eschoo joined advisers to Gov. Gray Davis in a conference call Sunday to
complain that Republican strategists had launched a $5 million advertising
campaign blaming Davis for high power costs.
The ads, set to air today, were funded by the American Taxpayers Alliance, a
politically active nonprofit group associated with the Washington law firm
Webster, Chamberlain & Bean. The law firm successfully defended George W.
Bush in the recent Florida vote-count controversy.

Atomic generation revisited
Energy shortages in the '60s and '70s put the spotlight on nuclear power. Now
it has new supporters.
June 18, 2001
By JOHN WESTCOTT
The Orange County Register
The airplane's engines hummed just south of Orange County as President John
F. Kennedy and his entourage rested during a short hop from San Diego to San
Francisco.
The year: 1961.
CIA Director John McCone pointed out the pristine bluffs of San Onofre. The
surf crested white on the empty beach, by the brown hills of Camp Pendleton
and the thin strip of Highway 101.
Wouldn't that make a nice spot for a nuclear power plant? McCone asked,
trying to tie up one last loose end from his recent stint as Atomic Energy
Commission chairman.
The president, who liked the idea of splitting atoms for peace, had to agree.
That casual airplane conversation broke a political logjam, suddenly putting
plans for the San Onofre Nuclear Generating Station on track. By 1968,
Southern California Edison would switch on the world's largest nuclear power
plant.
In the decades that followed, San Onofre helped spark the same questions
about energy that bedevil us today.
How would we get enough power to light all those homes and heat all those
swimming pools? Where is the line drawn between power plants, the environment
and blackouts? What role should nuclear power play?
Power shortages and the stratospheric cost of electricity have put dozens of
new power plants on the fast track, though probably none of them will be
online in time to fend off summer outages.
Old idea gains new proponents
Today's energy crunch also has Californians mulling an option once left for
dead: nuclear power. Decades after the horrors of Three Mile Island and
Chernobyl turned most people against atomic power, 59 percent of Californians
now favor building more nuclear plants, according to a Field poll in May.
Nuclear energy was the wave of the future in 1963, when the AEC predicted
half the nation's electricity would be nuclear-generated by 2003.
A citizens group fought plans for the San Onofre plant. Edison and its
partner, San Diego Gas & Electric Co., issued a joint statement describing
nuclear power as "vital to the continued growth and prosperity of Southern
California."
At the time, earthmovers were scraping 1.5 million cubic yards of rock and
dirt from San Onofre's bluffs. Lead contractor Bechtel Corp. began erecting a
steel containment shield that would enclose a nuclear reactor and three steam
generators. An inch thick, pale blue and perfectly round, it was soon dubbed
"the Beach Ball."
A 350-pound reactor vessel squeezed through the Panama Canal on its way to
Long Beach, then crawled down Highway 101 by night at about 3 mph, when it
wasn't hobbled by flat tires. More than 28,000 rods were installed in the
vessel, then filled with uranium oxide pellets.
Public interest swelled as the mammoth project continued. More than 58,000
visitors from all 50 states and 27 nations had come to see it by the fall of
1965.
On Jan. 1, 1968, San Onofre's Unit 1 began lighting up parts of Orange and
San Diego counties. It soon revved up to 450 megawatts, enough to light half
a million homes.
It was by far the most powerful nuclear power plant anywhere, remembers
Jarlath Curran, a plant engineer in the early years and today a project
manager at San Onofre.
"There were no water lines at first, so we used flash evaporators to make
ocean water pure," he said. "They didn't have all the fences and intrusion
detectors they do now. Only about 100 people worked there. There's about
2,000 now."
Edison soon applied for a major expansion. By then, numerous environmental
groups born in the early 1970s battled it with lawsuits, delaying
construction for years.
Development plans cut in half
Still, many people heralded nuclear power as the clean energy of the future.
One of the most enthusiastic was John Briggs, then a Fullerton state
assemblyman.
The city of San Clemente also was a fan, but mostly of San Onofre's revenue
possibilities. The city tried in the early 1970s to annex the plant - drawing
snickers from San Diego County that it might try to annex Disneyland.
The Three Mile Island accident in 1979 turned many against nuclear power.
More than 200 nuclear plants were once expected by the end of the century.
Only about 100 plants operate today.
The twin 1,120-megawatt reactors now covered by huge white domes began
operating in 1983 and 1984, supplying enough power to run 2.2 million homes.
They tower over the old "beach ball," now encased in concrete. The old plant,
shut down in 1992, is slowly being torn down.
Orange County had only one power plant actually inside its borders, the
Huntington Beach Steam Generation Plant. Edison unsuccessfully tried to
expand it in the 1970s. It's now owned by the AES Corp., which recently won
the right to fire up its two old generators, churning up enough electrons to
light up 37,000 homes.
Another nuclear plant was once planned for an artificial island off Bolsa
Chica in the 1960s, not for energy but to produce another scarce commodity:
clean water.
After years of planning and many hearings, the proposed desalination plant
was scrapped as too expensive.
The San Onofre plant today is still among the largest nuclear power plants in
the nation, second only to the Palo Verde plant near Phoenix.
More nuclear plants probably lie in California's future, said Ray Golden,
Edison spokesman. But don't expect anything soon.
No utility has announced plans for such a plant, and it would take at least
four to six years to build one, he said.

Blackouts could hit today, Cal-ISO says
Heat wave is expected to tighten supplies, power officials say.
June 18, 2001
By GARY ROBBINSThe Orange County Register
The state could experience power disruptions as early as today due to a
growing heat wave that will scorch much of inland California through
Thursday, power officials said Sunday.
The California Independent System Operator, or Cal-ISO, which manages the
state's power grid, said Stage 1 and 2 power alerts are likely today and
Tuesday and that rolling blackouts are possible both days. Power supplies
will be tightest from noon to 8 p.m. today, and during late afternoon
Tuesday, when temperatures hit 100 degrees in some parts of the San Joaquin
Valley and the 90s in the San Fernando Valley and Inland Empire.
Things could get worse from there.
"The hottest days will be Wednesday and Thursday when high pressure covers
all of California, Utah, Arizona and some of the Pacific Northwest," said Joe
Dandria, a National Weather Service forecaster in San Diego.
The heat could send energy use soaring past today's projected demand of
37,725 megawatts and the forecast 38,700 megawatts Tuesday. Energy demand hit
31,778 megawatts on Sunday.
Dandria said a sea breeze will make temperatures tolerable in most coastal
areas. But the breezes won't penetrate very far inland, allowing temperatures
to soar Wednesday and Thursday, the first full day of summer.
Forecasters issued their warning as Gov. Gray Davis was saying that the state
could suffer the worst fire season in years.

San Onofre generating power full bore again
June 18, 2001
By JOHN WESTCOTT
The Orange County Register
San Onofre's turbines are whirring at full strength for the first time in six
months, and that's good news for anyone dreading summer reruns - the
blackouts of last March and May.
Unit 3 reactor, powerless since Jan. 2 because of a routine refueling and
then a disastrous fire, is back joining forces with its identical sister,
Unit 2. That combination gives us a 2,240-megawatt jolt, enough juice to keep
2.2 million homes running.
A lot of those homes are ours, though some Orange County residents rarely
think about the nuclear plant just across the San Diego border. Unless we're
zipping by those two huge domes on I-5, or making nervous jokes about glowing
three-eyed fish.
San Onofre has been spewing electrons to our televisions and air conditioners
since Jan. 1, 1968, when Unit 1 was the world's largest nuclear reactor.
Then, nuclear power was the "clean" fuel, destined to run everything from
locomotives to toasters.
The environmental movement, concerns about nuclear waste and the one-two
punch of Three Mile Island and Chernobyl helped derail that future.
Now, nuclear power is back - at least it's back in the debate about where our
energy is going to come from in the years ahead.

Monday, June 18, 2001

Opening the contracts
The facts starting to trickle out in the wake of a court order to make public
the details of what Gov. Gray Davis has committed California taxpayers to pay
in long-term electricity contracts demonstrate how important it was to pierce
the veil of secrecy that has surrounded these contracts since January and
February. The Register was one of several news organizations that joined to
sue Gov. Davis to force full disclosure.
The principle is pretty simple. A private business could make a case for the
importance of keeping details of transactions under wraps for a while on
competitive or proprietary grounds - although managers who made a habit of
keeping secrets that have a material impact on financial results from
shareholders would find themselves looking for new jobs before long. But the
governor and his panel of supposed experts were at the negotiating table
using money extracted by force from California taxpayers. Given the sometimes
purposely convoluted paths of accountability built into most political
systems, the taxpayers can't expect much actual control over how the
politicians spend their money. But at least they should be able to find out
how it's being spent, and on a timely basis.
Sure enough, some of the concerns expressed at the time the contracts were
being negotiated in secret turn out to be valid. In electricity purchases, 10
years is an unheard-of time period for a long-term contract. As Cal State
Fullerton energy economist Robert Michaels explained to us, electricity is an
inherently volatile commodity and market players are just beginning to
develop risk-reduction financial instruments - futures, options, hedges,
flexible market-price-based contracts, as have recently been developed for
natural gas markets - as they learn to cope with less rigid price regulation.
It looks as if - although some risk-reducing provisions may turn up on
further analysis of the contracts - California taxpayers could be locked into
paying prices that reflect the extremely unstable sellers' market of a few
months ago for up to 10 years. The daily "spot market" prices today are
actually lower than what California taxpayers are committed to for years -
although those spot prices could easily rise significantly as the summer
heats up. Well, at least the contracts are being opened up for scrutiny and
we are beginning to discover how misguided the state, and the whole idea,
really, was.
Whether that will sink in and affect public opinion the next time someone
proposes to invite the government take a bigger role in solving some future
market crisis, is another question.

California ISO Unveils Outage Notification Plan; Meets Deadline for
Governor's Executive Order to Roll Out Warnings to Public

June 18, 2001

FOLSOM, Calif.--(BUSINESS WIRE)--June 15, 2001 via NewsEdge Corporation -
The California Independent System Operator (ISO) unveiled a plan today,
Friday June 15, 2001, aimed at giving Californians as much notice as possible
about the likelihood of rotating outages. The notification plan is in
response to a June 1st Executive Order by Governor Gray Davis, and a
corresponding directive by the ISO Board of Governors.
ISO Board of Governors Chair Michael Kahn said the plan will help people cope
with rotating outages. "Along with giving customers, business and public
safety officials adequate time to prepare for possible outages, the warnings
are also expected to spur conservation," said Kahn. "Conservation may even
obviate the need for the outage."
As of today, the California ISO has in place a system for issuing a public
warning two days before the possibility of rotating blackouts, which will be
refined 24 hours ahead of time based on dynamic factors such as weather,
power plant and transmission line outages, and conservation. If rotating
outages appear imminent, the ISO will notify local utilities and the
Governor's Office of Emergency Services 90 minutes ahead. That will give
utilities time to provide a one-hour's notice to the news media, the public
and other agencies about where the outages will occur and how many customers
will be affected.
Matching the supply and demand of electricity in California is a constant
balancing act. The weather, the flow of imported power and conservation
efforts and overall demand can fluctuate hour by hour. California ISO
President and CEO Terry Winter said people need information about the
possibility of blackouts. "Our goal is to give people the information they
need to plan their lives, run their businesses, and reduce the impact of
rotating outages. We will be fine tuning this system through the summer to
make sure we're achieving that goal."
Electronic notices will be issued 48 and 24 hours ahead of challenging days
when the grid operators forecast possible rotating blackouts. These notices
are an extension of the ISO's current electrical emergency notifications
issued via its Alerts, Warnings and Emergencies System, which are e-mailed
and e-paged to key governmental agencies, utilities and media.
The ISO's unique System Conditions section of its website www.caiso.com,
which currently features AWE notices, demand forecasts and other information,
will be enhanced by the addition of "Today's Outlook." The new resource will
forecast the supply and the demand of electricity, any expected shortfall,
and other pertinent information. Today's Outlook is already on line and
posted at www.caiso.com/SystemStatus.html.
The California ISO is charged with managing the flow of electricity along the
long-distance, high-voltage power lines that make up the bulk of California's
transmission system. The not-for-profit public-benefit corporation assumed
the responsibility in March 1998, when California opened its energy markets
to competition and the state's investor-owned utilities turned their private
transmission power lines over to the California ISO to manage. The mission of
the California ISO is to safeguard the reliable delivery of electricity,
facilitate markets and ensure equal access to a 25,526 circuit mile "electron
highway."
CONTACT: California ISO, Folsom | Stephanie McCorkle, 888/516-NEWS

BPA and California Ink Summer Assistance Plan

June 18, 2001

PORTLAND, Ore., June 15 /PRNewswire/ via NewsEdge Corporation -
The Bonneville Power Administration, the California Department of Water
Resources and the California Independent System Operator have reached
agreement on a plan that outlines when and how BPA may be able to help
California during this summer's anticipated energy shortages.
"The principles on which the plan is based," said Steve Wright, BPA's acting
administrator, "will ensure that all transactions will benefit both the
Pacific Northwest and California and that reliability problems will not be
shifted from one region to the other. This agreement protects and benefits
the Northwest while helping California when it is possible."
According to the plan, BPA and the California Department of Water Resources
will share information on each power supply situation. If California is in
imminent danger of rolling blackouts, CDWR will alert BPA and the agency will
determine what, if anything, it can do to help. Because of the drought in the
Northwest, there may be times when BPA may not be able to help. If the agency
can help, CDWR and BPA will agree on the terms.
The transactions are expected to be in the form of energy exchanges with the
exchange ratios and the timing of the returns to be mutually agreed upon at
the time of the transaction. Instead of the fixed 2-to-1 exchange ratios BPA
and California used earlier this year, the ratios will depend on market
conditions, the shape of BPA's system and the nature of the request. The
ratios will always be better than 1 to 1 for BPA. The exchange energy would
be returned to BPA in 24 hours, in seven days or next fall depending on BPA's
energy needs.
"We want California to know that we're prepared to help them if we can as
long as it does no harm to the Pacific Northwest," said Wright. BPA would
only alter the way it operates the hydro system to benefit fish listed as
threatened and endangered if California authorities assert that blackouts
sufficient to threaten human health and safety are imminent.
Changes to fish operations are possible under the National Marine Fisheries
Service biological opinion in order to preserve system reliability. If fish
operations must be modified, an environmental premium of 0.5 megawatts would
add to the exchange return ratio for those hours in order to fund any needed
environmental remediation. This would, for example, change a 1.5 to 1
exchange into a 2 to 1 exchange.
BPA and California officials will continue discussions to arrive at a
contingency plan that would determine the conditions under which California
may be able to help the Northwest in the event of energy shortages during the
winter when Northwest energy usage is at its highest.
MAKE YOUR OPINION COUNT - Click Here
http://tbutton.prnewswire.com/prn/11690X61507545
SOURCE The Bonneville Power Administration
CONTACT: Ed Mosey or Mike Hansen, both of The Bonneville Power
Administration, 503-230-5131
Web site: http://www.bpa.gov

Editorial
California 's Energy Woes (Cont'd)
?
06/18/2001
The Washington Post
FINAL
Page A16
Copyright 2001, The Washington Post Co. All Rights Reserved
A May 31 Business story questioned the historical effectiveness of price caps
but unwittingly made the case for them in regard to electricity in California
.
The reporters wrote, "Economists say that price caps make the most sense when
markets are not working properly -- when a shortage of sellers, for instance,
means there is no real competition."
That summarizes California 's problem: It has only a few sellers of energy,
and unscrupulous suppliers can game the market and push wholesale prices for
electricity to unprecedented levels.
For that reason, Sen. Gordon Smith (R-Ore.) and I have introduced legislation
that would force the Federal Energy Regulatory Commission to impose a
temporary wholesale rate cap or cost-based rates on energy sold into the
Western region.
As 10 noted economists recently wrote to President Bush, cost-of-service
prices are an "obvious remedy" to California 's broken market and will help
ensure "just and reasonable rates."
DIANNE FEINSTEIN
U.S. Senator (D-Calif.)
Washington
*
"I'm going to hold my breath until you buy me a pony!" seems to be the logic
in California these days.
Californians want price caps on their electricity , which means that the rest
of us must subsidize them by paying higher electricity rates and sending them
our available power. At the same time, I watch them on TV, demonstrating
against building more generating plants.
Californians won't get real (we knew that already), but the rest of us
should. We should tell them to solve their own shortage by increasing their
own supply.
CHRISTOPHER M. WALLACE
Dale City
*
In his June 13 op-ed column, Robert J. Samuelson tries to minimize the
negative effects of the huge price increases California is paying for
electricity by noting that the increases are only 2 percent of California 's
economic output in dollars. Ask a small-business owner what percentage that
comes to in operating costs. Some have had their rates increased by more than
50 percent. California paid $7 billion for electricity in 1999 and $27
billion in 2000; it expects to pay $50 billion this year with little or no
increase in consumption. No matter what percentage of the total economic
output, it is easy to tell when you are getting gouged.
The large vacillations in prices because of supply and demand make a strong
argument against deregulation. We do not need an electricity market in which
one pays hardly anything one year and the next year one has to refinance the
house to cover the power bills. Unregulated markets, with prices rising and
falling wildly, are not well suited for basic necessities, such as
electricity , natural gas and gasoline, especially where there is a long time
between shortages and reinvestment to increase supply.
RICH WILLIAMS
Petaluma, Calif.

http://www.washingtonpost.com
Contact: http://www.washingtonpost.com

A Section
Bush to Back FERC Energy Price Limits; Proposed Restraints Would Affect 11
States
Mike Allen
?
06/18/2001
The Washington Post
FINAL
Page A02
Copyright 2001, The Washington Post Co. All Rights Reserved
President Bush, who has argued against price caps on California electricity ,
plans to support less stringent price limits by the Federal Energy Regulatory
Commission, administration officials said yesterday.
The commission will meet today to consider new restraints on the wholesale
price of electricity in California . An aide to California Gov. Gray Davis
(D) said the governor considers the commission's leading proposal to be "too
little, too late."
Administration officials said they will argue that Bush can support new FERC
limits that are based on market factors, and will contend that the president
has not changed his position.
Nevertheless, the willingness to embrace new limits could temper the anxiety
of some congressional Republicans, who fear Bush has handled the matter
callously. Rep. Anna G. Eshoo (D-Calif.) said Vice President Cheney rankled
some members of the California delegation during a Capitol Hill meeting last
week.
"He lectured us about markets," Eshoo said yesterday on a conference call
with reporters organized by Davis's office. "When I reminded him that our
market was dysfunctional and that in a healthy market there's competition, he
looked at his watch."
FERC, an independent agency with commissioners appointed by the president,
has limits on wholesale electricity prices in California that are in effect
only during emergency power shortages. FERC sets a target price based on the
costs of the least efficient producer, and companies have to explain in
writing if they exceed that target.
At a special meeting today to deal with California energy issues, the
commissioners will consider a proposal supported by congressional Republicans
that would extend those restraints around the clock during the next year, and
to 10 other Western states, federal officials said.
Davis plans to use a Capitol Hill appearance this week to reiterate his
request for the federal government to order electricity generators to refund
billions of dollars to his state, an aide said.
Power producers are planning television ads in California that Democratic
officials consider to be anti-Davis, and the governor plans to point to those
campaigns as evidence that generators have made excessive profits during the
state's power crunch, the aide said.
One of California 's leading electricity generators, Reliant Energy Inc. of
Houston, said it is considering television ads in California but has not made
them yet. Richard N. Wheatley, the firm's director of corporate
communications, said the ads would be "educational, talking about the
supply-demand imbalance in California ."
Asked about Davis's planned comments about the ad spending, Wheatley said,
"There's been a tremendous amount of misinformation coming out of Sacramento,
so I'm not surprised by the tenor of the remarks."
Time magazine reported that Republican consultants hope to raise $25 million
to run an anti-Davis ad in California beginning today under the name of the
American Taxpayers Alliance.
Davis will make his request for refunds at a hearing Wednesday called by Sen.
Joseph I. Lieberman (D-Conn.), the new chairman of the Governmental Affairs
Committee. Lieberman held his first hearing on energy regulation last week
and said the commission had done too little to carry out its mandate to
ensure "just and reasonable" wholesale energy rates following deregulation in
California .
Lieberman's hearings are an example of the benefits to Democrats of
controlling the Senate. But Senate Majority Leader Thomas A. Daschle (D-S.D.)
doused some Democratic officials' desires for investiga- tions of financial
dealings of Bush administration officials.
"Democrats want to legislate, not investigate," Daschle said on "Fox News
Sunday." "We're not going to engage in payback. There's plenty of temptation
to do that, but we're not going to do that."
Staff writer Peter Behr contributed to this report.

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